Single Asset Real Estate Bankruptcy Filings and Pitfalls
By Leslie Godfrey

To commence a voluntary bankruptcy, debtors are required to complete and file a Voluntary Petition for Bankruptcy. The first page of the petition requires the debtor to disclose the nature of its business and identify in it as: (1) a health care business; (2) a single asset real estate business as defined in 11 U.S.C. §101(51B); (3) a railroad; (4) a stockbroker; (5) a commodity broker; (6) a clearing bank; or (7) other type of business. Often debtors fail to correctly identify their true status as a single asset real estate entity by stating that they fall within category of “other.” This is frequently done to buy the debtor more time to propose a plan. Unfortunately for creditors, the result is an increase in fees, costs, and time associated with the bankruptcy process that could otherwise be minimized for single asset real estate entities.

The difference between single asset real estate and a typical chapter 11 reorganization
Typically, in a chapter 11 reorganization, the debtor has 120 days to file a plan for reorganization. 11 U.S.C. § 1121(b). However, section 362(d)(3) of the Bankruptcy Code shortens that period of time for single asset real estate entities to 90 days from the petition date. Specifically, 11 U.S.C. § 362(d)(3) provides that a court shall grant relief from the automatic stay to secured creditors to allow them to proceed against their collateral unless, within 90 days of the petition date or 30 days after the court determines the debtor is subject to section 362(d)(3), the debtor either (i) files a plan of reorganization that has a reasonable possibility of being confirmed, or (ii) commences monthly payments to the secured creditor in an amount equal to the no-default contract rate of interest or the value of the secured creditor’s interest in the real property.

Congress enacted Section 362(d)(3) in 1994 to address drawn out chapter 11 reorganization filings by debtors who own only a single piece of real estate, which is the sole source of income for the debtor. H.R. 5116, § 218. The purpose is to restore a secured creditor’s right to its collateral unless the debtor can quickly confirm a plan or make payments to the secured creditor to protect its interest during the bankruptcy proceeding. But, when debtors fail to accurately indicate they are a single asset real estate entity, this goal is not met.

What is a single asset real estate matter?
The Bankruptcy Code defines “single asset real estate” to mean real property constituting a single property or project, other than residential real property with fewer than four 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).

This definition leaves considerable room for interpretation of what constitutes “single asset real estate.” Courts have made single asset determinations on a case-by-case basis, resulting in case law that is instructive as a reference point for how to conduct this analysis. The portion of the law most often contested is the question of what constitutes “activities incidental” to the operation of the real property.

Courts generally hold that a debtor’s business is not a single asset real estate debtor only if the business activities are not just a passive investment, but the site of significant income producing activities. In re Prairie Hills Golf & Ski Club, 255 B.R. 228 (Bankr. D. Neb. 2000). The court queries whether the nature of the activities are of such materiality that a reasonable and prudent business person would expect to generate substantial revenues from the operation activities, separate and apart from the sale or lease of the underlying real estate. In re Kara Homes, Inc., 363 B.R. 399 (Bkrtcy. D.N.J. 2007). For example, courts have held that the development and sale of single family residences and condominiums are not sufficiently separate from the underlying real estate to qualify for an exemption from Bankruptcy Code Section 362(d)(3). In Kara Homes, the court ruled that because it is necessary to acquire land, plan the community, and market those homes for sale, these activities were “merely incidental to the Affiliated Debtors to sell these homes or condominium units, and do not constitute substantial business [separate and apart from the real property.]” Id. at 406.

Conversely, a court ruled that the operations of a full service hotel were operation activities separate and apart from the sale and lease of the underlying real property. In re CBJ Dev., Inc., 202 B.R. 467 (B.A.P. 9th Cir. 1996). The distinction the court found was identified within the numerous activities associated with a full service hotel, including, for example, room service, maid service, linen service, regular laundry service, concierge, shuttle service, bell service, doorman, restaurant and bar operations, snack shop, gaming services, etc. Id. In contrast, courts throughout the country have found that apartments and motels with minimal services are single asset real estate entities. In re Vienna Park Properties, 125 B.R. 84 (S.D.N.Y. 1991); In re 9281 Shore Road Owners Corp., 187 B.R. 837 (E.D.N.Y. 1995); In re Crosscreek Apartments, Ltd., 213 B.R. 521 (Bankr. E.D. Tenn. 1997); In re Pleasant Hill Partners, L.P., 163 B.R. 388 (Bankr. N.D. Ga. 1994); In re Equitable Dev. Corp., 196 B.R. 889 (Bankr. S.D. Ala 1996); In re LDN Corp., 191 B.R. 320 (Bankr. E.D. Va 1996); Majestic Motel Assocs., 131 B.R. 523 (Bankr. D. Me. 1991); In the Matter of Bouy, Hall & Howard and Assocs., 1995 WL 17006338 (Bankr. S.D. Ga.)

Potential responses and repercussions
When a debtor fails to accurately identify an entity as a single asset real estate entity, creditors are entitled to file a petition with the bankruptcy court to determine that an entity is a single asset real estate entity. If the court does reclassify the matter, the debtor has 30 days from the date the order is entered to submit a plan that has the reasonable possibility of being confirmed. Often, creditors file simultaneous motions to lift the automatic stay on the basis that the petition was filed in bad faith, and for determination that the matter is truly a single asset real estate case. There seems to be a trend among bankruptcy courts to look carefully at a single asset real estate case to ensure they are not filed in bad faith.

For example, in In re McBride Estates, Ltd., 154 B.R. 339, (Bkrtcy, N.D. Fla., 1993), the court found that a single asset real estate matter was filed in bad faith. “While not every single asset real estate case is per se a bad faith filing, absent a demonstrated ability to successfully reorganize at inception of such a case, it is apparent that the vast majority of such cases will be found to have been filed in bad faith.” Id. at 343. The court cited several factors to consider: (1) the debtor has a significantly higher percentage of secured claims than unsecured claims; (2) the debtor has little or no income or business activity; (3) the debtor has only one asset, encumbered by one mortgage; (4) the debtor’s financial difficulties were the result of actions by the debtor himself, and could be resolved; and (5) the timing of the petition for bankruptcy is very close to the time period scheduled for a foreclosure sale. Id.; see also In re Phoenix Piccadilly, 849 F.2d 1393, 1394-95 (11th Cir. 1986) (similar factors).

Attorneys filing such cases should be cognizant of the burden they carry in demonstrating that such cases are not filed in bad faith, lest they leave themselves exposed to the imposition of Rule 9011 sanctions. “It is well settled that sanctions under Bankruptcy Rule of Procedure 9011 may be imposed against debtors who file bankruptcy petitions in bad faith.” McBride Estates, 154 B.R. at 342, citing In re Whitney Place Partners, 123 B.R. 117 (Bankr.N.D.Ga., 1991). The standard is not whether the petition was filed in bad faith, but whether the debtors or their attorneys knew or should have known that the filing was in bad faith. Id. at 121, citing In re Villa Madrid, 110 B.R. 919 (9th Cir. BAP 1990). “By presenting to the court a petition, pleading, written motion or other paper, an attorney . . . is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, . . . it is not being presented for any improper purpose, such as to harass or cause unnecessary delay or needless increase in cost of litigation . . . .” Bankruptcy Rule of Procedure 9011(b). Counsel is required to study the law before representing its contents to a federal court and cannot misrepresent the law and put the burden of illumination on other counsel or the court. Findlay v. Banks (In re Cascade Energy & Metals Corp.), 87 F.3d 1146 (10th Cir. 1996).

Proceed with caution
In sum, a petition for bankruptcy filed on behalf of a debtor with a single asset of real property should be approached cautiously. Debtors’ counsel should carefully consider whether there are actual grounds to exempt the matter from the single asset rules. If, after filing, the parties identify an error on the bankruptcy petition, they should work together to enter into a stipulation and avoid needless fees and costs associated with moving the court to redesignate the matter as a single asset real estate matter.

Leslie Godfrey is an associate at Greenberg Traurig, LLP, whose practice includes commercial litigation and bankruptcy. She may be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Southern Nevada’s real estate market has suffered from a perfect storm consisting of unprecedented declines in real estate values; tightened credit markets; an oversupply of residential, commercial, and industrial property; and the “Great Recession.” This perfect storm has unfortunately caused a number of loans secured by real property to go into default for one reason or another, leaving lenders with the unenviable task of having to foreclose upon their collateral.

The primary remedy a Nevada lender has to collect a loan secured by real property is to non-judicially foreclose and then sue the borrower and guarantors to recover a deficiency judgment. See generally NRS 40.430–.459; NRS 107.080. In instances where the real property produces income, lenders frequently seek the appointment of a receiver to collect the rent from the property and preserve that income pending the conclusion of the foreclosure. Applications seeking the appointment of a receiver are excepted from Nevada’s one action rule. NRS 40.430(6)(a). An order appointing the receiver will set forth the receiver’s powers and duties with respect to the property and the income, and requires regular reports to the issuing court.

The most common preemptive defense to appointment of a receiver is for the borrower to file a chapter 11 bankruptcy petition after the recordation of a notice of breach and election to sell but before the hearing on the application for appointment of a receiver. The filing of a bankruptcy petition creates an automatic stay that stays the receivership action. 11 U.S.C. § 362(a). The lender must then obtain an order terminating or modifying the automatic stay before it can proceed with the receivership action.

There are a number of recent cases, however, where the borrower waited until after a receiver was appointed, and then filed for bankruptcy. These cases raise unique issues for the receiver and the lender.

The effect of the bankruptcy filing on the receiver
After a bankruptcy petition is filed, the receiver becomes a “custodian.” 11 U.S.C. § 101(11). A custodian has three primary obligations. First, the custodian must refrain from making any disbursement from, or taking any action in, the administration of property of the debtor, except such action as is necessary to preserve the debtor’s property. 11 U.S.C. § 543(a).

Second, the custodian must deliver to the trustee—normally the chapter 11 debtor—“any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents or profits of such property, that is in such custodian’s possession, custody or control on the date that such custodian acquires knowledge of the commencement of the case.” 11 U.S.C. § 543(b)(1). One court has described this as “an absolute duty . . . to refrain from any further action in the administration of property of the debtor’s estate and [the custodian] must deliver to the debtor in possession any property of the estate held by the custodian at the time knowledge of the bankruptcy case was acquired.” In re Constable Plaza Associates, L.P., 125 B.R. 98, 103 (Bankr. S.D. N.Y. 1991). The third obligation of the custodian is to file an accounting of property of the debtor in its possession. 11 U.S.C. § 543(b)(2). This accounting is similar to the reports the receiver is ordinarily required to file with the court which appointed it.

Problems bankruptcy raises for the receiver/custodian
As can be seen, the custodian’s obligations under the Bankruptcy Code may conflict with the receiver’s obligation to the lender and the appointing court. Indeed, the first two obligations place the receiver on the horns of a significant dilemma. The lender’s original purpose in seeking a receiver was to gather and collect rents and profits for the property and use it to pay the borrower’s obligation. Unfortunately for the receiver, ceasing its administration of the property and immediately complying with the Bankruptcy Code’s turnover requirements is not only burdensome, but is also almost certainly likely inconsistent with the order appointing it a receiver, as well as contrary to the obvious wishes of the lender that sought its appointment. If the receiver turns everything over to the debtor, it risks violating the order appointing it receiver. But if the receiver, as a custodian, fails to turn everything over to the debtor, it risks being charged with violating the automatic stay and the turnover provisions of section 543 of the Bankruptcy Code. The final custodian obligation also carries risk. The receiver’s past decisions, as reflected in the accountings a custodian must file with the bankruptcy court, may be scrutinized by that court and the debtor or trustee. The bankruptcy court has authority to surcharge the custodian for disbursements that it made that are not consistent with applicable law or that were not authorized by the court that appointed the custodian. 11 U.S.C. § 543(c)(3).

Strategies for resolving the receiver’s dilemmas
Fortunately, there are strategies to resolve the dilemmas faced by receivers. One strategy requires action by the lender that sought appointment of the receiver. That lender may file a motion to excuse the custodian from complying with the reporting and turnover requirements. Bankruptcy Code section 543(d)(1) provides that

after notice and hearing, the bankruptcy court - (1) may excuse compliance with subsection (a), (b) or (c) of this section if in the best interests of creditors and, if the debtor is not insolvent, of equity security holders would be better served by permitting a custodian to continue in possession, custody, or control of such property.

Typically, the lender will file such a motion at the same time as a motion seeking relief from the automatic stay to complete the pending foreclosure and receivership actions.

However, there is some tension between section 543(d) of the Bankruptcy Code, which enables a lender to ask the court to relieve the receiver of the turnover requirements, on the one hand, and the immediate turnover requirements of section 543(b) and the automatic stay. This tension raises the issue of whether a custodian must still comply with the mandatory turnover requirements once a the lender has filed a motion to excuse the custodian from those same turnover requirements. The custodian’s failure to comply with the turnover requirements violates both the automatic stay and Bankruptcy Code section 543(b), but a motion filed pursuant to Bankruptcy Code section 543(d) would be rendered moot if the custodian complies with the turnover requirements before the motion is heard. It appears that only one reported decision has recognized this tension, but even that court declined to address the issue in any detail. See In re Kennise Diversified Corp., 34 B.R. 237, 244 n.6 (Bankr. S.D. N.Y. 1983). Accordingly, this tension remains open for debate, and will likely be the subject of argument at any hearing brought by a lender seeking to excuse the custodian from compliance.

Another strategy is to provide direction in the order appointing a receiver. When a receiver is appointed, the resulting order details that particular receiver’s duties and obligations. A receiver may negotiate to have the order set forth the receiver’s responsibilities if and when a bankruptcy petition is filed. While it is unlikely that language in a receiver’s order can alter the custodian’s obligations under the Bankruptcy Code, such language may clarify that the receiver/custodian may turnover the property in its possession without any claim of wrongdoing by the lender, and further require that any action to excuse the receiver/custodian from the turnover must be made in a timely manner by the lender.

Further protections for receivers
The receiver also has some built-in protections under the Bankruptcy Code. First, the Bankruptcy Code protects custodians from liabilities incurred during the administration of the receivership. After notice and a hearing, which is normally triggered by a motion filed by either the custodian or the lender, the court shall “protect all entities to which a custodian has become obligated with respect to such property or proceeds, product, offspring, rents or profits of such property.” 11 U.S.C. § 543(c)(2). Second, the Bankruptcy Code provides that a custodian, after notice and a hearing, is to be compensated for the services it provided pursuant to the order appointing it as receiver. See 11 U.S.C. § 543(c)(2) (providing that the court shall “provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian”). Custodian compensation is one of the rare instances in which a pre-petition claim is afforded administrative priority. 11 U.S.C. § 503(b)(3)(E); In re Lake Region Operating Corp., 238 B.R. 99 (Bankr. M.D. Pa. 1999) (holding that it is the policy of courts to use funds of the bankruptcy estate to pay a superseded custodian and that the superseded custodian’s pre-petition claim enjoys administrative status). Both of these protections are normally sought in connection with the application to approve the custodian’s report.

Options when bankruptcy is filed
The receiver and the lender that had the receiver appointed have difficult issues to address when a bankruptcy proceeding is filed. While each case is different, the key consideration is for the receiver, who becomes a custodian under the Bankruptcy Code, and the lender to act promptly upon learning of an intervening bankruptcy. Three common strategies are employed. The first is for the custodian to immediately turnover all of the debtor’s property in its possession and provide the court with an appropriate accounting and, if necessary, request to be reimbursed for debts incurred by the receivership and awarded reasonable compensation for the receiver. A second common strategy is for the lender to immediately file a motion seeking relief from the automatic stay and an order excusing the custodian from complying with the requirements of Bankruptcy Code section 543. Given the tension between the automatic stay, the custodian’s duty to immediately turnover property to the debtor and the ability of the lender to seek an order from the court excusing the custodian from turning over the debtor’s property, such relief should ordinarily be sought on an order shortening time. A third strategy is to attempt to negotiate a stipulation with the debtor which will excuse the custodian from complying with the requirements of Bankruptcy Code section 543. Ultimately, however, the receiver’s best strategy is to anticipate the possibility of a bankruptcy filing, and insist that its appointing order protect it from the conflicting obligations.

Bob L. Olson is a shareholder at Greenberg Traurig, LLP, where his practice focuses on representation of creditors in bankruptcy. Bob has been certified as a Business Bankruptcy Specialist by the American Board of Certification since 1995. Bob may be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it