Opinion
Case No.: 2:19-bk-24652-BB
02-28-2020
IN RE: 2034 SUNSET PLAZA DRIVE, LLC, Debtor(s).
Matthew Abbasi, Abbasi Law Corporation, Beverly Hills, CA, for Debtor.
Matthew Abbasi, Abbasi Law Corporation, Beverly Hills, CA, for Debtor.
MEMORANDUM DECISION DENYING MOTION OF PIVOTAL CAPITAL FOR ORDER DETERMINING THAT DEBTOR'S REAL PROPERTY IS SINGLE ASSET REAL ESTATE
Sheri Bluebond, United States Bankruptcy Judge
On February 5, 2020, secured creditor Pivotal Capital Group II, LLC ("Pivotal") moved for entry of an order determining that the debtor's real property is "single asset real estate" within the meaning of Bankruptcy Code section 101(51B). For the reasons set forth below, the Court will enter an order concurrently herewith denying the foregoing motion (the "Motion").
At the request of counsel for Pivotal, the Court notes for the record that Pivotal agreed to submit on the Court's tentative ruling on the Motion and did not attempt to persuade the Court to alter its tentative ruling solely because he considered the Motion moot in light of the Court's February 26, 2020 decision to dismiss the above-entitled chapter 11 case in 14 days.
The relevant facts are not in dispute. Debtor and debtor in possession 2034 Sunset Plaza Drive LLC ("Debtor") filed a chapter 11 petition commencing the above chapter 11 case (the "Case") on December 15, 2019 to prevent the loss of its only asset through foreclosure. According to the Debtor's schedules, that asset is a single parcel of vacant land located at 2034 Sunset Plaza Drive in Los Angeles, California (the "Property"). The Property is zoned only for use as a single family residence, and, according to the Debtor's initial status report [docket no. 30, ¶ 13], the Debtor's business plan is to build a single, high-end custom luxury home with all manner of custom and special buildouts on the Property. The Property is over-encumbered by a deed of trust in favor of Pivotal that is in default, and the Debtor is not generating any income. The only "business" being conducted by the Debtor is that it is attempting to obtain financing so that it can construct a single family dwelling on the Property.
As of the petition date, there was also approximately $376,500 in cash in the debtor's prepetition bank account at Bank of America, but the Debtor contends that these funds are not property of the Debtor or its bankruptcy estate. According to the Debtor, these funds belong to Tomas Nioac De Salles, who owns a one-third interest in the Debtor.
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In order for the Property to be "single asset real estate" within the meaning of 11 U.S.C. § 101(51B), all of the following requirements must be met:
1. The Debtor must not be a family farmer;
2. The Debtor must own a single piece of real property or a single project;
3. The Property cannot be residential real property with fewer than 4 residential units on it;
4. The Property must generate substantially all of the Debtor's gross income; and
5. The Debtor must not be conducting any substantial business on the Property other than the business of operating the Property and activities incidental thereto.
In the view of this Court, the first, second, fourth and fifth of the above requirements have been met. The Debtor is not a family farmer. The Debtor owns a single piece of real property. The Debtor has no income at this time, but, if it ever obtains any income, that income will be generated from a sale, lease or rental of the Property. And the Debtor is not conducting any business other than trying to develop the Property, so, if the debtor can be said to be conducting business at all, it is a business incidental to operating the Property.
The issue, therefore, is the third requirement -- whether the Property should be characterized as residential real property with fewer than 4 residential units. Clearly, it is real property and there are fewer than 4 units on the Property. In fact, there are zero units on the Property, and zero is less than four. But is it residential real property?
In support of its Motion, Movant has directed the Court's attention to In re Kachina Vill., LLC, 538 B.R. 124 (Bankr. D.N.M. 2015) and the cases cited therein as support for the proposition that Congress meant for courts to include undeveloped land in the definition of single asset real estate. But all of these cases involve projects that, once developed, would qualify as single asset real estate – with the exception of one, Kkemko, infra, which has nothing whatsoever to do with undeveloped land.
In the Kachina Village case itself, the property in question was real property on which the debtor planned to build four or more residential units. The property was zoned for mixed use and the debtor had obtained a conditional use permit that allowed both commercial and residential development. Although the specific details of its plan were not clear, the Court specifically noted that the plan "included the construction of more than four residential units" and that "The Court is not convinced that a developer holding 100 unimproved residential lots could avoid the SARE designation because it had not commenced construction on the petition date."
The Court in Kachina Village went on to cite a number of cases that it described as support for the general proposition that raw land intended for development constitutes single asset real estate:
See, e.g. In re Mountain Edge LLC , 2012 Bankr. LEXIS 4784, 2012 WL 4839784, at *3 (Bankr. D.N.M. 2012) (generally accepted that raw law acquired or held for development is SARE); In re Kkemko, Inc. , 181 B.R. 47, 51 (Bankr. S.D. Ohio 1995) (applying concepts of real estate law to conclude that "single asset real estate" includes raw land); In re Light Foot Group , LLC, 2011 Bankr. LEXIS 4399, 2011 WL 5509025 at *4 (Bankr. D. Md. 2011) (residential development was SARE despite incidental projected income from repairs); In re Pensignorkay, Inc. , 204 B.R. 676, 683 (Bankr. E.D. Pa. 1997) (undeveloped parcel held for development was SARE); In re A-1 Management Corp. , 2011 Bankr. LEXIS 4538, 2011 WL 5509262, *1 (Bankr. S.D. Fla. 2011) (finding that the debtor was a SARE entity where "its sole asset is a vacant parcel of mixed use real property....").
538 B.R. at 128. But none of the cases cited in Kachina Village involved raw land that would be excluded from the definition of single asset real estate once construction had been completed.
In Mountain Edge, the debtor's property was 24 residential lots in the Mountain Ridge subdivision in Otero County, New Mexico. In Kkemko, the debtor's property was an operating marina that the court found was not single asset real estate because there were other business activities being conducted on the property. In Light Foot, the debtor's real property consisted of five tracts of land, on which there were 17 rental units. Some of the rental units were single family homes; others were units within two four-unit buildings, and still others were mobile homes. In Pensignorkay, the debtor owned a tract of undeveloped land consisting of two parcels that the debtor acquired with the intention of creating subdivided parcels for building and development. In A-1 Management, the property in question was zoned for mixed use and the debtor planned
to develop it into a multi-family residential apartment facility with an associated commercial component.
A more accurate reading of these cases is that a debtor cannot escape the label "single asset real estate" by pointing to the fact that it has not yet constructed any units on the property (and therefore currently has less than 4 units). Or, stated differently, if the project, once constructed, will qualify as single asset real estate, the project is single asset real estate even if nothing has been built on it yet.
None of the authorities cited by Movant has any tendency whatsoever to suggest that, in this Case, the Property should be treated as single asset real estate. The Property cannot be used for anything other than residential purposes, and the Debtor will never be able to build more than a single unit on that Property. And the Debtor does not intend to do anything other than construct a single family residence on the Property. Movant invites the Court to fashion a new, judge-created rule that would automatically include undeveloped land within the definition of single asset real estate, no matter what kind of land it is or what kind of project can or will be built on it. The Court respectfully declines this invitation. If the debtor's only asset is a single piece of property that has a single family dwelling on it or is a vacant piece of land that can never have anything other than a single family dwelling on it, the debtor will not qualify as a single asset real estate debtor within the meaning of bankruptcy code section 101(51B). Therefore, the Motion must be denied, and the Court will enter an order to that effect concurrently herewith.