S. 256’s (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) Impact on Real Estate
R. Dale Ginter
At this time, S. 256 has passed the Senate and is scheduled for consideration by the House the week of April 4, 2005. Hence, further changes to S. 256 or its failure to become law are still possible.
Changes to the Bankruptcy Code’s treatment of real estate are not the primary focus of S. 256. Nevertheless, S. 256 has numerous (21 by the author’s count and possibly more) provisions that relate to real estate transactions under the Bankruptcy Code.
These provisions are outlined below in Bankruptcy Code section number order, followed by the S. 256 section number in parenthesis.
S. 256 has 14 amendments to Bankruptcy Code automatic stay that could involve real estate (there are more §362 amendments that do not relate to real estate). These are:
- §362(b)(18) (S. 256 §1225) is amended to broaden the types of property taxes and assessments by governmental units that are excepted from the automatic stay’s prohibition of creating post-petition liens.
- §362(b)(20) (S. 256 §303) is added to except from the automatic stay any act to enforce any lien against real property if a relief from stay order was entered in a prior case under new §362(d)(4). See below for a description of new §362(d)(4).
- §362(b)(21) (S. 256 §303) is added to except from the automatic stay any act to enforce any lien against real property if the debtor is ineligible under §109(g) to be a debtor or the case was filed in violation of an order in a prior case prohibiting the debtor from being a debtor.
- §362(b)(22) (S. 256 §311) is added to except from the automatic stay the continuation of any eviction or other similar proceeding against a debtor where the debtor is the lessee of residential real property and where the lessor has obtained a judgment prior to the petition. But, this new exception is subject to cure rights under applicable non-bankruptcy law. See new §362(l) below.
- §362(b)(23) (S. 256 §311) is added to except from the automatic stay an eviction action to obtain possession of residential real property where the debtor resides, based on endangerment of such property or the illegal use of controlled substances on such property. This provision is not self executing and requires the lessor to file a certificate with the bankruptcy court. See new §362(m) below.
- §362(b)(24) (S. 256 §311) is added to except from the automatic stay any transfer that is not avoidable under either §544 or §549.
- §362(c)(3) (S. 256 §302) is added to provide for the termination of the automatic stay as to any action with respect to a secured debt or lease on the 30th day after the petition filing if the debtor is an individual under chapter 7, 11 or 13, and where the debtor had a prior case dismissed within one year prior to filing. §362(c)(3) is a very lengthy provision complete with its own exceptions and evidentiary presumptions.
- §362(c)(4) (S. 256 §302) is added to provide that the automatic stay shall not go into effect if the debtor is an individual and two or more cases were pending and dismissed in the previous year. This new section also provides that the court shall enter an order confirming that no stay is in effect upon the request of a party in interest. It further provides that upon the request of a party in interest that the bankruptcy court may order that the stay (not so automatic any more) go into effect.
- §362(d)(3)(B) (S. 256 §444) is amended to, at least in part, specify the applicable nondefault contract rate of interest.
- §362(d)(4) (S. 256 §303) is added to permit relief from the stay in favor of a real property secured creditor when the petition is part of a scheme to delay, hinder and defraud creditors involving either (i) a transfer of the real property without the secured creditor’s or court’s consent, or (ii) multiple bankruptcy filings affecting the real property.
- §362(i) and §362(j) (S. 256 §106(f)) are new provisions establishing a presumption of good faith or lack thereof, and providing for a “comfort order” from the court, respectively.
- §362(l) (S. 256 §311) provides an exception to new §362(b)(22). This provision is lengthy and provides for detailed procedural requirements.
- §362(m) (S. 256 §311) provides an exception to new §362(b)(23). This provision is lengthy and provides for detailed procedural requirements.
The remaining sections of interest dealing with real estate are:
- §365(b)(1)(A) (S. 256 §328) is amended to provide more detail on the need to cure an existing non-monetary default under an unexpired lease of real property.
- §365(d)(4) (S. 256 §404) is revised to change the time for assumption or rejection of an unexpired nonresidential real property lease to the earlier of 120 days after the order for relief or the date of entry of an order confirming a plan. New §365(d)(4)(B) permits a 90-day extension. However, further extensions (e.g., beyond 210 days) require the prior written consent of the lessor.
- §503(b)(7) (S. 256 §445) provides for an administrative priority claim, and the method of computing such claim, in instances where a nonresidential real property lease is assumed, then subsequently rejected.
- §522(o) (S. 256 §308) provides for a reduction in the amount of the debtor’s homestead exemption (and certain other real property such as burial plots) to the extent of the value of any non-exempt property fraudulently transferred by the debtor within 10 years prior to the petition.
- §524(J)(i) (S. 256 §203) makes court approval unnecessary for a reaffirmation agreement of a consumer debt secured by a mortgage on the debtor’s real property.
- §1124(2) (S. 256 §328) amends the definition of impaired claims with regard to non-monetary defaults of nonresidential real property leases.