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Bankruptcy Considerations When There Is a Default On A Redevelopment Project
The challenges that have compelled municipalities to act to arrest and reverse negative conditions and encourage investment in redevelopment areas will increase as redevelopment projects face inflationary pressures and rising interest rates. Redevelopers may find their lenders enforcing protections embedded in loan documents, such as enhanced capital reserve requirements and loan covenants, performance guaranties and the like. If economic pressures become intense and defaults are a possibility, redevelopers and their lenders — redevelopment entities, taxing authorities and trade creditors — will be driven to consider the unique issues presented when there is a default on a redevelopment project, including consideration of a bankruptcy filing to stave-off creditor lawsuits or real estate foreclosure, or to permit a recapitalization of a distressed redevelopment project in order to deliver the project to completion.
Bankruptcy As a Lifeline for A Redevelopment Project
A Chapter 11 bankruptcy proceeding and business reorganization may also be an option for dealing with a financially troubled project. Such a proceeding is intended to provide a brief respite from the immediate repayment of debts and ongoing obligations through a court supervised process. See, 11 U.S.C. Section 101 et. seq. A redeveloper's decision to file bankruptcy, however, will undoubtedly impact the underlying redevelopment project, and bankruptcy courts will need to contend with the varying interests of the redeveloper/debtor, the lender, the redevelopment entity (i.e., the municipality) and trade creditors which provided materials and services to the project or the redeveloper/debtor.
Bankruptcy may be precipitated by timing or other issues under a redevelopment agreement or by a default under a loan agreement, and a potential debtor may elect to file a bankruptcy proceeding in order to gain the protections afforded by the automatic stay. See, 11 U.S.C. Section 362(a). The application of the automatic stay provides for a statutorily imposed injunction which will serve to stop or suspend litigation, postpone any ongoing foreclosure actions initiated by a lender as a result of a loan default, as well as initiate collection and enforcement proceedings in an effort to permit an orderly process of reorganization through a plan of reorganization to be developed by the redeveloper/debtor.
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