Judge Lamoutte Sua Sponte Revokes Subchapter V Designation From SARE Debtor Entities whose primary activity is the business of owning single asset
Judge Lamoutte Sua Sponte Revokes Subchapter V Designation From SARE Debtor Entities whose primary activity is the business of owning single asset
real estate (“SARE”) have long been treated differently in bankruptcy. This reflects concerns about SARE cases being filed for the sole purpose of stopping foreclosures (i.e., bad faith filings) and/or which lack a reasonable expectation of reorganization.
To address these concerns, the Bankruptcy Code permits termination of the automatic stay if (a) a plan with a reasonable possibility of being timely confirmed is not filed within 90 days, or (b) interest payments have not commenced to the secured creditor.
Additionally, SARE debtors are excluded from the definition of a small business debtor and of a debtor for purposes of subchapter V. In a recent case, the debtor argued that this exclusion did not apply to affiliates of a debtor under subchapter V. To understand the debtor’s argument, it is necessary to examine the relevant definition: “The term ‘debtor’[…] means a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) […].” 11 U.S.C. § 1182(1)(A).
According to this definition, “any affiliate of” a subchapter V debtor is also allowed to proceed under subchapter V. But what if the affiliate of a subchapter V debtor also meets the definition of a SARE?
Although no prior case seems to have addressed this controversy directly, some judges and practitioners appear to have assumed that the SARE exclusion also applies to affiliates.
In this case, the debtor argued that the proper reading of the SARE exclusion was that it did not apply to the immediately preceding phrase concerning affiliates, especially since such phrase used the word “any”, without qualification, when referring to the affiliates of a subchapter V debtor.
Without much discussion, Judge Lamoutte rejected this argument, emphasizing the lack of supporting authority. Instead, the court concluded that the language of the statute “expressly excludes SARE debtors, regardless of whether they are affiliates of Subchapter V debtors.” A column published in the ABI journal—whose authors agree with Judge Lamoutte’s reading of Section 1182—warn that “[j]uggling simultaneous SBRA and SARE chapter 11 cases increases costs, limits the effectiveness of the SBRA and, ultimately, could dissuade eligible small businesses […] from taking advantage of subchapter V.
If the goal of the SBRA is to provide faster, more effective reorganizations, then the categorical exclusion of SARE affiliates is an impediment to that goal.” According to the authors this particularly the case because “many small business owners who own real estate used for operations utilize a multi-entity corporate structure […] as an asset-protection, risk-management and tax-liability strategy.”