In re: BROADWAY REALTY I CO., LLC, et al., Debtors.
Case No. 25-11050 (DSJ)
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
June 29, 2025
Honorable David S. Jones
Chapter 11 (Jointly Administered)
INTRODUCTION
Before the Court is Debtors’ Supplemental Motion for Entry of Final Order (I) Authorizing the Debtors to Use Cash Collateral and (II) Granting Related Relief (the “Supplemental Motion” or “Motion,” (ECF No. 37). 82 separate but related Debtors voluntarily commenced these Chapter 11 cases on May 21, 2025. The cases are being jointly administered but have not been substantively consolidated. Debtors promptly sought and, with their secured lender‘s consent at this Court‘s urging despite the lender‘s initial strenuous opposition, received authorization to use cash collateral on an interim basis pending a final hearing at which Debtors would seek longer-term authorization. Under that interim authorization, Debtors’ authorization to use cash collateral ran only through June 26, but, at the conclusion of the hearing on the Motion,
Debtors filed their Supplemental Motion on June 14, 2025; Debtors’ secured lender, Flagstar Bank, N.A. (“Flagstar“) filed an opposition (“Obj.,” ECF No. 51) on June 20; Debtors filed a reply (ECF No. 58) on June 24; and the Court conducted a nearly seven-hour hearing at which evidence was taken on June 25. At the hearing, the Court received written direct testimony from Ephraim Diamond, a fact witness and Debtors’ representative, and from two valuation experts, Michelle Zell on behalf of Debtors and Scott Fowler on behalf of Flagstar. The Court also admitted into evidence voluminous exhibits.
The Court has considered the parties’ written submissions and briefing in connection with the Motion and all evidence adduced at the hearing. This Bench Decision constitutes the Court‘s findings of fact and conclusions of law with respect to the Motion.
For reasons detailed below, the Motion is denied.
JURISDICTION
The Motion is within this Court‘s jurisdiction pursuant to
BACKGROUND / FINDINGS OF FACT
Each of the 82 Debtors in these jointly administered but not substantively consolidated cases is a corporation (at least in most instances an LLC) that owns one or a small number of
Each individual Debtor is financed by its own secured loan now held by Flagstar Bank. This decision at times generically refers to these loans as mortgages. No loan relevant to this case is cross-collateralized and Flagstar has no recourse to any source of payment other than the assets of the relevant borrowing Debtor. Each respective mortgage is secured by the real property owned by the Debtor and by that Debtor‘s rent proceeds and cash. No Debtor has identified any unencumbered asset that is available for use, among other things, as a means of providing adequate protection of Flagstar‘s security interests.
Debtors and experts paint a picture of a challenging rent-regulated housing market, in which landlords are experiencing significant cost increases while they have a limited ability to increase their rental income, compounded by sharp increases in Debtors’ financing costs due to upward adjustments of the interest rates on much of their debt. Flagstar contends that all Debtors stopped making mortgage payments in January 2025 and that Debtors nonetheless reported no cash on hand as of the May petition date, thus suggesting serious net operating losses by Debtors, and/or some other transfer of Debtors’ funds that has not been explained. Debtors do not dispute
Prior to the bankruptcy, Flagstar commenced one state-court action in each borough in which Debtors owned properties, seeking typical lender relief (either foreclosure or the appointment of a receiver or both). Debtors filed the bankruptcy cases before the state courts ruled on the requested relief.
Flagstar is holding approximately $7 million in funds that it collected pre-petition from Debtors for purposes including paying real estate taxes when due, seemingly under typical mortgage-lender escrow arrangements. Debtors refer to this as the “Tax Advance,” and this Bench Decision employs that term without endorsing any party‘s legal contentions about ownership or entitlement to use of those funds. The next due date for such tax payments is reported to be sometime in July 2025. Debtors seek to compel Flagstar to use the funds to pay Debtors’ July tax obligations, while Flagstar objects and notes that Debtors’ lack of appreciable cash on hand coupled with their nonpayment of mortgage obligations and their attempt to cause Flagstar nevertheless to pay Debtors’ taxes reflects Debtors’ ongoing financial non-viability.
Debtors presented abundant and undisputed evidence that they need to use available cash to carry out all their operations – to name but a few pressing needs without which Debtors could not function, building maintenance, provision of utility service, repairs when needed, insurance coverage, and administrative functions including rent collection, record-keeping, payment disbursements, lease issuance and renewal, and all the ordinary-course activities that are incident to running residential rental real estate businesses. The Court does not question Debtors’ functional need to fund their operations. Nor, given Debtors’ lack of unencumbered funds, does the Court question that Flagstar‘s cash collateral is the only source each Debtor has to meet its
The Motion turns on whether Debtors have met their burden to show that their proposed use of cash collateral provides Flagstar with the statutorily required adequate protection of Flagstar‘s security interest in connection with its loans to Debtors. Additional factual findings are set forth below in tandem with this Bench Decision‘s discussion of the applicable law.
THE MOTION AND THE PARTIES’ CONTENTIONS
The Motion seeks authorization on a final basis for Debtors to use cash collateral, subject to conditions including adherence to a proposed budget and financial reporting and disclosure requirements. Debtors’ proposed budget lists categories of anticipated operating and non-operating disbursements for the next 13 weeks in the total amount of approximately $18.6 million, plus ongoing “bankruptcy disbursements” including escrowed professional-fee fund transfers of more than $9.7 million. The budget shows a starting cash balance of $1,388,568, and an ending balance of $ 1,587,716, notwithstanding that Debtors are not paying their mortgages and contemplate using the $7 million “Tax Advance” held by Flagstar to pay Debtors’ July property taxes.
Flagstar is the sole party to object to Debtors’ Motion. This is not surprising because Flagstar is Debtors’ apparent sole secured creditor, and thus appears to be the only party that could be adversely affected by Debtors’ continuing use of cash collateral.
Flagstar raised numerous objections. By way of non-comprehensive summary, Flagstar strenuously objects that Debtors seek to fund their cases by depleting Flagstar‘s collateral without providing adequate protection as is required by
The evening before the hearing, Debtors submitted a Reply accompanied by a supplemental declaration of Ms. Zell that responded to Mr. Fowler‘s criticisms.
As noted, on June 25, the Court conducted an evidentiary hearing and heard closing arguments from the parties. Debtors’ interim authorization to use cash collateral was set to expire on June 26, but, at the Court‘s request and with Flagstar‘s and Debtors’ agreement, that authorization was extended to July 1 to allow the Court time to prepare a decision for issuance on or before June 30. The Court reserved decision at the conclusion of the hearing.
GOVERNING LEGAL STANDARDS
The Motion seeks authorization to use cash collateral pursuant to
In general, the trustee, or debtor-in-possession here, “after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate,” with certain exceptions.
The Bankruptcy Code identifies three non-exclusive means of providing adequate protection, the third being explicitly flexible as to method: (1) requiring a cash payment or payments by the trustee to the secured party “to the extent that” the Code‘s automatic stay provision or the collateral‘s use “results in a decrease in the value of such entity‘s interest in such property“: or (2) providing “an additional or replacement lien“; or (3) granting such other relief . . . “as will result in the realization by such entity of the indubitable equivalent of such entity‘s interest in such property.”
It is undisputed that Flagstar holds separate mortgages on an individual basis as against each Debtor, and that each such mortgage and associated documents give Flagstar a security interest that extends to, among other things, each individual Debtor‘s real property, rents received from or on behalf of tenants or occupants of each such property, and other cash on hand.
Flagstar has repeatedly and strenuously contended, and Debtors have not disputed, that because each loan at issue was issued individually and solely to an individual debtor and without cross-collateralization, each Debtor‘s status and provision of adequate protection must be viewed on a standalone basis. See Flagstar Obj. at 9-10 (citing In re Dye, 502 B.R. 47 (Bankr. M.D. Pa. 2013); In re Southern Illinois Railcar Co., 301 B.R. 305 (Bankr. S.D. Ill. 2002); In re Valley Realty Advisors, LLC, No. 02-07-BK-04217-CGC, 2008 WL 11628636, at *8 (Bankr. D. Ariz. May 29, 2008)). Further, Flagstar contends and Debtors again do not disagree (although the Motion is filed generally to allow Debtors all to use cash collateral, and the Motion does not propose an alternative of granting relief solely as to some subset of Debtors) that to prevail on the Motion as presented, the Debtors must establish that Flagstar is adequately protected with respect to each one of the 82 Debtors. The Court agrees.
Equity Cushion. First, as to the asserted equity cushion with respect to each Debtor, Debtors have not met their burden of establishing the existence of an equity cushion, at least a sufficient one, to alone constitute adequate protection of Flagstar‘s security interests. Even fully crediting the analysis and testimony of Debtors’ valuation expert Michelle Zell, Debtors acknowledge that a subset of Debtors have an equity cushion of less than 18%. (This Bench Decision speaks in generalities in deference to the parties’ sealing request during briefing and the hearing in light of their view that public release of more specific valuation information would harm the parties’ commercial interests.) Although some courts will consider an equity cushion above 15% to be sufficient, many demand 20%, see, e.g., In re Fortune Smooth (U.S.) Ltd., 1993 Bankr. LEXIS 2377, *19 (Bankr. S.D.N.Y. 1993); Mendoza v. Temple-Inland Mortg. Corp., 111 F.3d 1264, 1272 (5th Cir. 1997). This Court need not decide whether a figure below 20% could be adequate because, for a subset of Debtors, an insufficient equity cushion is present even crediting Ms. Zell‘s analysis in full. Debtors, perhaps in recognition of this vulnerability,
This conclusion makes it unnecessary to decide a topic of considerable evidentiary attention during the hearing, namely, Flagstar‘s attempt through Mr. Fowler to critique and persuade the Court to disregard or downward-adjust Ms. Zell‘s valuation analysis. The Court does find that Ms. Zell is a well-qualified valuation expert who presented generally reasonable analyses. Mr. Fowler, also a well-qualified valuation expert, identified various debatable assumptions in Ms. Zell‘s analysis and calculated valuation changes that would result from substituting other assumptions he suggested were more reasonable, but he acknowledged that Ms. Zell used generally appropriate analytical methods and the Court concludes (with no intended future collateral estoppel effect and subject to possible revisitation in later proceedings if necessary to a future decision) that there was not one obligatory valuation method or set of assumptions from which Ms. Zell‘s analysis departed in a definitively incorrect manner. The Court‘s overall impression is that Ms. Zell‘s testimony explained reasonable grounds for her assumptions. There may be room for disagreement, especially as to her assumed capitalization
Section 506(c). The other main form of adequate protection asserted by Debtors is that all of their expenditures will increase the value of Debtors’ properties by preserving them as going concerns, such that the payments in Debtors’ view are permissible surcharges under § 506(c) and should be credited as adequate protection payments or deemed not to require separate adequate protection. Debtors’ initial Supplemental Motion brief devoted just two paragraphs to this contention (ECF No. 37 at 19-20) but their reply leads with this argument and devotes eight pages to it (Reply at 4-11).
Section 506(c) provides: “The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.”
At a broad level, the Court finds it intuitively logical that actual and necessary expenses of maintaining Debtors’ properties and operating their businesses will support the market values of the properties in a manner that may ultimately benefit Flagstar at least to some extent. Nevertheless, the Court concludes that Debtors’ § 506(c) contention is overbroad and unsupported, particularly insofar as it seeks to deem payment of Debtors’ professional fees as a
As to whether or how section 506(c) fits within the Bankruptcy Code‘s adequate protection framework, first, the only prong of the section 361 definition of adequate protection that could be implicated is the third subsection, which provides that courts may provide adequate protection by “granting such other relief . . . as will result in the realization by such entity of the indubitable equivalent of such entity‘s interest in such property.”
Even assuming without deciding that surchargeable payments could constitute a form of adequate protection in some circumstances, Debtors’ contentions here present a number of difficulties. First the language of section 506(c) and case law applying it contemplates a retrospective charge to a secured creditor, not advance funding by that creditor in the first place. Again, section 506(c) provides that “[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim,” language that seems to contemplate an initial payment by a trustee or debtor-in-possession for which recovery or compensation may be sought under section 506(c). See In re Towne, Inc., 536 F. App‘x 265, 268
Additionally, Flagstar observes that, given Debtors’ valuation-backed contention that many of their properties are worth significantly more than the debt that encumbers them, value and recovery enhancement would benefit general unsecured creditors or other lower-priority claimants, not Flagstar, whose security is already protected to the extent a robust enough equity cushion already exists. And courts have explained that “benefit to the secured creditor must be shown in the quantitative, not a[ny] qualitative or generalized, sense.” In re Flagstaff Foodservice Corp., 29 B.R. 215, 219 (Bankr. S.D.N.Y. 1983) (quoting Dozoryst v. First National Savings and Loan of Downers Grove, 21 B.R. 392, 394 (N.D. Ill.1982)) (internal quotations omitted). “Further, the secured creditor cannot be required to bear the expenses which benefit the entire estate under the theory that the expenses were incurred to preserve the assets of the estate as a whole.” In re Chicago Lutheran Hosp. Ass‘n, 89 B.R. 719, 728 (Bankr. N.D. Ill. 1988). Some courts have emphasized that the proper inquiry under section 506(c) is whether a “direct benefit” was conferred to the secured creditor and not “whether [a secured creditor] benefited or could reasonably have been expected to benefit . . . .” In re Towne, Inc., 536 F. App‘x 265, 268–69 (3d Cir. 2013) (internal citations and quotations omitted); see also In re Gen Crescenzi, No. 95 Civ. 2119 (DLC), 1995 WL 753906, at *5 (S.D.N.Y. Dec. 19, 1995) (“The issue is whether payment of [certain expenses] satisfy Section 506(c)‘s requirement that the expense directly benefit the secured claimant.“)); In re C.S. Assocs., 29 F.3d 903, 906 (3d Cir. 1994) (finding that payment of real estate taxes did not confer a direct benefit to the secured creditor.)
Debtors identify case law holding that section 506(c) nevertheless provides an exception in some circumstances to the rule that cash collateral must be adequately protected, but those authorizations concerned much more targeted uses of funds than Debtors propose here, and Debtors excessively stretch the authority on which they rely. For example, one case that Debtors invoke explains that the debtor “must prove that the expenditures in question are ‘(1) reasonable, (2) necessary, and (3) beneficial to the secured creditor.‘” In re KNM Roswell Ltd. P‘ship, 126 B.R. 548, 557 (Bankr. N.D. Ill. 1991) (quoting In re Chicago Lutheran Hospital Association, 89 B.R. 719, 727 (Bankr. N.D. Ill.1988)). Even that court concluded that the expenses were not covered by section 506(c) because the Debtor “offer[ed] virtually no evidence as to why this expenditure was reasonable, necessary or beneficial to [secured creditor]. [Debtor] does tell us its claim consists of $85,374.62 for ‘payroll and related taxes/benefits,’ $2,716.09 for ‘travel and expenses reimbursements,’ and $17,391.08 for ‘insurance. But it provides nothing which either
Debtors’ contentions here have similar (and other) deficiencies. First, the payments in KNM at least were quantified and arguably of direct benefit to a secured creditor. Debtors here propose a sweeping conclusion that every dime spent by the estate even millions of dollars of professional fees and other administrative expenses – will benefit Flagstar, on the speculative premise that the ultimate outcome of these cases will yield a better recovery for Flagstar than any alternative, notwithstanding that Debtors’ own valuation suggests there is “upside” value to many Debtors’ estates that will benefit unsecured creditors rather than Flagstar. That stretches section 506(c) beyond recognition, beyond its plain terms, and beyond any use of the statute known to this Court. As noted, case law recognizes that under section 506(c) “the secured creditor cannot be required to bear the expenses which benefit the entire estate under the theory that the expenses were incurred to preserve the assets of the estate as a whole.” In re Chicago Lutheran Hosp. Ass‘n, 89 B.R. at 728; see also In re Stearns Bldg., No. 98-1257, 1998 WL 661071, at *7 (6th Cir. Sept. 3, 1998) (at secured lender‘s request, barring debtor from using rent to pay professional fees after payment of necessary expenses); Putnal v. SunTrust Bank, 489 B.R. 285, 291 (M.D. Ga. 2013) (permitting use of rents to operate and maintain property but not for estate administrative expenses).
Also here, in addition to not providing a breakdown of the budget on a property-by-property basis, Debtors do not detail the basis or rationale for the budget, nor the necessity or benefit or reasonableness of their proposed expenditures. For example, both experts observed that Debtors’ reported payroll expenses are unusually high, and Debtors pay a 4% management fee to an insider even though their own expert assumed that a 3% fee was more typical and
In short, Debtors have failed to meet their burden to show that all of their proposed expenditures are “necessary” and “reasonable” and of clear benefit to Flagstar. The Court therefore cannot find that the proposed expenditures are eligible for surcharge under section 506(c). By necessary extension, the Court cannot conclude that the expenditures either do not trigger adequate protection requirements or constitute a form of adequate protection, even assuming that section 506(c)-eligible expenditures could have such an effect on adequate protection analysis where proven.
These conclusions make it unnecessary to decide another of Flagstar‘s contentions, which is an objection to Debtors’ intended provision for flexibility to allow large repair or other costs that an individual Debtor may encounter to be partly funded by inter-company loans or transfers.
Whether the total is greater than the sum of its parts. The Court has attempted to assess whether the mix of elements Debtors propose – equity cushions that on many but not all properties exceed even 20% combined with benefit to Flagstar of certain expenses – could satisfy adequate protection requirements even though neither element alone is sufficient. The Court has been unable to do so, in part because Debtors’ contentions are based on the undifferentiated, unproven, and questionable premise that their expenditures as a whole will benefit Flagstar. The Code, however, affords flexibility as to how a debtor provides adequate protection, so long as the result is the “indubitable equivalent” of Flagstar‘s “interest in such property.”
Other contentions. Debtors’ Reply refers to a third “distinct reason” they assert they should win. Reply at 3. That is that “Debtors could be liable to Flagstar for diminution only if Flagstar could later demonstrate that the value of its collateral was impaired as a result of the debtor‘s actual use of [the] collateral.” Reply at 3 (internal punctuation and quotation marks omitted; quoting Branch Banking & Trust Co. v. Beaman (In re Constr. Supervision Servs.), 2016 U.S. Dist. LEXIS 61444, *23-24 (E.D.N.C. 2016)). That ignores that section 363(c) expressly requires conditioning permission to use cash collateral on terms that will adequately protect security interests an explicitly prospective enterprise, not one that requires secured lenders to wait and “later demonstrate” impairment of their security interest. Moreover, Debtors cannot prevail based on their assertion that their budgeted uses of cash collateral will “preserve and enhance the value of Flagstar‘s collateral” such that Flagstar‘s collateral will not be diminished.
Debtors’ other contentions in their initial Supplemental Motion submission do not appear (at least with any prominence) in their Reply and were not emphasized (or mentioned) during the hearing. They thus may have been abandoned. In any event, they do not change the outcome.
Debtors argue that their projections reflect an increase in available cash from zero as of the Petition Date to, collectively, approximately $908,000 as of June 29 and approximately $1.587 million at the end of an initial 13-week budgeting period. This argument fails to establish adequate protection or a lack of need for adequate protection. First, an aggregate increase in available cash does not establish that each individual Debtor‘s available cash will increase throughout the case, or even in the case‘s first 13 weeks. Second, Debtors’ figures ignore that they have incurred either substantial operating losses or diversions of assets since the start of 2025, and it is not credible or evidence-supported to assert that that trend is not ongoing at least as to some Debtors. Third, and relatedly, Debtors’ projection of a net increase in available cash across all Debtors masks ongoing losses, including by assuming that Flagstar will release to Debtors or otherwise use the roughly $7 million in “Tax Advance” funds (Debtors’ term) that
Debtors also argue that the “equities of the case” support use of cash collateral. Debtors’ initial brief cites just one case for this proposition, and even according to Debtors’ own description that case was premised on the existence of a large equity cushion so that the use of rents would not harm the secured lender. Supp. Mot. at 20-21 (quoting In re 680 Fifth Ave. Assocs., 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993) (“if a creditor were sufficiently oversecured, the debtor could argue that the equities tipped in favor of allowing it to tap into rents that would otherwise be cash collateral because the creditor would be adequately protected and not harmed.“)). As discussed above, Debtors have not established that Flagstar is oversecured on each of its 82 loans, so the possibility identified by the 680 Fifth Ave. court is not present here.
Debtors’ remaining arguments concern ancillary issues that need not be reached in light of the Court‘s conclusions stated above. Debtors argue that a proposed escrow of funds to support their professional expenses is appropriate, noting that fee awards ultimately require Court approval. That does not pertain to the statutory requirement, not met here, that use of cash collateral is only permissible if a secured claimant‘s interest is adequately protected. Here, it is not.
As noted, Debtors also defend their proposed mechanism for allowing intercompany fund advances to meet unexpected, large needs that are likely to arise at particular properties whose identity cannot be predicted in advance. This decision already stated some tentative openness to that approach, but, again, this issue does not eliminate the fundamental problem that Debtors have failed to show their proposal will afford Flagstar the required adequate protection of their interests in each of the respective 82 Debtors.
Further, this decision is without prejudice to renewal of the Motion in whole or in part. It appears likely that some subset of Debtors have significant equity cushions that may alone suffice to adequately protect Flagstar‘s interests. Debtors’ motion sought relief for all 82 Debtors, and the Court was not asked to or given sufficient information to determine how or whether to rule with respect to individual Debtors.
As to the Motion as presented, however, the Court concludes that it must follow the statutory command that use of cash collateral “shall” be prohibited unless it can be approved on conditions sufficient to afford adequate protection, a requirement that Debtors have failed thus far to show they have met.
CONCLUSION
For the reasons stated above, the Supplemental Motion is denied, without prejudice. This Bench Decision and Order constitutes the order resolving the Motion as well as the Court‘s
The Court will conduct a status conference via Zoom before the July 4 holiday weekend. The parties are to contact chambers to schedule that conference. The Court is available at most times on June 30 through July 2. The parties are encouraged to pick the earliest possible time that will allow them to have assessed this decision and engaged in a pre-conference “meet and confer” discussion regarding next steps.
So ordered.
Dated: New York, New York
June 29, 2025
s/ David S. Jones
Honorable David S. Jones
United States Bankruptcy Judge