Businesses and organizations that have gone through Chapter 11 bankruptcy in Nevada have experienced everything from non-eventful reorganizations to bitter legal fights with disgruntled creditors.
Consider a few recent cases:
• Debt holders are taking over the Hooters hotel-casino after owners filed for bankruptcy last year to block a threatened foreclosure by creditors. Hooters’ owners used the bankruptcy process to buy time to look for investors to buy the property or bail them out. In the end no investors materialized.
• The nonprofit Nevada Cancer Institute had a much smoother ride, gaining confirmation of its reorganization plan just five months after filing for Chapter 11 in December. The NCI sold its clinical operations to UC San Diego, leased space in its Engelstad Research Building to the Desert Research Institute, slashed its debt from about $100 million to $13 million and emerged with a new name: The Nevada Cancer Institute Foundation.
And while board member Heather Murren said “there was some reluctance among past donors to make contributions” after the reorganization, concerns were overcome as the NCI, with court permission, established an escrow account and raised more than $7.9 million in charitable donations.
“The debtor’s successful emergence from Chapter 11, and the fact that it will continue to advance its important philanthropic mission, will bolster fundraising efforts,” Murren said.
Looking ahead, Nevada’s bankruptcy landscape could change dramatically depending on what the Nevada Supreme Court does with AB 273.
The Nevada Legislature’s new law limits deficiency judgments in commercial real estate foreclosures so that judgments are based on what a debt owner paid for debt as opposed to its face value.
For example, a debt investor may have paid $1 million for a $5 million defaulted loan. If the property backing the loan is foreclosed on for $700,000, the deficiency is either $300,000 or $4.3 million, depending on whether AB 273 is upheld.
The banking industry wants the law struck down, saying it’s unconstitutional. Industry members argue that distressed debt investors should be able to go after defaulting borrowers for the full amount of their deficiency.
Commercial real estate developers and guarantors fear that if AB 273 is struck down, they’ll be liable for the full deficiencies. At issue are hundreds, and perhaps thousands, of loans in Nevada.
“That could be a huge issue,” bankruptcy attorney Zach Larson said. “Depending on how it goes, it could lead to a huge increase in volume for bankruptcy attorneys. If it’s overturned, you’re going to see a ton of business people file (for bankruptcy).”
The possible expiration at the end of the year of the federal Mortgage Debt Relief Act of 2007 could also boost business for local bankruptcy attorneys.
The law excludes from taxable income debt that was erased as part of a mortgage restructuring and debt forgiven in a foreclosure. It applies to a person’s principal residence and excludes up to $2 million of forgiven debt from 2007 to 2012.
Nevada’s congressional delegation has been arguing for an extension of the law. If it isn’t extended, homeowners involved in mortgage restructurings, short sales or foreclosures could be hit with hefty tax bills.