Bankruptcy
The Nature of Single Asset Real Estate
By Dale C.
Schian
This paper was originally presented as part of the
Bankruptcy Section program at the June 2011 convention of the State Bar of Arizona.
It was updated on September 1, 2011, for presentation at the Arizona Trustee
Association's 24th Annual AIA Convention and again in January 2012.
I. The Statute
“Single Asset Real Estate” is
defined in 11 U.S.C. § 101(51B):
The term “single asset real
estate” means real property constituting a single property or project, other
than residential real property with fewer than 4 residential units, which
generates substantially all of the gross income of a debtor[1] who is not a family
farmer and on which no substantial business is being conducted by a debtor other
than the business of operating the real property and activities incidental.[2]
(emphasis added).
11 U.S.C. § 362(d)(3) indentifies
the consequence of a debtor owning “single asset real estate,” frequently
abbreviated as “SARE”:
(3) With respect to a stay of an
act against single asset real estate under subsection (a), by a creditor whose
claim is secured by an interest in such real estate, unless, not later than the
date that is 90 days after the entry of the order for relief (or such later date
as the court may determine for cause by order entered within that 90-day period)
or 30 days after the court determines that the debtor is subject to this
paragraph, whichever is later -
(A) the debtor has filed a plan
of reorganization that has a reasonable possibility of being confirmed within a
reasonable time; or
(B) the debtor has commenced
monthly payments that-
(i) may, in the debtor’s sole
discretion, notwithstanding section 363(c)(2), be made from rents or other
income generated before, on, or after the date of the commencement of the case
by or from the property to each creditor whose claim is secured by such real
estate (other than a claim secured by a judgment lien or by an unmatured
statutory lien); and
(ii) are in an amount equal to
interest at the then applicable nondefault contract rate of interest on the
value of the creditor’s interest in the real estate
Thus, unless the debtor
starts making interest payments, it gets only 90 days to submit a reorganization
plan (or 30 days later than when the court designates the case a SARE case,
whichever is later), compared with 120 days for a debtor without SARE property. Compare 11 U.S.C. § 1121(b) with § 362(d)(3).
Nowhere does the Code identify
either a “single asset real estate debtor” or a “single asset real estate
business.” Nevertheless, Official Form 1, the Voluntary Petition, promulgated
pursuant to Bankr. Rule 9009, asks under “Nature of Business” (Check one box):
“Single Asset Real Estate as defined in 11 U.S.C. § 101(51B).”[3]
II. Purpose of SARE Provisions
in Code - A Brief History of Single Asset Real Estate Entities in Bankruptcy
In the wake of the Great
Depression, financial institutions were left holding large amounts of real
estate that could only be sold at greatly reduced prices.[4]
At the same time, several states halted foreclosures.[5]
In response, Congress passed Chapter XII as part of the Chandler Act in 1938,
allowing individual and partnership real estate owners to reorganize.[6]
Single asset real estate cases comprised the majority of Chapter XII cases.[7]
During the 1980s, a real estate
crisis led many single asset real estate entities to seek Chapter 11 protection.[8]
In the view of some judges, these filings “clogged” the bankruptcy courts.[9]
Creditors accused single asset real estate debtors of unfairly using the Code to
avoid foreclosure (and any resultant tax liabilities), while capturing the benefits
of a market reversal.[10]
Commentators echoed these criticisms, pointing out that the traditional policy
justifications for bankruptcy, such as preserving going concern value, jobs, and
providing an orderly distribution to a diverse body of creditors, did not apply
in a single asset real estate bankruptcy.[11]
Throughout the Eighties, courts
responded by dismissing the cases of many single asset real estate entities as
having been filed in bad faith.[12]
The Eleventh Circuit Court of Appeals in 1984 surmised their reasoning. Dismissal
was appropriate “… when there is no realistic possibility of an effective
reorganization and it is evident that the debtor seeks merely to delay or
frustrate the legitimate efforts of secured creditors to enforce their rights
...”[13]
In 1994, Congress addressed the issue by enacting 11 U.S.C. § 362(d)(3), which shortened the time
granted to SARE debtors to file a plan[14],
and § 101(51)(B), which defined SARE property.[15]
The legislative history reveals that
Congress agreed with the concerns of the
Eleventh Circuit:
A single asset real estate
Chapter 11 case presents special concerns. As the name implies, the principal
asset in this type of case consists of some form of real estate, such as
undeveloped land. Typically, the form of ownership of a single asset real estate
debtor is a corporation or limited partnership. The largest creditor in a single
asset real estate case is typically the secured lender who advanced the funds to
the debtor to acquire the real property. Often, a single asset real estate
debtor resorts to filing for bankruptcy relief for the sole purpose of staying
an impending foreclosure proceeding or sale commenced by the secured lender.
H. Rep. No. 31, 109th Cong., 1st
Sess. (2005)
Courts interpreting § 362(d)(3)
have recognized that it was designed to correct the “relative unfairness of
lengthy delay” in single asset cases.[16]
Where a single case does not quickly “kick toward” confirmation, a debtor must
compensate its mortgagee for the time-value of the mortgagee’s debt investment,
by payment of interest at the original contract rate.[17]
At least one court of appeals has recognized that § 362(d)(3) did not supersede prior
jurisprudence subjecting filers to a factor-based test for bad faith.[18]
III. The Current
Definition of SARE Debtor Has Been Narrowed Substantially by the Courts
Courts have significant narrowed
the types of properties that are subject to § 362(d)(3) from the statutory
definition.[19]
Timber farms,[20]
slip marinas,[21]
hotels,[22]
senior housing facilities,[23]
steel scrap processing facilities[24]
and “any business involving manufacturing, sales, or services[25]
have been held to be outside of the § 101(51) definition. One commentator has
concluded
that “[u]nless the property in question is underdeveloped or, at most,
the debtor is simply collecting rent in exchange for only providing space and no
additional services, it will not be subjected to mandatory relief from stay
under § 362(d)(3).[26]
Thus, only where the property
is the business, such as apartment buildings, strip mall shopping
centers, and undeveloped parcels of real property, does the debtor's real
property remain within the ambit of §
101(51B). In re 83-84 116th Owners Corp., 214 B.R. 530, 534
(Bankr. E.D.N.Y. 1997). Creative entity formation does not appear to alter this
rule. The Bankruptcy Court for the District of New Jersey
found that a group of 32 affiliated debtors who owned separate real estate
development projects was a SARE debtor, rejecting the debtors’ attempt to
recharacterize their business as a collection of separate business operations
with a “separate construction trailer and model for each property, separate
employees who conduct closings and supervise the construction work, and
construction of common space, amenities and roadways incident to each project.[27]
IV. Conclusion
Bankruptcy courts are well aware of the traditional policy concerns regarding single asset real
estate debtors, and these concerns, rather than a strict application of the
statute, appears to control. Where the preservation of the debtor’s (or its
affiliates') business comports with the policy objectives behind reorganization,
courts find that the debtor is not a single asset real estate debtor. As stated
in In re Mayer Pollock Steel Corp.:[28]
From a human point of view, there
are real jobs and production of assets in the national economy at stake if plan
confirmation is denied, relief is granted to the Bank, and liquidation follows.
Compare In re Dollar Associates, 172 B.R. 945, 949-50 (Bankr. N.D. Cal.
1994); and River Village, supra, 161 B.R. [127 (Bankr. E.D. Pa. 1993)]
(no such considerations arise in single asset real estate cases). Processing
scrap steel may not be the backbone of the economy or take its place among the
most socially significant accomplishments of man, but preservation of entities
like the Debtors is, to a large extent, what Chapter 11 of the Bankruptcy Code
is all about.[29]
The court in In re Kkemko,
Inc., which found that a slip marina was not a SARE, employed similar
reasoning, stating that § 362(d)(3) and § 101(51B) were only meant to address
the situation.[30]
[W]here the owner of an
encumbered building is attempting to avert loss of his building to his major
lender who is grossly undersecured, and where there is no real hope that the
owner can come forth with a viable confirmable Chapter 11 plan.
Because it is common for an
enterprise to hold assets such as real property in separate entities,[31]
regardless of the nature of the aggregate enterprise, there seems little doubt that
a narrow construction of § 101(5IB) has served the policies underlying Chapter 11.
[1] The
term "gross income" in the bankruptcy code's definition of single asset
real estate is determined in accordance with the Internal Revenue Code's
definition of "gross income" in 26 U.S.C. § 61. In re Wagner, 808 F.2d
542, passim, (7th Cir. 1986) (Posner, J.); see also In re Lewis, 401 B.R.
431, 439-40 (Bankr. C.D. Cal. 2009); In re Golf Club Partners,
07-040096-BTR-11, 2007 WL 1176010, at *5 (E.D. Tex. Feb. 15, 2007).
[2] BAPCPA eliminated the $4,000,000 cap which
exempted larger real assets from being classified as SARE.
[3]
Checking the box is not determinative of whether a debtor's assets are
single asset real estate. In re View West Condominium Ass’n, Inc., 22
Fla. L. Weekly Fed. B 3, 1, n.1 (Bankr. S.D. Fla. 2008) (stating "[a]lthough
the Debtor checked the box . . . that determination is a legal one that
must ultimately be made by the Court," and finding that a condominium
development owned by the debtor was not single asset real estate,
because the debtor had the power to impose assessments on condominium
owners); see also In re SBPM Holdings, Inc., 10-80310-G3-11, 2010 WL
4976952, at *3 (Bankr. S.D. Tex. Dec. 2, 2010) (debtor did not "check
the box," nonetheless; its office building property was single asset
real estate because it was the debtor's sole asset and sole source of
income).
[4] John Butler, Jr., J. Eric Ivester, Stephen S.
Neuman. We Can’t Pay the Mortgage Either: Current Issues in Commercial
Real Estate Bankruptcies.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Robert N. H. Christmas, Eleventh Circuit Decision
Reaffirms Bad-Faith Precedent in single asset Cases, AM. BANKR. lNST.
J., February 2005, at 32.
[10] Butler, Ivester and Neuman, supra note 2, at 3 .
[11] Id.; see also, e.g., Robert M. Zinman, No Chapter
11 for Single Asset Real Estate, No “New Value” for Single Asset Real
Estate, Am. Bankr. lost. Winter Leadership Conf. (Dec. 5-7, 1996)
(unpublished article on file with American Bankruptcy Institute and
National Bankruptcy Review Commission) (stating single asset cases do
not serve traditional purposes of chapter II, such as preservation of
jobs and going concern value).
[12] Id. citing Little Creek Dev. Co. v. Commonwealth
Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1073 (5th
Cir. 1986) (listing factors which roughly correspond to the definition
of a single asset real estate property in § 101 (5 I) as evidencing bad
faith). See also In re National Land Corp., 825 F.2d at 298; In re
Heritage Wood’n Lakes Estates, Inc., 73 B.R. 511, 514 (Bankr. M.D. Fla.
1987); In re Sar-Manco, Inc., 70 B.R. 132, 141 (Bankr. M.D. Fla. 1986);
In re 83-84 116th Owners Corp., 214 B.R. 530,535 (Bankr. E.D.N.Y. 1997).
[13] In re Albany Partners, Ltd., 749 F.2d 670,674
(11th Cir. 1984) ( collecting cases).
[14] Butler, Ivester and Neumann, supra note 2, 4.
[15] Id.
[16] Alfred Adams, Jr., Jason Kirkham, The Real Estate
Lender’s Updated Guide to Single Asset Bankruptcy Reorganizations. 8
DEPAUL BUS. & COM. LJ. 1,4 citing In re Archway Apts. Ltd., 206 B.R.
463, 465 (Bankr, M.D. Tenn. 1997) and In re Heather Apts. Ltd. P’ship,
366 B.R. 45, 49-50 (Bankr. D. Minn. 2007).
[17] Adams & Kirkham, supra note 13, citing In re
Heather Apts. Ltd. P’ship, 366 B.R. 45,49-50 (Bankr. D. Minn. 2007).
[18] In re State St. Houses, Inc., 356 F.3d 1345,
1347 (11th Cir. 2004).
[19] See George W. Kuney, Jeffrey R. Patterson,
Single Asset Real Estate Under 11 U.S.C. § 362(d)(3): A Narrower
Construction Than You Might Expect (or, Why Every Hotel Should Have A
Gift Shop and Troubled Golf Courses Should Keep Their Bars Open), 26
CAL. BANKR. J. 123, passim (2002).
[20] See In re Scotia Pacific, Co. LLC, 508 F.3d
214 (5th Cir. 2007).
[21] See In re Kkemko, 181 B.R. 47 (Bankr. S.D.
Ohio 1995).
[22]
See In re CBl Dev., Inc., 202 B.R. 467 (B.A.P.
9th Cir. 1996).
[23] See In re Appleridge Retirement Cmty., Inc.,
422 B.R. 383 (Bankr. W.D.N.Y. 2010).
[24] See In re Mayer Pollock Steel Corp., 174 B.R. 414
(Bankr. E.D. Pa. 1994).
[25] See In re Philmont Dev., Co., 181 B.R. 220,
223 (Bankr. E.D. Pa. 1995).
[26] See Kuney & Patterson, supra note 18, at 131.
[27] In re Kara Homes, Inc., 363 B.R. 399,405 (Bankr.
D.N.J. 2007).
[28] In re Mayer Pollock Steel Corp., 174 B.R. 414,
422-23 (Bankr. E.D. Pa. 1994).
[29] Id. at 422-23.
[30] In re Kkemko, 181 B.R. 47, 51 (Bankr. S.D.
Ohio L995).
[31] See James Blake. From the Offshore World of
International Finance to Your Backyard; Structuring Series LLCs for
Diverse Business Purposes. 9 DEPAUL BUS. & COM. L.J. 1, Fall 2010, at
20.
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