Single Asset Real Estate: What Constitutes a Single Asset Real Estate Debtor Subject to Expedited Reorganization Procedures Set Forth in Section 362(d)(3)?
Case Note Re: Caillouet v. First Bank and Trust (In re Entringer Bakeries, Inc.), No. 07-30499, 2008 WL 4821613 (5th Cir. Nov. 6, 2008)
By: Jonathan L. Howell
2007
Ad Hoc Group of Timber Noteholders ("Noteholders") filed a motion to expedite the chapter 11 proceedings of Scotia Pacific Co., LLC ("Debtor") pursuant to § 362(d)(3) of the Bankruptcy Code (the "Code"). In doing so, the Noteholders argued that, because Debtor's income derived from harvesting timber on 200,000 acres of timberland that it owned and an additional 10,500 acres that it leased, it was a single asset real estate debtor as defined in Code § 101(51B). The bankruptcy court denied the motion. The Noteholders subsequently appealed the order and moved the bankruptcy court to certify the appeal to the Fifth Circuit pursuant to 28 U.S.C. § 158(d)(2). The district court certified the appeal to the Fifth Circuit before the case had been docketed in the district court.
On appeal to the Fifth Circuit, the court addressed two issues: First, should the Fifth Circuit exercise appellate jurisdiction notwithstanding the fact that the district court certified the case while it was still technically pending before the bankruptcy court? Second, was the debtor a single asset real estate debtor as defined in Code § 101(51B)?
With respect to the first issue, the Fifth Circuit held that its exercise of appellate jurisdiction was proper. In coming to this conclusion, the court first noted that 28 U.S.C. § 158(d)(2) was a new procedure added by the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, and that Interim Bankruptcy Rule 8001(f) requires certification to take place while the matter is pending in the bankruptcy court. Applying § 158 and Interim Rule 8001(f) to the present case, the court reasoned that the certification was properly accomplished because, when the district court certified the case for appeal, the case had not yet been docketed in the district court and, therefore, was still pending in the bankruptcy court.
With respect to the substantive issue, the Fifth Circuit held that Code § 101(51B) provides that the debtor must meet the following three requirements for it be a single asset real estate debtor: (1) the debtor must have real property that is a single property or project (other than four residential units); (2) the real property must generate substantially all of the debtor's gross income; and (3) there must be no other substantial business conducted on the real property other than operation of the property itself and activities incidental thereto. Additionally, the Fifth Circuit opined, that the revenues received by the owner must be passive in nature, such as receipt of rent, marketing activity, or mowing the grass.
Applying these requirements to the facts before it, the Fifth Circuit determined that Debtor did not constitute a single asset real estate debtor as defined by Code § 101(51B). The court reasoned that the land had nine distinct watersheds, each of which was a different or separate project. In addition, the court found Debtor's business was not merely to own the land but to manage the expansive timberlands that it operated, and Debtor's employees were essential to Debtor's timber harvesting. Because Debtor was not a single asset real estate debtor pursuant to section 101(51B), the court sustained the bankruptcy court's decision denying Noteholder's motion to expedite Debtor's chapter 11 proceedings pursuant to § 362(d)(3).
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