Lender Files Involuntary Bankruptcy Against Defaulting Developer

When a developer defaults on a construction loan or other financing, the lender typically commences a foreclosure action against the property. That tactic may not work, however, if ownership of the property is disputed. The recent filing of an involuntary bankruptcy petition in the Southern District of New York by Churchill Credit Holdings shows how involuntary Chapter 11 bankruptcy may be a better remedy for the creditor than a simple foreclosure.

The land in question is a single lot in SoHo at 74 Grand Street. According to the bankruptcy petition, the lot was supposed to be the site for a six-story four-unit residential condominium with ground level retail. The project was supposedly slated for completion in 2018, but the land is still vacant. The lender claims that the developer begin to miss scheduled loan payments in August 2017 and that the total debt is $12.5 million. As required by the bankruptcy code, the lender found two additional creditors of the developer to file separate involuntary bankruptcy petitions.

All parties agree that the land was originally owned by a New York couple when the financing transaction closed in 2006. The lender now alleges that the original owners conveyed the lot to one or more corporations owned by the couple and their family members. These conveyances are not completely disclosed by New York land records, and they are the main reason that the lender chose involuntary bankruptcy instead of foreclosure to protect its interests.

The developer will now be required to disclose its financial situation, including amounts owed to other creditors. The bankruptcy disclosures will also provide information about which parties now hold an interest in the land at issue. The debtor will have 18 months to file a plan of reorganization for review by the creditors and the bankruptcy trustee. With possible extensions, the fate of the lot may remain unknown for many months.