Members secure single asset provision to U.S. bankruptcy laws

When the Bankruptcy Code went into effect in 1979, it contained several elements that were intended to strengthen the power of the bankruptcy courts. These components of the Code enabled the bankruptcy courts to hold off or modify the claims of creditors, allowing the debtor to reorganize itself and its finances and to continue in business. Over the years, however, commercial real estate mortgage lenders began to experience a notable increase in tactics by certain borrowers to delay foreclosure by seeking bankruptcy-court protection, particularly by entities whose sole asset is a single piece of commercial real estate. Through the leadership of Raymond Smith, currently senior executive vice president with Dorman & Wilson, a White Plains, N.Y.-based commercial mortgage banking firm, MBA established a special committee in 1989 to address commercial real estate bankruptcy matters. In cooperation with the American Council of Life Insurance (ACLI), the committee agreed to pursue three amendments to the Bankruptcy Code that address only the delays caused by the automatic stay, further specifying only those pertaining to "single asset' cases. These amendments sought by MBA would: 1) dissolve the automatic stay unless the debtor files a reorganization plan within 90 days of filing the petition; 2) perfect the assignment of rents; and 3) allow the state foreclosure process to continue up to the point of actual foreclosure.

Through the committee's auspices, annual surveys and questionnaires were distributed among MBA-member life insurance companies, reflecting real estate industry losses for the period of 1985 to 1990 of $1.7 billion due to delays in single asset cases. Further,, at least 80 percent of the cases filed had no reorganization plans. In July 1991, federal legislation was first introduced incorporating MBA'S specific language for the three changes to the U.S. Bankruptcy Code. During the same month, James W. Nelson, chief executive officer of the Eberhardt Company, Minneapolis, Minn., and then MBA president, testified before the Subcommittee on Courts and Administrative Practices of the Senate Committee on the Judiciary. Although the legislation always reflected strong Senate support, the action in the House was fraught with delays and opposition from the chair of the House Judiciary Committee. While disappointing, it was not too surprising when a compromise bill, as described by the Washington Post, "died quietly" due to a "unanimous consent" technicality in the waning hours of Congress in late 1992.

Undaunted, MBA's Commercial Real Estate/Multifamily Legislative subcommittee chairs - Jack Hastings, vice president, UNUM Life Insurance Company, Portland, Maine, and his successors, Peter VanGraafeiland, president, The Oxford Mortgage Corporation, Raleigh, N.C., and Rodrigo Lopez, senior portfolio manager/Mortgage Loans, Woodmen of the World Life Insurance Society, Omaha, Neb. - continued in their belief that these changes were necessary and would eventually become law. Led by Senator Howell Heflin (D-Ala.), a bankruptcy reform bill was introduced in September 1993, virtually identical to the previous bill and containing MBA'S single asset provisions. Again, the House was slow to react, delaying hearings until well after the full Senate had passed the bill by a vote of 94-0 in April 1994. Finally, in August 1994, the House Judiciary Subcommittee on Economic and Commercial Law considered MBA's amendments at a long-awaited hearing and introduced legislation shortly thereafter.

On October 22, 1994, President Clinton signed Public Law 103-394, the Bankruptcy Reform Act of 1994, into law. As signed, the reform bill incorporates: 1) an expedited hearing on the automatic stay, 2) protection of security interests in post-petition rents and lodging payments and, 3) the addition of single asset cases to the Bankruptcy Code for the first time. Further, it authorized a National Bankruptcy Review Commission to be appointed by the president and the leaders of Congress to review the Bankruptcy Code and make suggestions for improvement. MBA has established a working group, led by Bob Vestewig, senior vice president of L.J. Melody & Company, Houston, and John Shaw, vice president of CIGNA Investments Inc., Hartford, Conn., to assist the Commission in identifying and developing solutions to other impediments in the Bankruptcy Code affecting commercial real estate lenders.

The passage of this legislation culminates nearly five years of dedication by numerous commercial members of MBA. A truly grassroots effort, including several meetings and correspondence with their U.S. Representatives and Senators, MBA members united for a common purpose - a belief that a more level playing field was necessary if lenders were to continue to dedicate a significant portion of their resources to commercial mortgage activities. Although the changes are significant, they reflect only the beginning of a major review of the bankruptcy system that is certain to yield additional changes in the bankruptcy laws.

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