The Cap Comes Off: Expanding the Reach of the Single Asset Real Estate Provisions
The Bankruptcy Code imposes special expedited procedures for cases in which the bankruptcy estate consists of a single property or project. In these cases, known as single asset real estate cases, the automatic stay will terminate 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 … .”1 Accordingly, in single asset real estate cases, secured lenders may proceed with foreclosure proceedings upon the expiration of the 90-day period if the debtor has not filed the required plan or begun making monthly payments.
Prior to 2005, the single asset real estate provisions were limited in scope to relatively small bankruptcies involving noncontingent, liquidated secured debts in an aggregate amount of no more than $4 million. The 2005 amendment to the Bankruptcy Code (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005), however, eliminated the $4 million cap, expanding the reach of the single asset real estate provisions. The House Report on the 2005 amendment explained:
The present $4 million cap prevents the use of the expedited relief procedure in many commercial property reorganizations, and effectively provides an opportunity for a number of debtors to abusively file for bankruptcy in order to obtain the protection of the automatic stay against their creditors. As a result of this amendment, creditors in more cases will be able to obtain the expedited relief from the automatic stay which is made available under section 362(d)(3) of the Bankruptcy Code.2
By eliminating the $4 million cap on single asset real estate cases, the amended Bankruptcy Code now applies to cases in which the debtors are large multimillion dollar single purpose entities (SPE). Prior to the amendment, many of these SPEs were able to file petitions for relief pursuant to Chapter 11 of the Bankruptcy Code and could potentially suspend payments to the fully secured mortgagee while the SPEs attempted to refinance or restructure their debts. Under the old paradigm, these SPEs had at least 180 days of exclusivity, if not further extended by the bankruptcy court, within which to possibly suspend payments to its mortgagee while formulating its bankruptcy plan. With the amendment, these SPEs must either file a plan of reorganization that has a reasonable possibility of being confirmed or begin making monthly payments, as set forth above, within the initial 90-day period. For many large real estate projects, 90 days simply is too short a time to restructure or refinance.
Developers of real estate projects may want to consider including two or more projects in each SPE in an effort to avoid the consequence of being a “single asset real estate” case in the event a bankruptcy petition may one day need to be filed. In order for this strategy to work, however, the properties must be unrelated. Courts have ruled that a bankruptcy estate consisting of separate properties can be treated as a single asset real estate bankruptcy if those properties are linked together by a common plan or scheme involving their use.3
Despite the amendment’s expansion, Congress maintained other limitations to the scope of the single asset real estate provisions. As amended, the Bankruptcy Code defines single asset real estate as “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 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.”4
Initially, the phrase “on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental,” created a carve-out for real estate oriented businesses. Construing this phrase, courts have distinguished apartment buildings, commercial office buildings and cooperatives, which are subject to the single asset real estate provisions, from hotels, ski resorts and golf courses, which are not.5
The single asset real estate provisions are also still limited to property that “generates substantially all of the gross income of a debtor,” but the exact scope of this limitation is unclear. Only three reported cases have construed this phrase, two of which involved bankruptcies filed by individuals.6 In these latter cases, the issue was whether single asset real estate status was appropriate when the real estate in question was not currently generating income.7 In both cases, the courts ruled that the single asset real estate designation applied because the debtors’ proposed plans were to be funded primarily through future income produced by the real estate.8 In the third case, the court ruled that the single asset real estate provisions applied when the only asset of the bankrupt entity was undeveloped land that produced no income.9
The removal of the $4 million cap will likely lead to additional litigation concerning the scope of the single asset real estate provisions. For secured creditors, these provisions are a potentially powerful tool to protect their interests in cases involving real estate SPEs. Accordingly, creditors will have a strong incentive to move to have cases deemed single asset real estate bankruptcies whenever possible. In order to take full advantage of the restricted deadlines, secured creditors should seek such determinations early in a case. Debtors, however, will likely seek to limit the reach of the single asset real estate provisions, either by seeking an expansive reading of the definitional limitations, or by seeking extensions “for cause” as permitted in the automatic stay provisions. Although it is difficult to determine how courts will ultimately interpret these provisions, it is safe to assume that the case law concerning these provisions will develop more rapidly in the next few years.
1 11 U.S.C. §362(d)(3)
2 P.L. 109-8, BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 HOUSE REPORT NO. 109-31(I) April 8, 2005 H.R. REP. 109-31(I).
3 In re The McGreals, 201 B.R. 736 (Bankr. E.D. Pa. 1996) (two adjacent properties, one developed and one undeveloped, treated as single asset real estate); In re Philmont Dev. Co., 181 B.R. 220 (Bankr. E.D. Pa. 1995) (group of single-family semi-detached homes treated as single asset real estate).
4 11 U.S.C. §101(51B)
5 In re CBJ Dev., Inc., 202 B.R. 467 (9th Cir. BAP 1996) (full service hotel does not qualify as single asset real estate); In re Whispering Pines Estate, Inc., 341 B.R. 134 (Bankr. D. N.H. 2006) (hotel does not qualify as single asset real estate); In re Perry Hollow Management Co., Inc., No. 99-13373, 2000 WL 33679447 (Bankr. D. N.H. 2000) (golf course does not qualify as single asset real estate); In re Robinson, 225 B.R. 228 (Bankr. N.D. Okla. 1998) (ski and golf resort does not qualify as single asset real estate); In re Larry Goodwin Golf, Inc., 219 B.R. 391 (Bankr. M.D. N.C. 1997) (golf course does not qualify as single asset real estate); In re Kkemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995) (marina does not qualify as single asset real estate); In re 83-84 116th Owners Corp., 214 B.R. 530 (Bankr. E.D. N.Y. 1997) (coop qualifies as single asset real estate)
6 In re Kinard, No. 01-03621, 2001 WL 1806039 (Bankr. D. S.C. 2001); In re Syed, 238 B.R. 133 (Bankr. N.D. Ill. 1999).
7 Kinard, 2001 WL 1806039, *5; Syed, 238 B.R. at 140.
8 Kinard, 2001 WL 1806039, *5; Syed, 238 B.R. at 140.
9 In re Oceanside Mission Assocs., 192 B.R. 232 (Bankr. S.D. Cal. 1996).