WASHINGTON, DC-There is ample evidence that commercial real estate is hitting its stride, even getting a second wind. Still, investors and lenders must beware of the occasional curve ball thrown at them--in this case, in the form of the US bankruptcy code, Nelson F. Migdal, a locally based shareholder with Greenberg Traurig, tells me.

Migdal, who was a facilitator at ALM Real Estate Media Group’s recent Washington, DC RealShare conference, points to a bankruptcy case decided in the Western District of Pennsylvania as an example. In short, the US bankruptcy court wields significant powers, he says. Often a decision made by the bench can take real estate players by surprise. “It’s always a wild card--will this deal or that contractual obligation wind up in bankruptcy court and then be magically overruled by a stroke of the judge‘s pen,” he says.

The case he is referring to, Shubh Hotels Pittsburgh LLC, involved a hotel that operated under a franchise agreement from a premier hotel company. The hotel lost its flag, followed by a Chapter 11 bankruptcy petition. The owner of the hotel, or the debtor, as it became known in the court proceedings, ran the hotel as an independent entity, but that quickly went sour, Migdal relates.

The judge, noting that the hotel’s revenue had declined between 21% and 25% for a period of about three months, told the debtor to get a new franchise agreement. It did--a step held in favor by the judge and the unsecured creditors committee. “The party not happy about it was the lender,” Migdal says. “From a purely technical point of view, the lender, like all of those who disperse money secured by franchised hotels, wanted to know about and approve both the franchisor providing the franchise and the hotel manager that would provide day-to-day operations in compliance with the standards established by the brand.”

The judge’s response was essentially, “too bad.” Not that he was unaware of the business dynamics in this case. As Migdal explains, “the judge did a pretty nice job describing the value of trademarks and the use of the intellectual property that a franchise provides, as well as the benefits of a reservation system, access to guest loyalty programs and franchisor provided employee training based upon the proven track record of the brand.” Bottom line for the lender, though, was that the fact the new franchise might be against its wishes was irrelevant.

“The judge reminded us that he has the power and authority under the United States Bankruptcy Code to suspend the applicability of terms and conditions previously agreed to by the debtor,” says Migdal. As the judge put it, “bankruptcy causes certain provisions of a loan document to be suspended. This is one of those instances.”

So now what? The economy is improving in many markets so maybe this hotel with its new flag can survive. “Since our story began with a franchisor terminating its agreement and pulling its brand off the property, we can only hope that the new franchisor does not find itself in a similar situation--having to consider terminating its franchise agreement and pulling its brand off the property due to service deficiencies, poor guest satisfaction scores or any of the other criteria used to evaluate a franchisee’s performance,” Migdal notes.

As for the lender, the decision is yet another reminder that even seemingly ironclad agreements and legions of attorneys performing due diligence before a contract is signed do not trump the powers of the Bankruptcy Code to suspend the effect of a debtor’s agreement.