When a property owner files for bankruptcy, all proceedings against them are stayed to allow time to reorganize assets and, in some instances, repay creditors. However, bankruptcy courts across the country have held that there are certain situations where actions against a debtor will not be stayed, including those initiated by the government. When a property owner is confronted by eminent domain and files for bankruptcy (or vice versa) the eminent domain action will usually proceed.
If bankruptcy occurs before the eminent domain taking, the eminent domain award becomes property of the bankruptcy estate, unless the property is removed from the estate. If a property owner is in chapter 11, then the owner will normally be the debtor in possession and they will control the litigation of the eminent domain matter. If the owner is in chapter 7, then the entity controlling the matter will be the chapter 7 trustee that’s been appointed by the bankruptcy court. In either instance, the eminent domain lawyer’s fee agreement must be approved by the bankruptcy court.
If bankruptcy occurs after the taking, the eminent domain claim will still be an asset of the estate, but now the eminent domain attorney will need to ensure their fee agreement is approved by the bankruptcy court. If the agreement was hourly, any fee not paid might be listed as an unsecured claim.
If the property is subject to a mortgage, it could be removed from the bankruptcy estate if there is no equity. In this instance, the eminent domain attorney must be retained by the lender, even if they were initially retained by the property owner. The proceeds of the eminent domain claim will be applied to any claims of the mortgagee, and whether any balance is returned to the bankruptcy estate could depend upon the agreement between the lender and the bankruptcy trustee; or the matter could be litigated. If the property remained in the bankruptcy estate, any proceeds of the eminent domain claim will be an asset of the bankruptcy estate subject to any claims of mortgagees.
If you’re a property owner confronted with both eminent domain and bankruptcy, you need to know if you’re in chapter 11 or 7, whether the eminent domain taking occurred before or after the bankruptcy proceedings were initiated, and if you have equity in the property. From here, consult with your eminent domain lawyer and get them in touch with your bankruptcy lawyer.