American Bankruptcy Institute | Small Business and Partnerships: Single-Asset Real Estate

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Small Business and Partnerships: Single-Asset Real Estate

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)

ID	Name	Group	Other	Code Sec	Problem Referenced	Proposed Solutions
NBRC- 0183	William E. Cumberland	Senior Staff VP, Mortgage Bankers Assoc. of America	Submission of Robert P. Vestewig to Single Asset R.E. working group		Author provides written submission of Robert P. Vestewig, Senior Vice President of L. J. Melody & Co. Houston, TX, a commercial mortgage banking company, for consideration at the 12/17/96 meeting of the Working Group on Partnerships, Small Business and Single Asset Realty. Mr. Vestewig also serves as Chair of the Bankruptcy Working Group of the Mortgage Bankers Association of America. In his statement, he defines and discusses the "single asset debtor," and provides the following observations: 1) The preservation of jobs is not usually a consideration in reorganizing single asset debtors because these debtors normally have few employees, if any. Also, when a lender forecloses on a single asset property, jobs are not often lost because the lender usually retains the debtor's employees to manage the property. 2) Contrary to some critics' opinions, large land developers and hotel chains who own single asset properties are not automatically put out of business where a lender forecloses on the ownership of a single asset entity. Typically, these companies do not legally own the property, but rather ownership rests in a legal entity such as a corporation or limited partnership in which they own an interest or have a management contract. 3) Often, the creditor has far more capital investment in the asset that does the single asset debtor. Consequently, commercial mortgage lenders are understandably concerned about delays in bankruptcy proceedings and threats of cramdowns. 4) History has demonstrated that reorganization is not always possible with single asset debtor-owners. According to a MBAA survey of life insurance companies, single asset debtors often use Chapter 11 and reorganization provisions for delay rather than legitimate reorganization purposes. 5) Delaying a bankruptcy allows these debtors to avoid or defer income tax liability for recapture of depreciation, to divert rents to the owner, and to induce lenders to pay cash or to forego prepayment penalties. Delay is costly, resulting in higher mortgage interest rates, less investment in commercial mortages, and a decline in property values and corresponding tax bases. During this delay, tenants in commercial and residential property and nearby communites also suffer when single asset properties are not maintained. 6) Congress has begun to recognize that unwarranted delay by single asset debtors is "inappropriate," and has implied in recent amendments that single asset cases should not be entitled to "the presumption that reorganization is possible." The 1994 provision lifting the automatic stay in cases where reorganization is not reasonably likely to succeed may be "quite helpful" if ever applied to all single asset cases.	Single asset debtors are often incapable of reorganization because they have no "business" to reorganize. The NBRC should approach the issue of single asset debtors with the assumption that these debtors are not always capable of successful reorganization, but may be using the reorganization provisions simply to delay and take advantage of the bankruptcy system. Many issues, such as cramdowns, creditor classes, and the new value exception to the absolute priority rule, are more easily resolved if "there is no pervasive presumption that reorganization of a single asset debtor-owner is the goal." The Bankruptcy Code should be amended to reflect this "reality."
NBRC- 0211	Robert A. Greenfield	Conferee, National Bankruptcy Conference	Proposed amendment to the definition of "single asset real estate"	101(51B)	National Bankruptcy Conference (NBC) opposes the so-called technical amendments bill that passed in the Senate, but not the House, seeking the elimination the $4 million cap from the § 101(51B) definition of single asset real estate. The NBC is on record as opposing different treatment for single asset real esate cases, any change in the definition of "single asset real estate," and eliminating the $4 million cap.	If the $4 million cap were eliminated, the NBC is considering additional amendments to the definition which would limit "single asset real estate" to the smaller cases and those not likely to involve an operating business. The author encloses a copy of the proposed amendment which is presently being considered by the NBC.
NBRC- 0424	Robert A. Greenfield	Attorney, Conferee - National Bankruptcy Conference	Copy of proposed amendment to the single asset real estate definition prepared by members of the Conference.	101(51B)	National Bankruptcy Conference opposes different treatment for single asset real estate cases, any change in the definition of "single asset real estate," and eliminating the $4 million cap.	If cap on single asset real estate cases is eliminated, the National Bankruptcy Conference is considering additional amendments to the definition which would limit "single asset real estate" to the smaller cases and to the cases that are not likely to involve an operating business.
NBRC- 1071	Donald H. Siskind	Attorney, Rosenman & Colin LLP.			"I am familiar with the 'three prong proposal' of the 'Working Group on Small Business, Partners, and Single Asset Real Estate', to wit: 1) The $4 million debt limit should be eliminated from the definition of 'single asset real estat' debtor subject to section 362(d)(3). 2) The definition of 'single asset real estate' should be more carefully worded to exclude cases in which the real property is used by a debtor in an active business. 3) A SARE debtor should be able to confirm a lien-stripping under the new-value exception to the absolute priority rule only by infusing new equity, in cash, sufficient to pay down the mortgage to 80 percent of the court-determined fair market value of the property."	"...I wish to go on record in my cpacity as a long time practitioner in the area, as endorsing in full the above three proposals."
NBRC- 1072		J.S. Hollyfield	Attorney		"AS a real estate lawyer who has dealt with single asset real estate bankruptcy cases, I assure you that the proposed change in the definition of 'single asset real estate' makes good sense as does the elimination of the 44,000,000 debt limit."	"I would like to add my support to the recommendations of the Working Group as set out in the referenced report."
NBRC- 1082	John D. Cleavenger	Counsel, the Principal Financial Group			Author supports the elimination of the $4 million limitation on the definition of SARE; opposes the SARE Draft's proposal for a controlled group exception to the definition of SARE, which author discusses at length; opposes the proposal in regard to new value plans in SARE cases for a number of reasons, which author gives; and, finally, author strongly supports an auction approach for dealing with new value plans.	n/a
NBRC- 1083	Philip J. Bagley, III	Mays & Valentine L.L.P.			Author is "very much in favor of the revisions encompassed in the new definition" of SARE, and feels that the elimination of the $4,000,000 debt limit makes great sense.	n/a
NBRC- 1084	Richard r. Goldberg	Attorney, Ballard, Spahr, Andrews & Ingersoll			Author feels the elimination of the debt limit is appropriate. Author notes other changes that he feels are appropriate, and concludes "It is my pleasure to endorse your proposals."	n/a
NBRC- 1085	Alan J. Robin	Associate General Counsel, MetLife	Article by author and James Lipscomb published in the Real Property, Probate and Trust Journal is referenced in the letter as being enclose, but was not included with the database materials.		Author supports the removal of the cap on the definition of SARE. He notes that the specific reference to hotels and parking lots has been omitted from the definition, and feels it would be helpful if a footnote in the final Report would confirm that they do qualify. He supports the recommendation concerning the new value exception. Finally, author is sending a copy of an article which he wrote with James Lipscomb which was recently published and would appreciate it if footnotes 1 and 9 of the Report could reference the fact that the artcle has been published. (The article was not included in the database materials.)	n/a
NBRC- 1086	Dain C. Donelson and Judge Robert D. Martin		Memorandum with no affiliation or address given.		Author raises various objections to the proposal to modify the new value exception with respect to single asset real estate (SARE).	n/a
NBRC- 1087	Beverly J. Quail	Attorney, Ballard, Spahr, Andrews & Ingersoll			"From the viewpoint of a real estate practitioner, I wanted to comment on how well thought ouot the proposal of the Small business Working Group is."	n/a
NBRC- 1088	Joel B. Zweibel	Attorney, O'Melveny & Myers LLP			Author comments on the memorandum of August 29 containing the SARE proposals. Author feels the elimination of the $4 million debt limit would be a very constructive change. With regard to the definition of SARE author suggests changes in wording, a clarification that hotels and office buildings are SARE debtors, and a clarification in the "commonly controlled group" concept. Finally, author feels that the lien-stripping new value concept is bad policy.	See above.
NBRC- 1090	Sheldon S. Toll	Attorney, Honigman, Miller, Schwartz and Cohn			"The SARE Report is biased against real estate debtors and seems to be written from the lenders' standpoint." Author sees the problems in dealing with SARE as orginating with the combination of former Chapters X, XI, and XII into a single Chapter 11 in 1979. "The SARE Report is disciminatory because it proceeds from false premises and singles out real estate debtors for harsh treatment."	None
NBRC- 1091	Dean A. Rogeness	Vice President and Associate General Counsel, MassMutual			MassMutual strongly supports the removal of the $4 million cap. For reasons stated in the letter, MassMutual opposes the inclusion of the SARE lien stripping/new value exception provisions in the draft report.	Author proposes specific language changes to the amended language for SARE found on page 7 of the draft report.
NBRC- 1086	Dain C. Donelson and Judge Robert D. Martin		Memorandum with no affiliation or address given.		In a follow-up memorandum to their memorandum of 9/5/97, authors analyze the proposed modification to the new value exception (NVE) as it applies to single asset real estate (SARE) entities. "Whatever system (if any) is adopted, it should encourage realistic valuation proposals by the parties and serious negotiations between the parties. The 20% proposal does not provide these incentives. It provides the debtor with the incentive to gamble on a low valuation by the court whenever a property begins to lose value, which encourages a strategic response by the creditor."	Author proposes 'credit bidding' as an alternative to the 20% proposal. this would be a limited "auction" system allowing the secured creditor to "bid" on the property against the debtor. It is more fully outlined with a discussion of pros and cons in the memorandum.
NBRC- 1092	Kenneth N. Klee	Acting Professor, UCLA School of Law			Autor opposes the repeal of the $4 million cap in its entirety. Author notes a number of other deficiencies in the proposal.	"A $15 million cap, such as that contained in section 2(5)(B) of H.R. 764, as amended, would be superior to the SARE proposal."
NBRC- 1093	Robert M. Zinman	Professor, St. John's University			Author is in favor of removing the $4 million cap from the definition of SARE and gives a discussion of the arguments against such a change with counter-arguments. The author has taken the position that "new value" should not apply in SARE cases. "The 80/20 proposal of the working group helps to ease the harsh effect of the "new value exception" as currently applied to single asset real estate and for that reason it would be beneficial and deserves support."	See above.
NBRC- 1094	Lisa Hill Fenning	United States Bankruptcy Judge			"I strongly support both the overall approach and the details of the proposal." "In my view, the revised proposal offers at least three significant improvements over the current statute: 1. Streamlined prove-ups....2. Doctrinal consistency....3. Relative predictability of outcome...."	n/a
NBRC- 1095	Samuel L. Bufford	U.S. Bankruptcy Judge, Central District of California			Author likes the proposal numbers 10-12 relating to single asset real estate. "My only reservation is to question whether there should be a rule requiring a 20% equity contribution to a "new value" plan, or whether this requirement should be a rule of thumb. While I think a rule has many advantages, I am concerned that it may jeopardize the economy if it is enforced at a time of insufficient liquidity in the money supply." "I do not see how a proposal to permit a secured creditor to make a credit bid would be feasible. It appears to me that it would give such a creditor a veto over a reorganization plan. Unless it could be structured to avoid this, I would oppose it."	See above.
NBRC- 1099	Robert A. Greenfield	Attorney, Stutman, Treister & Glatt			Author agrees with most of Professor Kenneth Klee's comments, and limits his discussion to those areas not discussed by Professor Klee. Author's principal concern is with the SARE definition, both in the proposal and in the Code. "It does not appear to exclude many businesses that ought to be considered 'cases in which the real property is used by the debtor in an actual business...' as is apparently the intent of the SARE proposal. My concern is with the definition's reference to property "on which no substantial business is being conducted by the debtor..., other than the business of operating the real property...." What does 'the business of operating the real property' mean" Author is opposed to the concept of allowing a secured creditor to credit bid the value of its secured claim in connection with a new value cram down plan. Author also disagrees with the proposal that all SARE cases be defined as small business and subject to those provisions as well. Finally, author has a concern about the 90-day time period that is set forth in the proposal and the Code.	The definition of SARE should make clear that 'cases in which the real property is used by the debtor in an actual business...' is excluded from SARE. "...[I]f the creditor alleges that the property is SARE, the creditor ought to be required to bring a motion on for determination and [] the time period under section 362(d)(3) ought to be 90 days after the entry of the order for relief, or 30 days after the bankrutpcy court's determination that the property is SARE, whichever is later."
NBRC- 1100	Steven W. Rhodes	Chief United States Bankruptcy Judge for the Eastern District of Michigan			Author feels that "there is no principled basis upon which to distinguish these [single-asset real estate] cases from other Chapter 11 cases...." Author gives his reasons for this conclusion.	No specific proposal made.
NBRC- 1101	Pamela Platt Brown	Associate Counsel, Allstate			Author supports the elimination of any dollar cap from the definition of single asset real estate. Author explains that such a cap is not defensible from a policy perspective.	Eliminate any dollar cap on single asset real estate.
NBRC- 1101	Pamela Platt Brown	Associate Counsel, Allstate			Author is sending "the revised and finalized version of [her] letter in support of elimination of any cap from the definition of "single asset real estate" bankruptcy."	Eliminate any dollar cap from the Code's definition of single asset real estate.
NBRC- 1123	Samuel L. Bufford	Bankruptcy Judge, Central District of California			"I like the proposal numbers 10-12 from Working Group on Small Business, Partnerships, and Single Asset Real Estate, relating to single asset real estate cases....My only reservation is to question whether there should be a rule requiring a 20% equity contribution to a 'new value' plan, or whether this requirement should be a rule of thumb....I do not see how a proposal to permit a secured creditor to make a credit bid would be feasible. It appears to me that it would give such a creditor a veto over a reorganization plan. Unless it could be structured to avoid this, I would oppose it."	See above.