Chen Foundation, Inc.
24-10438
Bankr. S.D.N.Y.Jul 17, 2024Background
- Chen Foundation, Inc., a Nevada corporation, owns property at 250 Lafayette Street, New York, which it uses for both commercial leasing and operating an art gallery/cultural center focused on T.F. Chen's artwork.
- The property was acquired in 1994 to display and sell art and has operated as a cultural center since 1996; some floors were converted to commercial rental space in 2001 due to insufficient art gallery revenues.
- Revenues largely shifted to commercial leases over time, but the art gallery and cultural center have continued operations in the property, hosting events and displaying art.
- Chen Foundation filed for Chapter 11 bankruptcy on March 18, 2024, without designating the case as a single asset real estate (SARE) proceeding.
- The secured lenders (SCB and SCSB) sought a court determination that the debtor qualified as a SARE debtor under 11 U.S.C. § 101(51B), which would trigger creditor protections under § 362(d)(3).
- The Debtor objected, arguing its operation of the art gallery and cultural center meant it was engaged in substantial business beyond managing rental property.
Issues
| Issue | Plaintiff's Argument (Lenders) | Defendant's Argument (Chen Foundation) | Held (Court Ruling) |
|---|---|---|---|
| Whether the Debtor is a SARE debtor under 11 U.S.C. § 101(51B) | Property generates all gross income from leasing; no other business | Operates art gallery and cultural center; not only leasing activity | Not a SARE debtor |
| Whether the art gallery/cultural activity is merely incidental | All non-leasing activity is incidental to property management | Art gallery/cultural events are separate, entrepreneurial activities | Activities are non-incidental |
| Role of Non-Debtor Affiliates in gallery operations | Non-Debtor Affiliates' operations shouldn't count for SARE status | Affiliates act jointly with Debtor; sale of art benefits Debtor | Affiliates' conduct counts |
| Whether ongoing art events/services constitute substantial business | No substantial business beyond leasing | Regular events, active marketing, past income from art sales | Constitute substantial business |
Key Cases Cited
- In re Scotia Pac. Co., LLC, 508 F.3d 214 (5th Cir. 2007) (a property is not SARE where debtor conducts active, non-passive business such as timber sales)
- In re CBJ Dev., Inc., 202 B.R. 467 (B.A.P. 9th Cir. 1996) (SARE status depends on debtor's current, not potential, business activities)
- In re Kkemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995) (marina offering significant services beyond rental is not SARE)
- In re Prairie Hills Golf & Ski Club, Inc., 255 B.R. 228 (Bankr. D. Neb. 2000) (golf/ski club offering services was not SARE)