By: Donald L Swanson
Rules for Subchapter V eligibility exclude a “single asset real estate” business. The operative statute provides:
- “Debtor’ . . . [in Subchapter V] means a person engaged in commercial or business activities . . . excluding a person whose primary activity is the business of owning single asset real estate” (11 U.S.C. § 1882(1)(A), emphasis added). [Fn. 1]
It’s hard to find an opinion online [i.e., I haven’t been able to find one] that denies Subchapter V eligibility to a debtor for being a “single asset real estate” business. One reason is this: the phrase “single asset real estate” has a highly specialized and narrow meaning.
What follows is a summary of three separate bankruptcy court opinions in which each debtor is able to remain in Subchapter V, over a “single asset real estate” objection under § 1182(1)(A).
In re Moore Properties
The first opinion is In re Moore Properties of Person County, LLC, Case No. 20-80081, Middle North Carolina Bankruptcy Court (issued February 28, 2020, Doc. 42).
Debtor in this Subchapter V case owns three separate parcels of real property that it leases to third parties, who engage in farming operations. Two of those parcels, (i) are not contiguous, and (ii) secure separate obligations owed by Debtor to a single creditor.
The bankruptcy filing is precipitated by foreclosure proceedings filed by the single secured creditor against all three parcels. In the bankruptcy, Creditor insists that Debtor is a “single asset real estate” business and, therefore, not eligible for Subchapter V relief.
Here’s how the Bankruptcy Court rules:
- Excluded from Subchapter V eligibility are owners of a “single asset real estate”;
- As defined in § 101(51B), “single asset real estate” is limited to “real property constituting a single property . . .”;
- Debtor’s property consists of at least two separate parcels, each generating Debtor’s revenue; and
- Therefore, Debtor’s property is not a “single asset real estate,” and Debtor is eligible for Subchapter V relief.
In re McGrath
The second opinion is In re McGrath, Case No. 20-03689, Middle Florida Bankruptcy Court (issued March 16, 2021, Doc. 73).
Husband of the two Debtors in this Subchapter V case is a sole proprietor, owning a commercial property that generates a rental income of $27,000 per month.
The two Debtors jointly own two separate parcels of real property that do not generate any income for them:
- a single-family residence in Florida (Debtors’ former residence); and
- a single-family residence in Pennsylvania (Debtors’ current residence).
The only income the two Debtors have, aside from rents from husband’s commercial property, is social security in the combined amount of $3,590 per month.
Creditor argues that, since the two residential properties don’t generate any income, Husband’s commercial property is a “single asset real estate” that “generates substantially all of the gross income of the debtor” (see § 101(51)(B)).
The Bankruptcy Court rejects Creditor’s argument because:
- Creditor became entitled to receive all rent proceeds from the commercial property, by pre-petition action under an assignment of rents provision—so, Creditor (not Debtor) is the owner of all rents from the commercial property;
- Since Debtors have no rights in the rental revenue, such revenue cannot be “gross income” of the Debtors;
- “Debtors are left with a sole source of income, namely social security”; and
- Since Debtors own no real property that “generates substantially all of [their] gross income,” they do not have a “single asset real estate” business and are, therefore, eligible for Subchapter V relief.
In re ENKOGS1
The third opinion is In re ENGOGS1, LLC, 626 B.R. 860 (Bankr. M.D. Fla., 2021).
Debtor in this Subchapter V case owns and operates a seventy-nine-room hotel that employs fifteen people to operate the hotel and provide services to its customers. Such services include room cleaning, laundry internet/wi-fi, phone, bus and trailer parking, and business services.
Creditor argues that this hotel qualifies as “single asset real estate” and is, therefore, not eligible for Subchapter V relief.
In overruling Creditor’s argument, the Bankruptcy Court says:
- “courts often find that vacant land and residential apartment buildings are ‘single asset real estate’ projects”; but
- “courts rarely find that hotels are such,” because of the amenities and services hotels provide for their guests.
It’s possible that a debtor with vacant land or a residential apartment building as its only asset might file a Subchapter V case—and then get booted-out as ineligible. But it appears that such debtors aren’t filing Subchapter V—or are doing so only rarely.
Additionally, the three cases discussed above show how “single asset real estate” has, in reality, a highly specialized and narrow meaning.
Footnote 1. “The term ‘single asset real estate’ means real property constituting a single property or project,” (i) “other than residential real property with fewer than 4 residential units,” (ii) “which generates substantially all of the gross income of a debtor,” (iii) that “is not a family farmer,” (iv) “on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.” 11 U.S.C. § 101(51B).
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