Chen Foundation, Inc.
Case Information
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------------------------x Chapter 11
In re Chen Foundation, Inc., Case No.: 24-10438 (JPM) Debtor. -----------------------------------------------------------x
M EMORANDUM O PINION AND O RDER ON M OTION TO D ETERMINE D EBTOR ’ S SARE S TATUS A P P E A R A N C E S:
JACOBS P.C.
Proposed Counsel for Chen Foundation, Inc.
595 Madison Avenue, 39th Floor
New York, New York 10022
By: Leo Jacobs, Esq.
Robert M. Sasloff, Esq.
COZEN O’CONNOR
Counsel for Shanghai Commercial Bank Ltd., New York Branch
Counsel for The Shanghai Commercial & Savings Bank, Ltd.
123 N Wacker Drive, Ste. 1800
Chicago, Illinois 60606
By: Peter J. Roberts
Christina M. Sanfelippo
COZEN O’CONNOR
Counsel for Shanghai Commercial Bank Ltd., New York Branch
Counsel for The Shanghai Commercial & Savings Bank, Ltd.
3WTC, 175 Greenwich Street, 55th Floor
New York, New York
By: Frederick E. Schmidt, Jr.
JOHN P. MASTANDO III
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the Motion to Determine Debtor’s SARE Status (the “Motion”) filed by Shanghai Commercial Bank Ltd., New York Branch (“SCB”), and The Shanghai Commercial & Savings Bank, Ltd. (“SCSB”, and collectively with SCB, the “Lenders”). [Doc. 24]. The Motion seeks a determination as to whether the Debtor is a single asset real estate (“SARE”) debtor within the meaning of Section 101(51B) of the Bankruptcy Code. See [Doc. 24, p. 1].
In response to the Motion is the Debtor’s Opposition to Motion to Determine Debtor’s SARE Status (the “Objection”) filed by Chen Foundation, Inc. (the “Debtor”). [Doc. 34]. The Objection argues generally that the Debtor is not a SARE debtor because it “presently operates with affiliated parties an art gallery on the fifth floor of [its] Property.” [Doc. 34, p. 1–2].
After careful consideration, and for the reasons set forth below, the Court finds that the Debtor is not a SARE debtor within the meaning of 11 U.S.C. § 101(51B). Accordingly, the Motion is DENIED.
I. BACKGROUND
The Debtor is a corporation formed in 1996 under the laws of Nevada. [Doc. 11, p. 1]. As relevant here, the Debtor’s primary asset is real property located at 250 Lafayette Street, New York, New York (the “Property”). [Doc. 1, p. 1]. The Property is presently subject to a lien in favor of the Lenders. See Claim no. 4-1. The following facts regarding the Property are undisputed: (i) the Property was first purchased in 1994 for the purpose of displaying and selling the artwork of T.F. Chen, [2] see [Doc. 34, pp. 1–2] (describing T.F. Chen as the “patriarch of the Chen family” and “a world-renowned artist”); [Doc. 37, p. 3]; (ii) the Property operated for several years entirely as a “Cultural Center and Art Gallery” by non-Debtor entities (the “Non-Debtor Affiliates”) that are themselves owned and operated by the Debtor’s principals, [3] see [Doc. 34, pp. 1–2]; [Doc. 37, p. 3];
(iii) in 2001, the Debtor converted certain floors of the Property to commercial rental space because “revenues from the art gallery could no longer support the operating expenses of the entire building,” see [Doc. 38, p.2]; [Doc. 37, p. 4]; (iv) notwithstanding the Property’s conversion, the art gallery and cultural center has continually operated on various floors of the Property that were not leased out as a commercial rental space, see [Doc. 34, p. 2]; [Doc. 37, p. 4]; (v) although the art gallery continues to display and market the artwork of T.F. Chen, the Debtor’s predominant source of income has for several years been the revenue derived from its commercial leases, see [Doc. 34, pp. 2–4] (noting that “[u]nfortunately, [] T.F. Chen artwork has not sold in many years in the United States”); [Doc. 37, p. 2].
The Debtor filed a petition for chapter 11 relief on March 18, 2024. See generally [Doc.
1]. Although the Property is the Debtor’s primary asset, the Debtor’s petition did not designate this proceeding as a SARE proceeding. See id.
The Lenders filed the instant Motion on May 9, 2024, arguing that “[t]he Debtor is subject to the SARE Provisions [of the Bankruptcy Code] . . . [because] the Property generates substantially all of the Debtor’s gross income, and the Debtor operates no substantial business other than the management and leasing of the Property.” See [Doc. 24, pp. 3–4]. The Debtor filed its Objection on May 24, 2024, maintaining that “the Debtor is not a SARE [Debtor] as defined under the Bankruptcy Code, because since its inception and opening of the Property in 1996, the Debtor has always operated a cultural center and art gallery for the display of the artwork of T.F. Chen.” [Doc. 34, pp. 1, 5] (noting further that “[t]he Debtor purchased the Property in 1994 and renovated the [] building to be operated as a Cultural Center and Art Gallery when it opened in 1996”). The Lenders filed a reply on May 28, 2024. See generally [Doc 37].
A NALYSIS
II. SINGLE ASSET REAL ESTATE
a. Section 101(51B)
Under title 11 of the Bankruptcy Code, a SARE designation allows certain secured creditors
relief from the automatic stay unless, within a specific period of time, “(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 [to creditors].” 11 U.S.C. § 362(d)(3);
see also In re Nuovo Ciao-Di, LLC,
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 . . . 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.
11 U.S.C § 101(51B). Accordingly, to qualify as a SARE property, a debtor must engage in only: (i) the “business of operating [] real property;” and (ii) other activities incidental to that business. Id.
“Incidental activities” are those that are “intrinsic to owning and developing the real estate.”
In re Vargas Realty Enterprises Inc.
, No. 09-10402 (SMB), 2009 WL 2929258, at *4 (Bankr.
S.D.N.Y. July 23, 2009) (quoting
In re Kara Homes,
Inc.,
It is well-established that “incidental activities” include,
inter alia
, the lease and
maintenance of rental property.
See In re Vargas Realty Enterprises Inc.
, No. 09-10402(SMB),
In contrast, a property is not a SARE property if it provides goods or services unrelated to
the mere ownership of real estate.
See, e.g.
,
id
. (discussing
In re Club Golf Partners, L.P.
, No. 07-
40096-BTR-11,
Here, the presence of the cultural center and art gallery on the Property push the Debtor outside the purview of 11 U.S.C § 101(51B). First, the Debtor did not purchase the Property as a commercial rental space in 1994. [Doc. 34, p. 1–2]. The Property has contained a cultural center and art gallery since 1996, and portions of the Property were not converted into commercial rental spaces until 2000. Id. These activities are clearly not “intrinsic to owning and developing” the Property. C.f. , Vargas , No. 09-10402(SMB), 2009 WL 2929258, at *4 (“[E]ach debtor owns a building that leases apartments to tenants . . . [and] [t]he contracting, managing and leasing services that the debtors identified do not generate income except through the payment of increased rent, and [] are [therefore] incidental to the operation of the Properties.”).
Similarly, the sale of art is an enterprise that “a reasonable and prudent business person would expect to generate substantial revenues from.” Kara Homes , 363 B.R. at 406. It is undisputed that the Debtor has regularly “held pop up events and conducted [] special showings of [] artwork” at the Property since its acquisition. [Doc. 34, p. 2–3] (noting that “officers of the Lenders were invited to gallery events at the Property and [had] regular visits to the Property”). Although T.F. Chen’s art has apparently not sold for some time, art sales have constituted at least some of the Debtor’s past income, and was in fact the Debtor’s sole source of income prior to 2001. [Doc. 34, p. 4].
Finally, although the cultural center and art gallery are to some degree operated by the Non- Debtor Affiliates, those entities were “formed [solely] for tax purposes and to operate the art gallery and cultural center in partnership [] with the Debtor . . . . ” [Doc. 34-1, p. 4] (emphasis added); see also [Doc. 34, p. 4–5]. Indeed, both Non-Debtor Affiliates are owned by the same principals as the Debtor, and—notwithstanding their use of significant portions of the Property— labor and efforts versus merely passive investment income.”); [Doc. 34-1, p. 2] (noting that the “[s]ince the Covid pandemic, the Debtor operated the gallery on the 2nd and 4th floors when it [] lost certain of its commercial tenants”). As noted above, all three entities are owned by T.F. Chen, Julia Chen, Lucia Chen, and Ted Chen. [Doc.
34-1, p. 4]; [Doc. 32].
neither entity pays the Debtor rent. [Doc. 34-1, pp. 3–4]; [Doc. 34, p. 4–5]; [Doc. 32] . The Debtor and its Non-Debtor Affiliates are thus engaged in a joint commercial enterprise that operates at the direction of the same owners in pursuit of the same end: the sale of art. See [Doc. 34, p. 2–3] (the Debtor has “held pop up events and conducted multiple special showings of [T.F. Chen’s] artwork”); see also [Doc. 34-1, pp. 3–4] (noting that T.F. Chen regularly “uses the space[] at [the Property] for his studio for painting”).
C ONCLUSION
In conclusion, the Court finds that this bankruptcy proceeding falls outside the purview of 11 U.S.C § 101(51B). Accordingly, the Motion is DENIED.
IT IS SO ORDERED.
Dated: July 17, 2024
New York, New York
/S/ John P. Mastando III HONORABLE JOHN P. MASTANDO III UNITED STATES BANKRUPTCY JUDGE
[1] Unless otherwise specified, references to “[Doc. __]” are to filings entered on the docket are to filings entered in the bankruptcy case In re: Chen Foundation Inc., Case No. 24-10438 (March 18, 2024). References to “Bankruptcy Rule __” are to the Federal Rules of Bankruptcy Procedure. References to “Local Rule __” are to the Local Bankruptcy Rules for the Southern District of New York.
Notes
[2] Submitted in support of the Objection is the Declaration of Ted Chen in Support of the Debtor’s Opposition to Motion to Determine Debtor’s SARE Status , which provides: Debtor has [] since the acquisition of the Property hosted events on behalf of the cultural center and art gallery, held pop up events and conducted multiple special showings of the artwork of TF Chen, the patriarch of the Chen Family, who is a world-renowned artist. Debtor operated both in partnership with affiliated parties, the New World Art Center, and the T.F. Chen Cultural Center. New World Art Center was formed in 1995 and T.F. Chen Cultural Center in 1997, essentially for tax purposes and because they had operated elsewhere outside of the United States. The home of each though is the Property and, in conjunction with the Debtor, they have operated the Property in furtherance of their stated goal of global peace, love and unity and to promote art education and run a public art program. Dr TF Chen is the first artist-painter to be honored with a Global Tolerance Award from the Friends of the United Nations (2001). Dr TF Chen is also the initiator for “Arts for Humanity World Tour” (2005-2015) to advance Art Education and a Global Culture of Peace. [Doc. 34-1, p. 2].
[3] The Debtor and its Non-Debtor Affiliates, New World Art Center and T.F. Chen Cultural Center, are owned by T.F. Chen, Julie Chen, Lucia Chen, and Ted Chen. [Doc. 34-1, p. 4]; [Doc. 32].
[4] The Ninth Circuit has interpreted Section 101(51B) to limit a property’s SARE status to the property’s
current
condition, regardless of the owner’s intent when purchasing the property.
In re CBJ Dev., Inc.
, 202 B.R.
467, 473 (B.A.P. 9th Cir. 1996). In
CBJ
, that court found that the language of Section 101(51B)—namely, “is being
conducted”—suggests that only current activities should be considered when assessing whether a debtor is involved
in substantial business activities beyond the operation of the property.
Id
. (noting that “any other conclusion would
allow all debtors with unrented commercial space to evade § 362(d)(3) by simply declaring an intention to start a
business”).
CBJ
thus stands for the straightforward proposition that SARE status depends on the current business
activities of a given debtor. The Ninth Circuit did not, however, hold that the present
success
of those activities is
dispositive. Moreover, because the movant bears the burden of proving that a given property is a SARE property,
see In re 218 Jackson LLC
,
[6] The Lenders rely upon
In re JJMM Int'l Corp
.,