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In re Sargent Ranch, Llc.

United States Bankruptcy Court, Ninth Circuit
Aug 6, 2010
No. 10-00046-PB11 (B.A.P. 9th Cir. Aug. 6, 2010)

Opinion


In re SARGENT RANCH, LLC, Debtor. No. 10-00046-PB11. United States Bankruptcy Court, S.D. California. August 6, 2010.

ORDER ON MOTION FOR ORDER DETERMINING THAT DEBTOR IS A "SINGLE ASSET REAL ESTATE" ENTITY

PETER W. BOWIE, Chief Judge.

The primary secured creditor in this case has moved for an order determining that the debtor's property, which is the collateral securing its claims, is "single asset real estate, " as defined in Bankruptcy Code 101(51B) and is subject to the provisions of Code § 362(d)(3). For the reasons set forth below, the Court has determined that Debtor's property is a "single asset real estate."

The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G).

In its original "Schedule A - Real Property, " the debtor-in-possession, Sargent Ranch, LLC, (Debtor), listed "2755 U.S. Highway 101, Gilroy, CA Property approximately 6, 400 acres on 14 separate legal parcels, including various rights and credits, " followed by the Tax Parcel Numbers for each of the 14 parcels. Debtor valued the entire Property at $716,100,000.00. In its amended "Schedule A - Real Property" Debtor listed the same Property but attached a list of "Individual Parcel Values."

Debtor has owned the Property for several years. Initially, Debtor's primary plan for the Property was to develop a large residential development. Currently, Debtor's plans also includes and excavation, wildlife habitat mitigation, liquid asphalt extraction, solar energy production and others. However, as of the commencement of this case, the Property remained undeveloped, and the Debtor's sole source of income was rent (which was prepaid) from three leases for a cell tower, cattle grazing and hunting totaling $56,500 annually. As of the date of Debtor's opposition to this motion no development had been started - the opposition promises the projects "will be developed shortly."

Movant, Energy Research & Generation, Inc., and ERG, Inc., Retirement Trust (collectively "ERG"), is the beneficiary of various promissory notes of the Debtor reflecting principal obligations totaling $40,000,000.00 (Notes). The obligations under the Notes are secured in part by deeds of trust on the Property.

Movants request a determination that the Debtor is subject to the provisions of 11 U.S.C. § 362(d)(3) which provides that:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay-

....

(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later-

(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or

(B) the debtor has commenced monthly payments that-

(I) may, in the debtor's sole discretion, notwithstanding section 363(c) (2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and

(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor's interest in the real estate [.]

11 U.S.C. § 362(d)(3). For a debtor to be subject to the hastened program of § 362(d)(3), a debtor's assets must constitute "single asset real estate" as that term is defined by Bankruptcy Code § 101(51B):

The term "single asset real estate" means 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.

11 U.S.C. § 101(51B).

The parties agree on the basic elements of "single asset real estate":

This statutory definition requires three criteria be met in order to be deemed "single asset real estate": (1) the real property in question constitutes a single property or project other than residential real property with fewer than four residential units; (2) the real property in question generates substantially all of the debtor's gross income; and (3) the debtor is not a family farmer and is not engaged in any substantial business other than operation of the real property in question and activities incidental thereto.

In re Webb MTN, LLC , 2008 WL 656271 (Bankr.E.D.Tenn. 2008). Not surprisingly, the disagreement is found in the application of these elements to the Debtor's situation.

Single Property or Project

Debtor owns 6, 400 acres of contiguous parcels. Debtor argues that this is not a single property, since it is made up of numerous parcels in different counties. Courts have indeed respected separate parcels as separate properties. See e.g., In re The McGreals , 201 B.R. 736 (Bankr.E.D.Pa.1996). However, separate properties can still constitute single asset real property if they are part of the same project. See In re Webb MTN , 2008 WL 656271 (Bankr.E.D.Tenn. 2008).

In In re The McGreals, the debtor owned two pieces of real property, one developed and rented and one not, and had no plans to combine the properties. In that case the court held that the property was not single asset real estate. 201 B.R. at 744. In our case, Debtor has developed none of the Property - it is all one large undeveloped piece of real property, no matter how many parcels.

Long ago this Court held that single asset real estate included raw, undeveloped land. See In re Oceanside Mission Associates , 192 B.R. 232 (Bankr.S.D.Cal. 1996) (relying on In re Humble Place Joint Venture , 936 F.2d 814 (5th Cir.1991) (partially developed land but referred to by the bankruptcy court as "raw land" generating no income); In re Nattchase Associates Limited Partnership , 178 B.R. 409 (Bankr.E.D.Va.1994); In re Lake Ridge Associates , 169 B.R. 576 (Bankr.E.D.Va.1994); In re Clinton Fields, Inc. , 168 B.R. 265 (Bankr.M.D.Ga.1994); and In re Monica Road Associates , 147 B.R. 385 (Bankr.E.D.Va.1992). The Court remains of the same mind and is aware of no court since holding to the contrary.

Debtor attempts to avoid the single asset real estate label by trotting out the numerous plans it has for developing the Property. However, intentions do not constitute projects. There is no disputing the fact that at the time the case was filed, as well as at the time of the hearing, every inch of every parcel of the Property, with the exception of a small portion being leased to third parties, is part of the same operation - namely waiting and planning for future development.

The case most closely on point is In re Webb MTN , 2008 WL 656271 (Bankr.E.D.Tenn. 2008). In that case debtor owned 1, 865 acres of real property upon which the debtor intended to build two golf courses, a resort, convention center, retail center, i single family homes and condos. Had the debtor's intentions been i carried out, that is, had the multi-use development been completed, it would likely not have been considered single asset i real estate. See e.g., In re Whispering Pines Estates, Inc. , 341 B.R. 134, 136 (Bankr.D.N.H. 2006); In re CBJ Dev., Inc. , 202 B.R. 467, 473-74 (9th Cir.BAP 1996). However, as in the case at hand, the debtor had not made progress on the development. Accordingly, the court held that the separate tracts constituted a single project. Id. at *5.

This seems precisely the situation of the Debtor in this i case. Debtor has future plans for the Property which, if they i were completed, would likely constitute separate projects. At current, however, Debtor, like the debtor in Webb MTN, owns I undeveloped real property upon which no substantial business is being conducted. At present Debtor has a single project.

The Property Generates Substantially all Debtor's Gross Income

It cannot be gainsaid that to the extent Debtor has any income it is generated by the Property. In fact, it appears Debtor is currently generating no income - the few leases it does have having been prepaid. In its opposition Debtor concedes "[a]t this point in time, the Debtor's operations are not generating income." (Opp. at 15:25).

Substantial Business

This third element has been called "the heart of the definition" of "single asset real estate." In re Club Golf Partners, L.P. , 2007 WL 1176010, at *5 (E.D.Tex. 2007). In that case the court explained:

[T]he revenues received by the owner must be passive in nature; the owner must not be conducting any active business, other than merely "operating the real property and activities incidental thereto." Under the prior jurisprudence, those passive types of activities are the mere receipt of rent and truly incidental activities such as arranging for maintenance or perhaps some marketing activity, or in the Fifth Circuit's memorable phrase, "mowing the grass and waiting for the market to turn." In contrast, a variety of business ventures that own a tract of improved real estate on which active entrepreneurship is underway-such as the golf course of the Debtor-should fall outside the ambit of the § 101(51B) definition.

Id. (Citations omitted).

There is no question but that Debtor is not currently engaged in any business, let alone substantial business, other than the very limited operation of renting a small portion of the Property. As noted above, the Court is aware of no case in which a debtor holding vacant land was held to be other than a single asset real estate entity. In each of the cases in which the court found that the debtor was not a single asset real estate entity, the debtor was engaged in some business on the property.

Conclusion

Debtor owns only undeveloped real property. As it sits at present, the Property constitutes a single project. To the extent Debtor generates any income, it is generated by leasing the Property. Finally, Debtor is conducting no substantial business on the Property, other than the operation of the Property. Accordingly, the Court finds that Debtor's Property is single asset real estate and Debtor is a single asset real estate entity.

ERG shall lodge and serve an order consistent herewith and with Code § 362(d)(3) within ten (10) days of the entry of this order. The thirty (30) day period of § 362(d)(3) shall begin to run upon entry of said lodged order.

IT IS SO ORDERED.


Summaries of

In re Sargent Ranch, Llc.

United States Bankruptcy Court, Ninth Circuit
Aug 6, 2010
No. 10-00046-PB11 (B.A.P. 9th Cir. Aug. 6, 2010)
Case details for

In re Sargent Ranch, Llc.

Case Details

Full title:In re SARGENT RANCH, LLC, Debtor.

Court:United States Bankruptcy Court, Ninth Circuit

Date published: Aug 6, 2010

Citations

No. 10-00046-PB11 (B.A.P. 9th Cir. Aug. 6, 2010)