First, accept that no matter what your loan documents say about the remedies to which the lender is entitled following a bankruptcy, more than likely those seemingly well-drafted provisions will be superseded by the Bankruptcy Code. Second, know that Section 362 of the Bankruptcy Code contains "stop and go" rules that have lead to numerous cases interpreting Section 362. Third, understand that the word "automatic stay" is a bankruptcy term that means that you cannot begin or continue a foreclosure, exercise any remedy against a borrower or take any action to collect indebtedness of any kind, without a stipulation from the borrower approved by the court, or a court order granting relief from the automatic stay.

While the automatic stay means that you are stopped, barred, or dead in your tracks without a stipulation or further order of the court, depending upon the circumstances you may have one or more of four options for obtaining relief from the stay.

Section 362 itself contains three ways to ask the bankruptcy court for relief from the automatic stay. The first way is for equitable cause, and cause often includes a lack of adequate protection for a lender's security interest. The second way arises if the debtor has no equity in the real property security, and the real property is unnecessary for an effective reorganization of the debtor's affairs. The third way may arise if the real property security is "single asset real estate" and the debtor fails to take certain prescribed actions within the first 90 days of the bankruptcy proceeding. The fourth way to proceed is to ask that the bankruptcy proceeding itself be dismissed. Each of the four grounds for relief depend on the circumstances existing at the time, and each ground is discussed below.

1. Dismissal.
   
   Attempting to dismiss the bankruptcy case in some instances is like swinging for a home run with the first pitch of the game, but sometimes the best remedy available.
   
   If the situation warrants, a lender may move to dismiss the bankruptcy proceeding for "cause." Dismissal dissolves the automatic stay. "Cause" may be anything that provides good reason to end the proceeding including unreasonable, prejudicial delay by the debtor, serious post-filing erosion of assets and, in a proceeding where the debtor is seeking to reorganize its business, an inability to propose a feasible plan of reorganization or to carry out the plan. When a bankruptcy proceeding is dismissed for cause, frequently the cause cited is that the bankruptcy was filed in "bad faith." Although lenders commonly think any borrower who fails to timely pay its loan and files for relief in bankruptcy is acting in bad faith, there is a higher legal standard applied. Bad faith is an abuse of the bankruptcy process, and may be found where the debtor has very few creditors and there is other evidence that the debtor acted only to stymie creditors, such as filing bankruptcy on the eve of foreclosure or to forestall adverse tax consequences. Bad faith may also be found where the filing is but the latest in a series of bankruptcy filings, or where the prospect of successfully reorganizing the debtor's business is hopeless from the outset. Often a bad faith filing involves what is sometimes called the "new debtor syndrome." That is when an entity, such as a corporation, is formed and the real property security is transferred to it, usually on the eve of foreclosure, and then the new entity files for relief in bankruptcy.
   
   The Bankruptcy court will dismiss a case when circumstances show that there has been "bad faith," but when it is not conclusive and thus the court will usually rule in favor of the debtor.



2. Relief For Equitable Cause.
   
   Bankruptcy lawyers commonly look for equitable cause as the basis of a motion for relief from the automatic stay.
   
   Much like the cause needed to dismiss a case, cause for relief from the stay is anything that justifies the court in granting relief. If the lender's real property security is uninsured, for example, that may provide sufficient cause to justify granting relief from the stay because of the risk of destruction. Cause for relief from stay most often means that the lender's interest in the real property security is not adequately protected. The lack of adequate protection may appear where the lender's collateral is declining in value below the amount owed, and the debtor is unable to make payments to the lender to offset the declining value. In that situation the court probably would grant relief from stay for cause because of the lack of adequate protection. Conversely, relief for cause probably will not be given if the debtor insures the property, if the debtor makes payments to offset declining value, if the debtor gives a replacement lien on other property with equity, or if there is sufficient equity left in the real property security itself -- an "equity cushion" -- to ensure that the value of the lender's security interest is not eroding.



3. Lack of Equity and Prospect for Reorganization.
   
   A motion for relief from the automatic stay will likely be successful if the debtor lacks equity in the real property security, and the property is not necessary to the debtor's effective reorganization.
   
   Equity is determined by adding the costs of sale to the amount of all the liens, encumbrances and taxes against the real property, and subtracting from the value. Valuation of the real property security often requires a new appraisal. Historically, equity of less than ten percent above the amount of encumbrances has been inadequate and grounds for relief, while equity of approximately twenty percent or more has been adequate. Equity cushions between ten and twenty percent have been fertile grounds for bankruptcy litigation.
   
   If there is no equity, then the debtor must show that the real property is necessary for an effective reorganization. The debtor has the burden of proof on the issue of necessity. Where the debtor has filed a liquidation proceeding, there is no prospect for reorganizing and necessity is not an issue. More likely, though, the debtor filed for relief under the reorganization provisions of the Bankruptcy Code. The debtor will try to show that there is a reasonable possibility of a successful reorganization within a reasonable time. In opposition to the debtor, the lender will argue that reorganization is not feasible, or that the real property is unneeded for a reorganization.



4. Single Asset Real Estate.
   
   Single asset entities are basic requirements in lending today. But as a lender does this really help you on a motion for relief from the automatic stay?
   
   Under the Bankruptcy Code, single asset real estate is a single property or project, but is not residential real property with less than four units. The real property also must generate substantially all of the debtor's gross income. (If the debtor holds only raw land, which typically produces no income, likely the debtor still will be treated under the "single asset real estate" rules as long as the other factors are met.) Further, there can be no substantial business conducted on the real property, other than the business of operating the real property. Finally, the aggregate of the non-contingent, liquidated, secured debts may not exceed $4,000,000.
   
   A lender can obtain relief from stay against a debtor holding only single asset real estate if, within 90 days after the date that the debtor files for relief, (a) the debtor has not filed a plan of reorganization that has a reasonable possibility of approval within a reasonable time, or (b) the debtor has not begun making monthly payments to the creditors secured by the real property that are equal to the current fair market interest rate on the value of the creditor's interest in the real property. Note that the value of the real property security may be less than the amount owed, and so the value of the creditor's interest in the real property is also less than the amount owed. Such an under-secured creditor can receive interest only on the portion of the amount owing that is secured.
   
   The 90 day deadline for the debtor to act can be extended by the bankruptcy court for cause. If a debtor holds only a single real estate asset that does not qualify for treatment as "single asset real estate," one of the other means for avoiding the automatic stay can still be used.

Other Considerations About Seeking Approval to Foreclose.

If the facts warrant, any and all the four grounds may be pursued to advance a lender's goal of foreclosing the real property security. Yet one ground or another may better serve a lender's interests. For example, dismissal of a case allows all creditors to pursue the debtor, while relief from stay only benefits the creditor that successfully moves for relief. Furthermore, factors that support dismissing a case frequently also support granting relief from stay. When the debtor's equity in the real property is an issue under Section 362, the lender has the burden of proof. The debtor (or other party in opposition) has the burden of proof on all other issues. Thus a lender may choose to forgo the time and expense required for an appraisal if one of the other grounds for seeking relief from stay is available.

As a practical matter, in a newly filed bankruptcy case a bankruptcy court is less likely to grant relief from stay than later in the case. The court is also likely to grant only as much relief as will protect the creditor.

Relief from the automatic stay may also take different forms. Relief may be for termination of the stay, annulment of the stay (a retroactive termination), modification of the stay, conditions on maintaining the stay, or some combination of the foregoing.