A recent decision from the US Bankruptcy Court for the Southern District of New York has drawn a sharp line for real estate owners seeking to use lender cash in bankruptcy.1 In denying Broadway Realty’s motion to access rental income tied to over 80 rent-stabilized properties in New York City, the court reinforced a fundamental principle of bankruptcy law: debtors must prove—not presume—that their use of a lender’s collateral is justified and adequately protected.
The ruling offers a cautionary tale for landlords, investors, and lenders navigating distressed real estate. It underscores the importance of transparency, property-level financial detail, and a clear showing of benefit to secured creditors.
The Legal Framework: Section 363 and Adequate Protection
Under Section 363 of the Bankruptcy Code, a debtor may not use “cash collateral”—such as rental income or other funds subject to a lender’s lien—without either the lender’s consent or a court order. To obtain that order, the debtor must demonstrate that the lender’s interest is “adequately protected.” Adequate protection, codified in Section 361 of the Bankruptcy Code, is typically provided via three non-exclusive means: (1) requiring cash or other payments to the secured lender to the extent of any diminution in value in the lender’s collateral; (2) additional or replacement liens in favor of the lender; or (3) granting such other relief that ultimately results in the secured lender receiving the “indubitable equivalent” of its interest in the subject collateral.
The Case: Broadway Realty’s Chapter 11 Filing
Broadway Realty and 81 affiliated entities filed for Chapter 11 protection on May 21, 2025. Each entity owns one or more rent-stabilized apartment buildings in New York City, collectively totaling more than 5,000 units across four New York City boroughs. The properties are financed through individual mortgage loans from Flagstar Bank, with no cross-collateralization between them. Each loan is secured by the real property owned by the respective Debtor and by that Debtor’s rent proceeds and cash.
Shortly after filing, the Debtors sought court approval to use rental income—Flagstar’s cash collateral—to fund property operations and pay for bankruptcy-related expenses. The proposed 13-week budget totaled approximately $18.6 million in disbursements, plus ongoing “bankruptcy disbursements” including escrowed professional fees of more than $9.7 million. The budget also assumed the use of $7 million in escrowed tax funds held by Flagstar to pay July property taxes.
The Debtors’ motion drew an objection from Flagstar, the Debtors’ sole secured creditor and the only party that could be adversely affected by the continuing use of cash collateral. Flagstar’s objection overarchingly argued that the Debtors’ request would essentially deplete Flagstar’s collateral without providing the required adequate protection in accordance with Section 363(e) of the Bankruptcy Code. In particular, Flagstar argued that (1) each Debtor is, in essence, a single-asset real estate debtor; (2) the cases have not been substantively consolidated; (3) each Flagstar loan is not cross-collateralized and therefore can only be satisfied from the assets of the specific borrower; and (4) the Debtors have not established (and cannot show) that each Debtor will adequately assure Flagstar of the continued availability and lack of diminution of its collateral as a result of the proposed use of cash collateral.
The Debtors’ Responsive Arguments
- Argument 1: Equity Cushion as Protection: The Debtors’ first line of defense was the claim that each property had an “equity cushion”—a buffer between the property’s value and the debt owed—that protected Flagstar’s interests. Their valuation expert, Michelle Zell, testified that most properties had cushions of at least 15% and a subset of Debtors had an equity cushion of less than 18%, which Ms. Zell opined was sufficient from her perspective.
- Argument 2: All Expenses Benefit the Lender: The Debtors next argued that their proposed expenses, including legal and professional fees, would ultimately benefit Flagstar by increasing the value of the properties by preserving them as a going concern. Relying on Section 506(c) of the Bankruptcy Code, which allows certain costs to be charged against a lender’s collateral if they directly benefit the lender, the Debtors argued that such payments should be considered surcharges and therefore be credited as adequate protection payments.
- Argument 3: No Harm, No Foul: The Debtors also suggested that as long as Flagstar was not actually harmed—i.e., its collateral was not diminished—there was no need for additional protection.
The Court’s Ruling
The court ultimately sided with Flagstar. First, the Court noted that while a 15% equity cushion was generally accepted, most courts nonetheless require a 20% equity cushion to demonstrate that a lender’s collateral is adequately protected. Even accepting the Debtors’ valuations at face value, the Court rejected the equity cushion argument without a proper mechanism to redistribute funds.
Acknowledging that some operating costs might benefit the lender, the Court emphasized that Section 506(c) of the Bankruptcy Code is narrow, not covering general administrative costs or legal fees unless they clearly and directly preserve the lender’s collateral. The Court was particularly troubled by the inclusion of nearly $10 million in professional fees, which were not broken down by category or tied to specific benefits for Flagstar, and the lack of clarity in respect thereof. For example, the Debtors’ Chief Restructuring Officer admitted that the budget, in part, comprised of a $35,000 monthly fee for his firm notwithstanding that such fee covered services provided to both debtor and non-debtor entities. At a minimum, the Court ruled that such lack of clarity made it impossible to assess whether the fees were reasonable or necessary. More fundamentally, the Court noted that Flagstar was being asked to allow its collateral to be used to fund litigation against itself. This, the Court said, was not what Section 506(c) was designed to permit. The statute allows for recovery of costs that directly preserve or dispose of collateral—not for funding adversarial proceedings that the lender opposes.
Last, the Court rejected the Debtors’ “no harm, no foul” argument, finding that it ignored the express terms of Section 363(c), which requires conditioning permission to use cash collateral on terms that will adequately protect security interests—an explicitly prospective enterprise, not one that requires a secured lender to wait and later demonstrate impairment of the security interest.
Conclusion
The Broadway Realty ruling is a wake-up call for distressed real estate owners and a reassuring signal for lenders. It reinforces the principle that bankruptcy is a tool for reorganization—not a free pass to use secured funds without safeguards.
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1 In re Broadway Realty I Co., LLC, et al., 2025 Bankr. LEXIS 1550 (Bankr. S.D.N.Y. June 29, 2025).
