Opinion
No. 78-1397EG
June 28, 1979
Real Property Arrangements — Automatic Stays — Modification — Foreclosure Actions
An automatic stay imposed under Rule 12-43 of the Bankruptcy Rules of Procedure in a Chapter XII proceeding was modified to permit the creditors to foreclose on the debtor's property since there was no equity in the property and no reasonable possibility of the rehabilitation of the debtor's business.
The debtor filed a petition for a real estate arrangement under Chapter XII of the Bankruptcy Act subsequent to the creditors' obtaining a judgment of foreclosure on their mortgage with the debtor. Pursuant to Rule 12-43, the creditors were automatically precluded from executing their foreclosure judgment.
To determine whether a Rule 12-43 stay should be modified, the Chapter XII policy of encouraging the rehabilitation of a financially burdened business and the rights of secured creditors have to be considered. Case law has established three basic criteria to be taken into account in striking a balance: "1) whether the property is essential to effect a rehabilitation; 2) whether the secured creditor will suffer imminent and irreparable injury from continuation of the stay; and 3) whether there exists a reasonable possibility of a successful rehabilitation within a reasonable time."
Although in the instant case the property was essential to the debtor's rehabilitation, thus satisfying the first criterion, the court looked beyond this to determine that the stay should be modified to permit foreclosure. It was noted that there was no equity in the property — it was burdened with liens far in excess of the value of the property. While this fact alone does not justify modification of the stay, some other protection must be afforded the creditors. A reasonable possibility of rehabilitation of the debtor's business will substantiate a finding that injury to the creditors is not irreparable as it gives creditors an assurance that they will face only the risk of slight or reparable diminution in value if the stay is continued. But, because the debtor had no financing for a plan of rehabilitation and even if he had financing for the plan he proposed, which involved revival of the business that led to the debtor's poor financial condition, there was no reasonable possibility of succeeding, the stay was modified. See Rule 12-43 at ¶ 20,843.