This is an appeal from a bankruptcy court order which was certified to this Court pursuant to 28 U.S.C. § 158(d)(2). Appellant challenges the bankruptcy court’s holding that Scotia Pacific Company LLC (“Scopac”) was not a “single asset real estate” (“SARE”) debtor under § 101(51B) of the Bankruptcy Code and was therefore not subject to expedited reorganization procedures set forth in § 362(d)(3) of the Code. We affirm.
I.
A.
Scopac is a limited liability company which was formed as a “special purpose” subsidiary of Pacific Lumber Company (“Palco”). Palco transferred to Scopac approximately 200,000 acres of timberlands in Humboldt County in Northern California as well as the contractual right to harvest timber on an additional 10,500 acres owned by its affiliates. Scopac’s business is to derive maximum revenue from the timber grown on these lands
Scopac currently has over sixty employees, the majority of whom are scientists employed within the forestry program. The bankruptcy court’s order contains detailed findings of fact regarding Scopac’s operations and the activities of its employees. The following is a summary description of the specialized work done by the Scopac employees. Scopac performs tim-berlands analysis and inventory through its own employees and outside contractors. It also ensures compliance with various laws and rules including its habitat conservation plan, the California Forest Practice Rules, and the Clean Water and Porter-Cologne Acts. Scopac also develops a Timber Harvesting Plan, submits it for approval, and implements the Plan. This includes road planning, design, and engineering. Scopac also supervises harvesting by Palco personnel to ensure compliance with the Timber Harvesting Plan and applicable regulations. Additionally, Sco-pac prepares and submits permit applications including those regarding water quality, Erosion Control Plan development and implementation, and a Streambed Alteration Agreement. Further, Scopac is involved in individual programs in a variety of specialized fields such as watershed analysis and other scientific studies as well as litigation support. After harvesting by Palco, Scopac performs post-harvest site preparation, replanting, vegetation management efforts, and streambed remediation.
Scopac borrowed funds in the capital markets from investors in the amount of $867 million to fund its business. The Timber Notes Scopac executed are senior secured obligations of Scopac and are secured by the land and the income generated through the harvesting and sale of timber.
B.
Scopac (and several affiliated companies) filed a Chapter 11 bankruptcy petition to avoid foreclosure proceedings by the indenture trustee of the Timber Notes. The Ad Hoe Group of Timber Noteholders (“Noteholders”) moved the bankruptcy court to expedite the bankruptcy proceedings pursuant to § 862(d)(3)
2
of the Bank
The bankruptcy court made extensive factual findings and concluded that Scopac does not meet the definition of SARE set forth in § 101(51B) of the Bankruptcy Code. The court concluded that because Scopac operates substantial business on the property, it is not a SARE:
Scopac is also engaged in a “substantial business” other than operating the real property. This Court agrees with Judge Rhoades’ interpretation [in In re Club Golf Partners, L.P. ] of the definition “according to an active-versus-passive criterion that inquires into the nature of revenue generation on and by the property, that is, whether the revenue is the product of entrepreneurial, active labor and effort — and thus is not single asset real estate — or is simply and passively received as investment income by the debtor as the property’s owner — and thus is single asset real estate .... Real property that, for the generation of revenues, requires the active, day-to-day employment of workers and managers other than or additional to the principals of the debtor, and that would not generate substantial revenue without such labor and efforts, should not be regarded as single asset real estate.”
In re Scotia Dev., L.L.C.,
The Noteholders appealed the order to the district court and moved the bankruptcy court to certify the appeal to this Court pursuant to 28 U.S.C. § 158(d)(2). The bankruptcy court initially denied certification of the appeal but three days later entered an order vacating the order denying certification and recommended that the district court certify the appeal. The district court then entered an order certifying the appeal to this Court. In response to the district court’s certification order, we accepted this appeal.
Two issues are presented in this appeal. First, whether this Court should exercise appellate jurisdiction in this case notwithstanding the fact that the case was certified to this Court by the district court while it was still technically pending before the bankruptcy court; second, whether Scopac is a SARE. We consider these issues below.
II.
This Court applies the same standard in reviewing decisions of a bankruptcy court as does the district court.
Nesco Acceptance Corp. v. Jay (In re Jay),
III.
A.
Scopac argues first that this Court should not entertain this appeal because the case was not certified to this Court in accordance with the applicable rules. More particularly, Scopac contends that because the appeal was pending in the bankruptcy court when the district court certified it, the wrong court certified it for appeal, and consequently we should not consider the appeal.
The certification of bankruptcy cases for appeal from the bankruptcy court to the Court of Appeals under § 158 is a new procedure added by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005. 4 The procedure to be followed in such certification is supplied by Interim Federal Rule of Bankruptcy Procedure 8001(f) (which has been adopted by the Southern District of Texas) which provides that a bankruptcy court shall make the certification while the matter is pending in the bankruptcy court. Fed. R. BaNKrP. 8001(f) [Interim]. 5 It is uncontested that when the district court certified this case for appeal it had not yet been docketed in the district court and therefore was still “pending” in the bankruptcy court according to Interim Rule 8001(f)(2). Thus, it is clear that the proper court to certify the appeal from the bankruptcy court judgment was the bankruptcy court rather than the district court.
Because the procedure for certification of judgments in bankruptcy cases is a court-promulgated rule and not governed by statute, certification by the district court in this case did not deprive this Court of jurisdiction.
See Bowles v. Russell,
— U.S. -,
Scopac does not argue that the certification of this case by the district court rather than the bankruptcy court deprives us of jurisdiction, and we agree with Note-holders that this procedural glitch does not deprive us of jurisdiction. The only question is whether we should consider the merits of this appeal despite the procedural mistake.
The record makes it clear in this case that both the bankruptcy court and the district court sought to certify the bankruptcy court judgment to this Court for appeal. After the bankruptcy court judgment was appealed to the district court, the bankruptcy court recommended certification to the district court. The fact that the bankruptcy court and the district court overlooked the fact that the case was still technically pending in the bankruptcy court under Interim Bankruptcy Rule 8001(f)(2) apparently prompted the district court to certify the judgment for appeal. Under these circumstances, where both courts wish to certify the case to this Court for appeal, this error is technical in nature, does not affect the substantial rights of the parties, and prompts us to exercise our discretion in favor of proceeding to the merits of this appeal.
B.
Turning to the merits, the Note-holders argue that the bankruptcy court erred in concluding that Scopac was not a SARE. In determining whether Scopac is a SARE, we turn first to the statutory definition in § 101(51B) of the Bankruptcy Code:
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) (2006). Three requirements emerge from this definition which must all be met for a debtor to be considered a SARE debtor: (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. If a debtor fails to meet any prong, it is not a SARE.
The Noteholders argue that Scopac should be considered a SARE because it meets all three prongs of § 101(51B) of the Bankruptcy Code. Scopac argues that it does not qualify as a SARE under any of the § 101(51B) prongs. We find it unnecessary to consider whether Scopac qualifies under the first two prongs because we conclude that it clearly does not qualify under the third prong—it conducts substantial business other than operation of the real estate.
1.
The term “SARE” was added to the Bankruptcy Code in 1994.
See In re Kkemko, Inc.,
In a recent case,
In re Club Golf Partners, L.P.,
the Eastern District of Texas held that a golf club which conducted substantial business other than operating the real property was not a SARE.
In order to be single asset real estate, the 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 ... mowing the grass and waiting for the market to turn.
Id. at *5 (internal quotations omitted). The court explained that the debtor golf club was not a SARE because in addition to owning real estate, it also operated a variety of revenue-producing activities. Id. at *6. These included the debtor’s employment of third-party employees, the sale of memberships, the charging of fees for access to the golf course and other amenities, and the sale of merchandise, food, and beverages in its pro shop and restaurant. Id.
Because its business activities are variegated and multiple and are dependent on the entrepreneurial efforts and ongoing hard work of its principals and its other employees, and because it does not simply lease its property to tenants as the owner of true single asset real estate such as an apartment house does, the Debtor’s golf course does not fall within the scope of the definition of single asset real estate ....
Id. (internal quotations omitted).
In
In re Prairie Hills Golf & Ski Club, Inc.,
a bankruptcy court held that the debtor, an operator of a golf and ski club, was not a SARE because it conducted
The Ninth Circuit Bankruptcy Appellate Panel in
In re CBJ Development
held that a hotel was not a SARE because it conducted substantial business other than operation of the real estate.
The Noteholders contend that this Court should find that Scopac is not a SARE based on a recent bankruptcy court case from New Jersey:
In re Kara Homes, Inc.,
The above discussed cases are representative of those discussing the third prong of the SARE definition: what constitutes substantial business other than operating the real estate. The record in the case demonstrates that Scopac’s business activities discussed above are much more extensive and diverse than the activities of golf clubs, marinas, and hotels considered in the above cases. 7
2.
Scopac also points out that although § 101 (51B) added the term SARE as a statutory term in 1994, the term already had a well established meaning in the bankruptcy jurisprudence. Scopac argues that the pre-1994 meaning attached to this term is helpful in interpreting its statutory meaning. Several post-1994 cases agree.
See, e.g., In re Kkemko,
The debtor has one asset, such as a tract of undeveloped or developed real property. The secured creditors’ liens encumber this tract. There are generally no employees except for the principals, little or no cash flow, and no available sources of income to sustain a plan of reorganization or to make adequate protection payments .... Typically, there are only a few, if any, unsecured creditors whose claims are relatively small. The property has usually been posted for foreclosure because of arrearages on the debt and the debtor has been unsuccessful in defending actions against the foreclosure in state court.
Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.),
3.
The Noteholders also rely on the 2005 BAPCPA amendments to support the argument that Scopac should be considered a SARE. In 2005, § 101(51B) was amended by BAPCPA to exclude family farmers and to remove the existing $4 million cap on businesses that could qualify as SAREs. 8
The Noteholders’ main argument on this point is that by excluding family farmers as SAREs, Congress implied that the definition included large farming operations such as Scopac’s tree farming operation. To draw this inference, we would presumably need to accept that Congress by excluding family farmers intended to include other farms regardless of size and regardless of the extent and diversity of their active operations. We are unable to accept the notion that Congress intended to adopt one model for SAREs that applies only to farms and another to all other types of businesses. It is much more reasonable to assume that Congress sought to avoid a conflict with Chapter 12 of the Bankruptcy Code.
The Noteholders also point to the removal of the $4 million cap and argue that this makes it clear that Congress intended to include large enterprises within the scope of the SARE definition. However, including large enterprises does not mean Congress intended to otherwise abandon the statutory definition of SARE or overrule the established court interpretations of the term. We find no merit to this argument.
IV.
We agree with the bankruptcy court’s holding that Scopac conducts substantial business other than operating the real property and activities incidental thereto. Scopac’s timberland is clearly more than a passive investment. Scopac has over sixty employees and at times hires additional independent contractors to assist in conducting its business. Sophisticated operations take place on the timberland such as planning, growing, and maintaining the timber as well as building and maintenance
We are also convinced that a holding that Scopac is a SARE would violate the plain language of the statute and is inconsistent with the meaning (both pre- and posH994) given that term by the courts. Section 101(51B) severely limits the class of debtors which qualify as SAREs, and we have no warrant to expand that definition. SARE debtors are carved out and subjected to stringent requirements in § 362(d)(3) which expedite the time for SARE debtors to file a plan of reorganization or commence making monthly payments, failing which the automatic stay is promptly lifted. See 11 U.S.C. § 362(d)(3). If Scopac is considered a SARE debtor, this narrow exception to the ordinary bankruptcy process would sweep broadly and require us to include such entities as owners of land or mineral interests who operate sophisticated businesses such as mining, oil and gas drilling, and large commercial farms simply by virtue of the debtor owning the land. Such a result is obviously contrary to the plain language of § 101(51B).
For the above reasons, we agree with the bankruptcy court that Scopac is not a SARE debtor and affirm its judgment.
AFFIRMED.
Notes
. A watershed is an area of land draining into a stream. Each watershed is a distinct area with unique characteristics that require the application of watershed-specific forestry management techniques.
. Section 362(d)(3) provides: "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 ... 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 in 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
. The bankruptcy court held that Scopac did not meet any of the three prongs of the test in § 101 (5IB); however, because we only reach the third prong — whether Scopac conducts substantial business other than operating the real property — we refer only to the bankruptcy court’s analysis on this point.
. 28 U.S.C. § 158(d)(2)(A) provides: "The appropriate court of appeals shall have jurisdiction of appeals described in the first sentence of subsection (a) if the bankruptcy court, the district court, or the bankruptcy appellate panel involved ... certifies] that—(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States ... and if the court of appeals authorizes the direct appeal of the judgment, order, or decree.” 28 U.S.C. § 158. Subsection (a) mentioned within (d)(2)(A) pertinently provides for jurisdiction to hear appeals from final judgments, orders, and decrees. Id.
. Interim Federal Rule of Bankruptcy Procedure 8001(f) pertinently provides: “A certification that a circumstance specified in 28 U.S.C. § 158(d)(2)(A)(i)-(iii) exists shall be filed in the court in which a matter is pending for purposes of 28 U.S.C. § 158(d)(2) and this rule. A matter is pending in a bankruptcy court until the docketing, in accordance with Rule 8007(b), of an appeal taken under 28 U.S.C. § 158(a)(1) or (2), or the grant of leave to appeal under 28 U.S.C. § 158(a)(3). A matter is pending in a district court or bankruptcy appellate panel after the docketing, in accordance with Rule 8007(b), of an appeal taken under 28 U.S.C. § 158(a)(1) or (2), or the grant of leave to appeal under 28 U.S.C. § 158(a)(3). (A) ... (i) ... Only a bankruptcy court may make a certification on request or on its own initiative while the matter is pending in the bankruptcy court.” Fed. R. Bankr.P. 8001(f)(2) [Interim].
.
See also Kara Homes, Inc. v. National City Bank, et al. (In re Kara Homes Inc.),
. The meaning attached to the statutory term SARE is consistent with the legislative history of the 1994 Act. The legislative history of the 1994 inclusion of SARE in the Bankruptcy Code indicates that SARE refers to property held for passive investment- — not property used in an active business enterprise. “We commonly think of a single asset case as one of a debtor with a single apartment house or condo complex or a single piece of real estate. However, this could include a debtor ... such as a real estate investment trust ....” 138 Cong. Rec. S8241-01, *S8264 (daily ed. June 16, 1992) (statement of Sen. Reid). The Senate Report for the Bankruptcy Reform Act of 1994 further explains that the “definition is limited to investment property of the debtor.” S.Rep. No. 168, 103rd Cong., 1st Sess. (October 28, 1993).
. The following redlined version of § 101(5IB) shows, through underlined additions and stricken-through deletions, the changes made by the 2005 amendment: "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 debt- or 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 having aggregate noncontingent, liquidated secured debts in — amount no more than $4,000,000.”
. The sale of Scopac timber to Palco is not a sale of the real estate itself. None of the SARE cases have held a sale of timber to be a sale of the real estate itself. Further, under the California Civil Code, timber, as appurtenant to the land, would be considered part of the real property unless “for the purposes of sale, emblements, industrial growing crops and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale, shall be treated as goods ....” Cal. Civil Code § 658;
see also
Cal. Comm.Code § 2107 (“A contract for the sale apart from the land of ... timber to be cut is a contract for the sale of goods within this division whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.”). We are therefore unpersuaded that "real estate” for the purposes of bankruptcy law would include this timber contracted for sale to Palco.
See In re Kkemko, Inc.,