Broadway Realty I Co., LLC
25-11050
| Bankr. S.D.N.Y. | Jun 29, 2025Background
- 82 Debtors, each owning one or several multifamily New York City rent-stabilized residential buildings, filed for Chapter 11 bankruptcy and are jointly administered (but not substantively consolidated).
- Flagstar Bank is the sole secured creditor for each Debtor, holding individual mortgages secured by each property and its rents/cash; there is no cross-collateralization among Debtors.
- Debtors initially had interim authorization to use cash collateral (with Flagstar’s consent) set to expire while they sought longer-term and final use; they had stopped mortgage payments prior to filing and lacked unencumbered cash.
- Debtors argued their continued operation (paying for maintenance, insurance, administration, etc.) required use of Flagstar’s collateral.
- Flagstar opposed continued use of cash collateral, citing inadequate protection for its security interests, insufficient transparency, and potentially unreasonable or self-serving Debtor expenditures.
- After evidentiary hearings and expert testimony regarding property values and cash flows, the Court considered whether the proposed use of cash collateral met the Bankruptcy Code’s adequate protection requirements for Flagstar.
Issues
| Issue | Debtors' Argument | Flagstar's Argument | Held |
|---|---|---|---|
| Adequate Protection (Equity Cushion) | Properties have sufficient equity cushion above the Flagstar debt, allegedly ensuring adequate protection for lender. | Many Debtors have insufficient equity cushion, with some below 15-20%; each Debtor must be analyzed individually. | Debtors did not meet their burden; not all have adequate equity cushion to satisfy statutory protection. |
| Section 506(c) Surcharge/Benefit | All estate expenditures (including professional fees) benefit Flagstar's collateral and are thus permissible under §506(c), supporting cash collateral use. | 506(c) only applies to specific, proven expenses that directly and quantifiably benefit creditor; Debtors’ plan is speculative and overbroad. | Court found 506(c) arguments overbroad, lacking proof that all expenses are reasonable, necessary, and directly beneficial under the statute. |
| Use of Cash Collateral for All Debtors Collectively | Aggregate cash projections and collective relief suffice for authorization; intercompany loans could help shortfall debtors. | Requires property-by-property analysis; relief cannot be granted in aggregate, especially with opaque intercompany transfers. | Court required adequate protection for each Debtor individually; collective proposal insufficient. |
| Prospective vs. Retrospective Collateral Impairment | Diminution only matters if Flagstar can later show collateral value was actually impaired by Debtors’ use. | Code requires prospective adequate protection before collateral is used, not retroactive remedies. | Court agreed with Flagstar; prospective adequate protection is mandatory. |
Key Cases Cited
- Mendoza v. Temple-Inland Mortg. Corp., 111 F.3d 1264 (5th Cir. 1997) (discusses the minimum required equity cushion for adequate protection)
- In re South Side House, LLC, 474 B.R. 391 (Bankr. E.D.N.Y. 2012) (debtor's burden to show adequate protection)
- In re 680 Fifth Ave. Associates, 154 B.R. 38 (Bankr. S.D.N.Y. 1993) (role of equity cushion and case equities)
- In re C.S. Assocs., 29 F.3d 903 (3d Cir. 1994) (506(c) surcharge must show direct benefit to secured creditor)