by Valerie L. Marciano
During the boom years of 2002 to 2005, many people bought not
just one investment property, but numerous properties, with the
intention of either flipping them for a quick profit or renting
them out to generate an income stream. Often times, the investors
took out loans from institutional or private lenders to purchase
their investment properties. The investors planned to repay the
loans from proceeds generated from the sale of the assets, or from
the rental income received from tenants.
The ease of Arizona laws allows investors to form limited
liability companies to hold each of their investment properties.
Holding each of the investments in a separate distinct limited
liability company or LLC may have provided liability protection or
some tax advantage. When the market fell flat, the investors found
themselves in an untenable position. They were unable to rent, much
less sell their holdings, whether it was 3 properties or 10 or more
different properties. Without the ability to liquidate the
investments, the investors had three possible options.
First, if possible, the investors relied upon their income from
their "day jobs" to pay the debt service on the investments, which
was never their intention. As can be imagined, the "day job" income
has not stretched far enough to cover all the payments to the
lenders. Second, the investors have allowed the investments that
were "under water" to go back to the lenders. Finally, and what has
been noted as a current trend, the investors are filing for
personal bankruptcy, even though each of the investment properties
are held in separate, distinct entities, such as an LLC.
The lenders are finding themselves identified as "creditors" in
personal bankruptcy proceedings even though their true "borrowers"
are the LLC entities. If the lenders are asleep at the switch in
the bankruptcy cases, the investors have been able to modify the
payment terms owed to the lenders, and reemerge from bankruptcy
still holding the investment properties in the separate, distinct
entities. If, however, the lenders are proactive in the personal
bankruptcy proceedings, the lenders have been successful in their
requests to have the Bankruptcy Courts lift the "automatic stay",
and declare that the investment properties are not part of the
bankruptcy case, leaving the lenders to recover the properties
through foreclosures. Depending upon whether the property is the
type subject to the "anti-Deficiency Statutes", the lenders may or
may not be able to pursue the borrowers for the deficiency.
If you are an investor in a situation described above, you
should seek legal assistance in determining whether you can
preserve some or all of your assets. On the other hand, if you are
a lender, and find yourself involved in a bankruptcy of someone
that was not your "borrower," beware and take the necessary steps
to learn whether you can extricate yourself from the reach of the
Bankruptcy Court.