Opinion
Case No. 3: 20-bk-03689-RCT
03-15-2021
In re: Richard Archibald McGrath and Jane McGrath, Debtors.
Chapter 11 ORDER OVERRULING CREDITOR'S OBJECTION TO DEBTORS' SUBCHAPTER V ELECTION
THIS CASE was considered on February 24, 2021 on, among other things, the Objection to Debtors' Subchapter V Election (Doc. 30) (the "Objection"), filed by Creditor First National Bank of Pennsylvania (the "Bank"). After hearing the argument of counsel, the Court took the matter under advisement and invited the parties to file supplemental briefs. Debtors Richard Archibald McGrath and Jane McGrath ("Debtors") filed a response in opposition (Doc. 65). The Bank filed a reply (Doc. 66). Upon the undisputed facts and argument presented, the Court overrules the Bank's objection.
Background
On December 31, 2020, Debtors filed their voluntary petition under Chapter 11 of the Bankruptcy Code. Debtors elected to proceed under Subchapter V of Chapter 11. Debtors' petition listed debts owed to the Bank totaling roughly $2.75 million (Doc. 1 at 8-9). Mr. McGrath, who operates a sole proprietorship, represented that his business was not a single asset real estate business as defined by § 101(51B) of the Bankruptcy Code (Doc. 1 at 4).
11 U.S.C. §§ 101-1532 ("Code" or "Bankruptcy Code").
The Bank objects to Debtors' Subchapter V election. The Bank asserts that Debtors are ineligible to proceed under Subchapter V because their "primary activity" is owning "single asset real estate" in contravention of § 1182.
Debtors' Schedule A/B lists three pieces of real property: (1) a single-family residence in Florida held as tenants by the entireties (the "Florida Residence"); (2) a single-family residence in Pennsylvania held as tenants by the entireties (the "Pennsylvania Rental"); and (3) commercial property located in Pennsylvania owned solely by Mr. McGrath (the "Commercial Property") (Doc. 1 at 15-16). Debtors reside at the Florida Residence. The Pennsylvania Rental is Debtors' former homestead but is now rental property that does not generate any income for Debtors. The Commercial Property is a warehouse structure leased to commercial tenants and generates gross revenue of $27,000 per month.
Pursuant to an agreed order denying Debtors' motion to use cash-collateral (the "Agreed Order"), Debtors and the Bank stipulated that the revenue from the Commercial Property is "not property of the Debtors' bankruptcy estate under 11 U.S.C. § 541 as [the Bank] exercised its [property] rights in the rents prepetition pursuant to certain assignment[s] of rent." In the Objection, filed prior to entry of the Agreed Order, the Bank contends Debtors' "inclusion of the rents as income of the estate was improper and in violation of the assignment of leases and rents agreements . . . ." Per the Agreed Order, it is undisputed that "[the Bank] owns the rents [from the Commercial Property]" and has held such property rights for some time since before the bankruptcy was filed.
Doc. 56.
Doc. 56 ¶ 2 (emphasis added).
Doc. 30 at 4 n.3.
Doc. 56 ¶¶ 2-4.
Other than the $27,000 per month of income arising from the Commercial Property, Debtors' Schedule I lists income of $3,590 per month from Social Security. This is the total of Debtors' scheduled income. Debtors' Statement of Financial Affairs lists $171,536 in business income and $47,031 in Social Security income for calendar-year 2020.
Doc. 1 at 39-40 (Sch. I). Debtors' social-security monthly income is attributable to Mr. McGrath in amount of $2,575 and to Mrs. McGrath in the amount of $1,015.
Doc. 1 at 44 (Statement of Fin. Affairs). Debtors' social-security monthly income for calendar-year 2020 is attributable to Mr. McGrath in amount of $33,746 and to Mrs. McGrath in the amount of $13,285.
Analysis
In August 2019, Congress enacted the Small Business Reorganization Act (the "SBRA") to "streamline[] the bankruptcy process by which small business debtors reorganize and rehabilitate their financial affairs." "The SBRA created Subchapter V under Chapter 11 of the Bankruptcy Code to permit eligible small business debtors 'to file bankruptcy in a timely, cost-effective manner.'" The eligibility requirements for Subchapter V are found in § 1182 of the Bankruptcy Code. Section 1182(1)(A) specifically "exclud[es] a person whose primary activity is the business of owning single asset real estate" from eligibility to proceed under Subchapter V.
In re Parking Mgmt., Inc., 620 B.R. 544, 549 (Bankr. D. Md. 2020) (internal quotation omitted).
Id. (quoting H.R. Rep. No. 116-171, at p. 4 (2019)).
The Bankruptcy Code defines "single asset real estate" as:
real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.For a debtor to be considered a single asset real estate debtor, three criteria must be met: "(1) the debtor must have real property constituting a single property or project (other than residential real property with fewer than 4 residential units); (2) which generates substantially all of the gross income of the debtor; and (3) on which no substantial business is conducted other than the business of operating the real property and activities incidental thereto." To satisfy this test, a debtor must satisfy all three elements.
In re Yishlam, Inc., 495 B.R. 328, 330 (Bankr. S.D. Tex. 2013).
See id.; see also In re Alvion Props., Inc., 538 B.R. 527, 532 (Bankr. S.D. Ill. 2015).
The first element "requires a 'single property or project.'" The mere fact that multiple parcels of real property are involved is not dispositive as the definition allows for either a "single property" or "single project." For two or more real properties to constitute a "single project," "courts have generally determined that the multiple parcels of real estate must be purchased, developed, or sold pursuant to a 'common plan or scheme,' linked together by 'common usage' or in pursuit of a 'common purpose.'"
In re Alvion Props., Inc., 538 B.R. at 532.
Id. at 532-33 ("[T]he definition of a SARE set forth in § 101(51B) encompasses not only single 'properties,' but also single 'projects.'").
In re Yishlam, Inc., 495 B.R. at 331; see also In re Hassen Imports P'ship, 466 B.R. 492, 507 (Bankr. C.D. Cal. 2012) (providing a four-factor test to determine whether multiple real properties constitute a "single project"); In re JJMM Intern. Corp., 467 B.R. 275, 277-78 (Bankr. E.D. N.Y. 2012) ("For a property or properties to constitute a single project, common ownership alone is not sufficient; the debtor must also have a common plan or purpose for the property."); In re TTM MB Park, LLC, No. 12-00174, 2012 WL 844499, at *1 (Bankr. S.D. Ala. Mar. 12, 2012) ("[The] properties must be linked together in some fashion in a common plan or scheme involving their use. The mere fact of common ownership, or even a common border, will not suffice." (quoting In re McGreals, 201 B.R. 736, 742-43 (Bankr. E.D. Pa. 1996))).
Here, there is no allegation of a common plan, usage, or purpose that would link the three properties or even link merely the Pennsylvania Rental and Commercial Property. The Bank's argument implicitly assumes the two residential properties are irrelevant. In fairness to the Bank, the definition of "single asset real estate" does not include an express requirement that the debtor own only one property or project and own no other real estate at all.
For now, the Court will assume the Commercial Property may constitute single asset real estate for purposes of Subchapter V eligibility notwithstanding Debtors' ownership of the two additional single-family residential properties. This appears appropriate given Congress' use of the phrase "other than residential real property with fewer than 4 units." That is, while Congress has excluded single-family residences from constituting single asset real estate, it has not expressly stated, in either § 101(51B) or § 1182, that owning one or more single-family residences automatically defeats the possibility of owning single asset real estate so long as the other requirements are met. The parties have cited no case law to the contrary.
11 U.S.C. § 101(51B) (emphasis added).
But the Court need not decide that issue as the Courts concludes the second element of the test, i.e. whether the Commercial Property "generates substantially all of the gross income" of the Debtors, is not met. In the Agreed Order, the Bank and Debtors have stipulated that the revenues generated by the Commercial Property have been "owned" by the Bank since before the petition was filed and are not property of the estate. Debtors have no rights in the rental revenue and the revenue, therefore, cannot be "gross income" of the Debtors. Thus, per the schedules and statement of financial affairs, Debtors are left with a sole source of income, namely social security. In other words, Debtors do not own "single asset real estate" because they own no real property that "generates substantially all of [their] gross income." Failure to satisfy the second element is dispositive.
Doc. 56.
For these reasons, the Bank's argument must fail, and Debtors are eligible to proceed under Subchapter V of Chapter 11.
Accordingly, it is ORDERED that the Bank's objection to Debtors' Subchapter V eligibility (Doc. 30) is OVERRULED.
ORDERED.
Dated: March 15, 2021
/s/_________
Roberta A. Colton
United States Bankruptcy Judge Attorney John Joyce is directed to serve a copy of this order on interested parties who do not receive service by CM/ECF and file a proof of service within three days of entry of this order.