Broadway Realty I Co., LLC
25-11050
| Bankr. S.D.N.Y. | Jun 29, 2025Background
- 82 Debtors, mostly LLCs owning over 5,000 rent-stabilized units in NYC, filed for Chapter 11 in May 2025; cases are jointly administered but not consolidated.
- Each Debtor has a separate, non-cross-collateralized mortgage with Flagstar Bank, which is also the Debtors' sole secured creditor.
- Debtors ceased paying mortgages in January 2025 and had no cash on hand at the petition date; Flagstar held $7 million in pre-petition escrowed taxes.
- Debtors sought final authorization to use cash collateral for operational and bankruptcy expenses, asserting ongoing need to maintain properties and fund administration.
- Flagstar objected, arguing a lack of adequate protection, transparency issues, and the risk to its collateral—especially absent evidence justifying Debtors’ proposed expenditures and equity cushions.
- Interim cash collateral use was authorized until July 1, 2025, pending this decision after an evidentiary hearing.
Issues
| Issue | Debtors' Argument | Flagstar's Argument | Held |
|---|---|---|---|
| Adequate protection for use of cash collateral | Use is justified because properties' value exceeds debt (equity cushion); all expenditures benefit Flagstar | Must assess protection Debtor-by-Debtor; not all have sufficient equity cushion; risk to collateral is significant | Debtors failed to show adequate protection for each Debtor; motion denied |
| Are all Debtors' payments surchargeable under § 506(c) as benefiting Flagstar? | All payments (including professional fees) preserve/increase value, thus surchargeable and permissible | Only directly beneficial, necessary, and reasonable expenses can be surcharged; professional fees/blanket expenditures do not qualify | Court rejects blanket 506(c) application; expenditures not shown to directly benefit Flagstar |
| Aggregate cash increase justifies use without added protection | Increased post-petition cash justifies continuing use | Aggregate increases mask continuing losses/diversions; individualized assessment required | Aggregate figures insufficient; individualized losses/risks persistent |
| Equities of the case tip in favor of Debtors' relief | Housing role and need for operations necessitate sustained use of collateral | Statutory mandate controls; equities cannot override Flagstar's lack of protection | Statute requires adequate protection; equities insufficient |
Key Cases Cited
- In re South Side House, LLC, 474 B.R. 391 (Bankr. E.D.N.Y. 2012) (Debtor bears the burden to demonstrate a creditor is adequately protected)
- In re 680 Fifth Ave. Associates, 154 B.R. 38 (Bankr. S.D.N.Y. 1993) (Adequate protection requires equity cushion for secured creditor; debtors must establish sufficient cushion)
- Mendoza v. Temple-Inland Mortgage Corp., 111 F.3d 1264 (5th Cir. 1997) (Minimum equity cushion for adequate protection typically considered to be at least 20%)
- In re Flagstaff Foodservice Corp., 29 B.R. 215 (Bankr. S.D.N.Y. 1983) (Section 506(c) surcharges require direct, quantifiable benefit to secured creditor)
- In re C.S. Assocs., 29 F.3d 903 (3d Cir. 1994) (Real estate taxes may not confer a direct benefit qualifying for Section 506(c) surcharges)