In a significant ruling issued on June 29, 2025, U.S. Bankruptcy Judge David S. Jones denied the motion of Broadway Realty I Co., LLC and its 81 affiliated debtors (collectively, the "Debtors") seeking final authorization to use cash collateral in their chapter 11 proceedings. See In re: BROADWAY REALTY I CO., LLC, et al., No. 25-11050 (DSJ), 2025 WL 1803089 (Bankr. S.D.N.Y. June 29, 2025). The decision underscores the rigorous standards debtors must meet to prove adequate protection of a secured lender's interests under 11 U.S.C. § 363—and the difficulties single-asset real estate debtors can face in multi-property restructurings.
Background: Over 5,000 Rent-Stabilized Units at Stake
The 82 Debtors collectively own more than 5,000 rent-stabilized apartments in New York City, making them major providers of affordable housing. Each Debtor owns one or a small number of buildings financed by separate, non-cross-collateralized mortgages held by Flagstar Bank, N.A. ("Flagstar"). The Debtors stopped paying mortgages in January 2025 and filed bankruptcy in May 2025, just before state-court receivership and foreclosure actions initiated by Flagstar could proceed.
Flagstar holds approximately $7 million collected prepetition for paying property taxes, which has become a flashpoint in the dispute. Debtors sought to force Flagstar to release these funds to pay the July 2025 property taxes, while Flagstar opposed the use of its collateral without adequate protection.
The Debtors' Motion and Supporting Arguments
The Debtors sought final authorization to use cash collateral pursuant to a 13-week budget projecting approximately $18.6 million in operational disbursements and an additional $9.7 million in professional fees related to the administration of the Chapter 11 cases. In support of their motion, the Debtors advanced several arguments:
- Equity Cushion: The Debtors relied on an expert appraisal by Michelle Zell, asserting that a majority of their properties were significantly overcollateralized, thereby affording Flagstar a sufficient equity cushion to satisfy the adequate protection standard under 11 U.S.C. § 363(e).
- Benefit to the Secured Creditor: The Debtors maintained that all proposed expenditures—including professional fees—would directly benefit Flagstar by preserving property values and ensuring continued operations of the Debtors' rent-stabilized multifamily housing portfolio, which comprises more than 5,000 units across New York City.
- Surcharge Under 11 U.S.C. § 506(c): The Debtors further contended that the contemplated expenditures were reasonable, necessary, and directly benefitted Flagstar, thereby qualifying for a potential surcharge against Flagstar's collateral.
Flagstar's Objections
Flagstar filed a comprehensive objection, opposing the Debtors' request for continued use of cash collateral. The bank's principal contentions included the following:
- Debtor-by-Debtor Adequate Protection: Flagstar emphasized that each Debtor was a separate, single-asset entity with no cross-collateralization among them. Accordingly, Flagstar argued that each Debtor was independently required to demonstrate adequate protection of its collateral and that the use of a consolidated budget obscured the financial condition and equity position of individual Debtors.
- Inadequate Equity Cushions: Even crediting the Debtors' valuations, Flagstar noted that several Debtors exhibited equity cushions below 15–18%, a threshold courts often deem insufficient to establish adequate protection.
- Questionable Expenditures and Insider Transactions: Flagstar challenged the reasonableness of certain budgeted expenses, including management fees paid to insider affiliates and unitemized professional fees. The bank argued these expenditures could not qualify as surchargeable under section 506(c), particularly absent a clear showing of direct benefit.
- Lack of Financial Transparency: Flagstar raised significant concerns about the Debtors' financial disclosures, including unexplained depletion of cash prior to the petition date and the absence of any unencumbered assets or proposed non-debtor funding sources. This lack of transparency, in Flagstar's view, made it impossible to assess whether its security interests would be adequately protected.
The Bankruptcy Court's Ruling
The bankruptcy court denied the motion without prejudice, to the Debtors re-filing with targeted, entity-specific adequate protection proposals, saying it "appears likely that some subset of Debtors have significant equity cushions that may alone suffice to adequately protect [the lender's] interests."
Key Holdings
1. Adequate Protection Must be Shown on a Per-Debtor Basis
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.
2. Equity Cushion Thresholds
The Debtors contended that the 15% across-the-board equity cushion by itself was sufficient to provide adequate protection. The Court noted that although some courts will consider an equity cushion above 15% to be sufficient, many demand 20%. Here, several of the Debtors' equity cushions hovered below 15–18%, which Judge Jones found inadequate to support a blanket order. According to the Court, the Debtors' contention that the 15% across-the-board equity cushion by itself was sufficient to provide adequate protection missed the mark:
[L]eveling all equity cushions at 15% imposes serious risk on [the lender] given Debtors' seeming ongoing negative cash flow even during a period when they ceased paying their mortgage obligations, and given how speculative (at best) it is to think that favorable deal terms could be achieved given the acknowledged challenges facing the rent-regulated housing real estate market, and given [the debtors' expert's] assumption that a robust marketing period would be required to achieve the sale outcomes she projects.
The Court found: "Debtors have not established a sufficient equity cushion as to each property to establish adequate protection to [the lender] based solely on the asserted existence of an equity cushion."
3. Scope of Section 506(c) Surcharge
As a primary component of the proposed adequate protection, the Debtors argued that all of their expenditures constituted "adequate protection payments because all contemplated expenditures are eligible for surcharge under Bankruptcy Code Section 506(c)." According to the Debtors, "all such payments benefit Flagstar's interests by preserving and increasing each Debtor's value compared to the alternative of a liquidation." Rejecting this contention, the Court held "that Debtors' § 506(c) contention is overbroad and unsupported, particularly insofar as it seeks to deem payment of Debtors' professional fees as a form of adequate protection or surchargeable payment, but also as to the extent of certain other payments." As the Court explained:
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.
On the issue of whether the Debtors could surcharge Flagstar's collateral in advance for projected administrative and professional fees, Judge Jones emphasized that section 506(c) "is forward-looking only insofar as it allows the estate to recoup expenses already incurred" and may not serve as a pre-approval for future cash needs. Debtors must instead secure explicit consent for key operating costs or rely on the interim order and then employ section 506(c) to recover—and only recover—those discrete, reasonable outlays after the fact: "[T]he proper analysis under section 506(c) is not hypothetical and prospective, but rather is retrospective and concrete, assessing whether a particular expenditure was 'reasonable' and 'necessary' and was devoted to 'preserving' or 'disposing of' property in a manner that directly benefitted the secured creditor."
Notably, the Court left the door open for renewal: The Debtors may return with tailor-made proposals that specify, for each property, the amount and necessity of expenses, the timing of cash collateral usage, and the direct value uplift to the secured creditor's lien.
Practical Takeaways for Creditors and Debtors
This decision offers several important lessons for both secured creditors and Chapter 11 debtors, particularly in real estate-driven restructurings involving multiple affiliated entities:
- Single-Asset Debtors Must Provide Individualized Adequate Protection: Where each Debtor holds a distinct parcel of collateral and obligations are not cross-collateralized, courts will require evidence of adequate protection on a debtor-by-debtor basis. Consolidated budgets and generalized arguments are likely to fall short.
- Equity Cushion Must Be Substantiated and Sufficient: Courts are unlikely to find adequate protection where equity cushions fall below generally accepted thresholds (often 15–20%)—even when supported by expert valuation testimony. Proposals to "average out" equity through intercompany mechanisms will face heavy scrutiny.
- Section 506(c) Is Not a Substitute for Adequate Protection: Efforts to justify the sweeping use of cash collateral based on the theory that all expenditures benefit the secured creditor under section 506(c) will face an uphill battle. Courts typically require a direct, quantifiable benefit and apply the surcharge doctrine retrospectively—not as a preemptive justification for funding estate-wide expenses.
- Transparency and Documentation Are Essential: Courts expect debtors to provide detailed, property-level financial data, clear justification for budget line items, and accountability regarding insider transactions and prepetition conduct. Vague assertions and incomplete disclosures can materially undermine the Debtor's position.
- Judicial Flexibility Depends on Evidentiary Rigor: While courts may be sympathetic to debtors' operational challenges—particularly where housing or public interest is implicated—they will not sacrifice statutory protections for secured creditors. Relief is more likely where debtors proactively tailor requests, support them with robust evidence, and address creditor concerns in good faith.
Conclusion
The Broadway Realty decision underscores the rigorous evidentiary burden debtors must meet to obtain continued access to cash collateral over a secured creditor's objection. Courts will not presume adequate protection exists—particularly in cases involving multiple single-asset real estate entities—nor will they accept generalized assertions that expenditures benefit the secured creditor. Instead, debtors must provide detailed, property-specific financials and demonstrate that each proposed use of funds either maintains collateral value or otherwise satisfies the statutory requirements under the Bankruptcy Code.
For secured lenders, the ruling reaffirms the importance of insisting on transparency, individualized analysis, and evidentiary support before consenting to or being compelled to permit the use of cash collateral. For debtors, it serves as a cautionary reminder: creative restructuring strategies and equitable appeals cannot substitute for the hard proof required by section 363(e). Where that proof is lacking, courts will not hesitate to deny relief—even in cases with broad operational impact.
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