New Additional Provision on Views of Four Commissioners on Hud Mortgages

Commissioners John A. Gose, Jeffery J. Hartley, Edith Hollan Jones, and James I. Shepard.

The Working Group on Single-Asset Real Estate did not have time to take up and present to the full Commission all the unique single-asset realty problems that were presented to it. One pressing problem that the Working Group considered relates to certain real-estate debt held by the United States Department of Housing and Urban Development ("HUD"). As understood by Commissioners Jones, Gose, Hartley and Shepard, who are endorsing the proposal set forth below, HUD finances low-income residential-housing projects and provides rent supplements to the tenants. When the project files Chapter 11, HUD must continue the rent payments, but its efforts to foreclose are inhibited by the automatic stay. HUD contends that frequently the owners during Chapter 11 fail to maintain the property. Thus, HUD must pay the rent supplements, HUD is denied the ability to foreclose and HUD cannot, unless it litigates, cause the rent-supplement money to be channeled into property maintenance. To compound the adverse effects on the federal government, in at least some cases, the primary purpose of the Chapter 11 filing is for the equity investors to postpone the payment of federal income taxes arising from debt cancellation on foreclosure.

The four subscribing Commissioners named above, on the basis of the foregoing, have concluded that HUD should receive specific relief in the Bankruptcy Code. Because of competing items for attention and other factors, the Single-Asset Real Estate Working Group was unable to submit a proposal about HUD mortgages to the full Commission. Accordingly, what follows is a recommendation of the four Commissioners named above, not a proposal by the full Commission.

The four Commissioners recommend that HUD should be entitled to relief from the automatic stay if the court finds (a) that the mortgage loan held by HUD was in default for more than 90 days prior to the entry of the order for relief; (b) that HUD provides rent-supplement payments for at least 25% of the units in the project; and (c) the debtor has failed to carry the burden of proof that the property has been and is in substantial compliance with the applicable health and public-safety standards, including compliance with HUD's section 8 housing assistance payments contract or other similar HUD requirement."