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Subchapter V and the Single Asset Real Estate Debtor in a COVID-19 World
May 28, 2020
Over a year ago, Congress amended the Bankruptcy Code to create Subchapter V, with the intent of encouraging small businesses (defined as those with less than $2,725,625.00 in debt) to file reorganization plans more often by saving certain costs of a routine Chapter 11. Congress then passed the CARES Act in response to the COVID-19 pandemic, raising the debt limit to $7,500,000.00. Though these new laws are intended to streamline small business bankruptcy cases, we openly question whether the target audience--those impacted most immediately by the pandemic--will even qualify.
In particular, the interplay of 11 U.S.C. § 101(51B) (which defines a single-asset real- estate debtor [SARE]) and 11 U.S.C. § 1182(1)(A) (which renders SARE debtors ineligible under Subchapter V) may limit the intended positive impact of Subchapter V on debtors (and give creditors grounds for attack). To date, the SARE definition has not created too much controversy (though it has created some). However, imagine this scenario: a commercial landlord owns a single commercial building that rents units to a handful of tenants. Those tenants operate "non-essential" businesses. As a result, those tenants' income is substantially limited. They cannot pay rent. The landlord suffers a cash shortage and cannot pay its mortgage on the commercial building. The landlord decides to file for bankruptcy protection. This is easy enough to envision because these circumstances are playing out across all 50 states right now.
In those situations, a commercial landlord may seek bankruptcy protection, particularly if the landlord has a spotty payment history itself and its creditors are therefore less understanding about how COVID-19 (and not a poor payment history) play into the resulting payment default. Landlords may think twice, however, if they own a single commercial building unless they can convince a court they are not SARE debtors. If they are SARE debtors, they do not qualify for Subchapter V and will either have to dismiss their case (not always a given), convert their case to Chapter 7 (contrary to their goals), or let the case play out in Chapter 11 (despite the additional costs and expenses).
As a result, this issue--when is a debtor considered a SARE--likely will become a common Subchapter V dispute in the immediate future. Case law has developed to define the boundaries of the definition of a SARE. Hotel owners and operators, golf course owners and operators, and marina owners and operators, for example, are generally not SARE debtors. On the other hand, an owner of multiple contiguous parcels of real property generally treated as a single tract leased to one, or even multiple, tenants, has been considered a SARE debtor.
One of the new features of a Subchapter V case is the initial status conference, generally set within 30-60 days of the filing, in which the Court will often hear from the debtor, interested creditors, and the Subchapter V Trustee (another new feature of Subchapter V) to determine when the claims deadline should be set, when certain other deadlines should be set, and whether there are more general issues the Court needs to address. A creditor will want to determine whether the debtor is a SARE and, importantly, whether the creditor even wants to attack the debtor's qualifications as a Subchapter V debtor in the first place, prior to that status conference.
Either way, the decision will have long-term consequences for the bankruptcy case and the financial status of the debtor. As a result, this choice requires careful examination and weight of the pros and cons of a Subchapter V case. Understandably, the consequence of this reality will be the development of a rich body of case law and splits of authority on the issue. As such, the results will not always be predictable, but, given the consequence, practitioners and their clients should weigh their options carefully and immediately to produce the best results possible.
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Bankruptcy & Creditors' Rights