Kara Homes Inc. v. National City Bank (In Re Kara Homes, Inc.)Kara Homes Inc. v. National City Bank (In Re Kara Homes, Inc.)
MEMORANDUM DECISION
I. JURISDICTION
This Cоurt has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(A). Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a).
II. FACTS AND PROCEDURAL HISTORY
On October 5, 2006 (the “Petition Date”), Kara Homes, Inc. (“Kara”) filed with the Court a voluntary petition under Title 11, Chapter 11, United States Code (the “Bankruptcy Code”). Subsequently, on October 9 and 10, 2006, November 17, 2006, December 8, 2006, January 12, 2007, February 2, 2007 and February 13, 2007, thirty-two (32) of the Debtor’s affiliates (the “Affiliated Debtors,” and collectively with Karа, the “Debtors”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. The Affiliated Debtors own separate real estate development projects for the construction of single family homes
On October 17, 2006 and January 9, 2007 2 , the Court entered Orders directing joint administration of Kara’s bankruptcy case and the Affiliated Debtors’ bankruptcy cases, for procedural purposes only, and designating Kara’s bankruptcy case as the lead ease. The Debtors’ bankruptcy eases have not been substantively consolidatеd. Since the filing dates, the Debtors have remained in possession of their assets as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
On November 16, 2006, an Order Authorizing the Debtors to Enter Into Agreement With Traxi LLC to Provide Crisis Management Services (the “Traxi Order”) was entered. Pursuant to the Traxi Order, Perry Mandarino (“Mandarino”) was authorized to serve as Debtors’ Chief Restructuring Officer and Anthony Pacchia (“Pacchia”) serves аs Chief Financial Officer.
On the same date that the Court entered the Traxi Order, a hearing was held on the interim approval of Debtors’ Motion for an Order authorizing the Debtors’ to incur post-petition secured indebtedness with Bear Stearns Investment Products Inc. (“Bear Stearns”). Bear Stearns was later replaced as DIP lender by WCP Real Estate Strategies Fund, L.P. (“WCP”).
In addition to the aforementioned check-mark on the face of еach voluntary petition indicating that each of the Affiliated Debtors constituted a single asset real estate case, each Affiliated Debtor, for which a petition was filed in 2006, also listed itself as a single asset real estate entity in response to question 18b on each Statement of Financial Affairs (“SOFA”). Question 18b requires the debtor to identify which of the debtor entities, if any, listed in question 18 of the SOFA, are single asset real estatе entities. Subsequently, each of the Affiliated Debtors filed Amended SOFA’s and a Verified Statement Regarding Debtor’s First Amendment to Chapter 11 Voluntary Petition and Schedules,
On December 19, 2006 the Affiliated Debtors filed, against pre-petition secured construction lenders (“Lenders”), a Complaint for Declaratory Judgment that thе Debtor Affiliates are not Single Asset Real Estate Entities pursuant to 11 USC § 10K51B) and 11 USC § 362(d)(3) (the “Adversary Proceeding”) 3 . Simultaneously, the Debtors filed a Motion for an Order Extending the Date by Which the Debtor Affiliates Must File Plans of Reorganization or Commence Monthly Payments to Pre-Petition Secured Creditors Until 60 Days Following the Court’s Determination of the Debtors’ Declaratory Judgment (the “Motion”) seeking to stay their obligations under 11 USC § 362(d)(3) to file a Plan or begin making interest pаyments until sixty (60) days after the Court determines the issue of whether the Affiliated Debtors are single asset entities.
At the December 26, 2006 hearing on the Motion, the Court imposed a schedule for motions and cross-motions for summary judgment to be filed on the issue of whether the Affiliated Debtors are single asset cases. Several of the defendant Lenders moved for summary judgment 4 . Those Lenders and the Affiliated Debtors to which their liens attach are as fоllows:
Pre-petition Secured Party Debtor Affiliate
Amboy National Bank Horizon at Birch Hill, LLC Kara at Crine West, LLC Kara at Mt. Arlington II, LLC Kara at Navasink, LLC Kara at Tradewinds, LLC
Provident Bank of New Jersey Limerick Estates, LLC Kara at Orchard Meadows, LLC
TD BankNorth, N.A. Bergen Mills Estates, LLC Horizons at Woodlake Greens, LLC
National City Bank Kara at the Glen Eyre, LLC Kara at Hawkins Ridge, LLC The Landings at Manahawldn, LLC
Winding Run Estates by Kara, LLC
WCP Real Estate Strategies Fund LP Kara at Mt. Ai-lington I, LLC
Yardville National Bank Estates at Galloway Woods, LLC
Credit Suisse Loan Funding, LLC Kara at Buckley Estates, LLC
The Debtors responded and сross-moved for summary judgment on the same issue. The Committee filed a brief in opposition to the Lenders and in support of the Affiliated Debtors. Not all named Defendants filed a motion for summary judgment but the foregoing relief shall be binding on all parties to the litigation.
The Affiliated Debtors argue that they are not single asset real estate entities as defined in 11 U.S.C § 101(51B). Instead, the Affiliated Debtors assert that each separate affiliate оperates a business sufficiently active so as to be excluded from § 101(51B). As described in the Cross-Motion, “it is the business of each Affiliated Debtor to acquire developable land, to design homes and/or condominiums suitable to that land, to arrange for the construction of these homes and/or condominiums and then to market and sell them to
In contrast, the Lenders argue that each of the Affiliated Debtors own a single real estate project that constitutes its sole asset and conducts no business operations other than the improvement and sale of real estate. Therefore, as the Lenders assert, since the Affiliated Debtors derive all of their revenue from improving and selling its real estate, the Affiliated Debtors, as single asset real estate entities, are required to abide by the “plan or payment” deadline outlined in Section 362(d)(3).
III. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate where “the pleadings, depositions, answers to interrogatоries, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law.” Fed. R.Civ.P. 56(c). As the Supreme Court has indicated, “Summary Judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather an integral part of the Federal Rules as a whole which are designed to secure the just, speedy and inexpensive determination of every action.”
Celotex Corp. v. Catrett,
The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact.
Huang v. BP Amoco Corp.,
All parties have stipulated that there are no genuine issues of material fact and that the record before the Court is fully developed so as to permit the Court to resolve the issues on summary judgment.
IV. SINGLE ASSET REAL ESTATE
Prior to the Bankruptcy Reform Act of 1994 (the “1994 Act”), the Bankruptcy Code laсked an express provision for single asset real estate case. The 1994 Act provided special treatment of single asset real estate by defining the term “single asset real estate in Bankruptcy Code Section 101(51B) and by placing single asset real estate cases on an expedited reorganization track through the enactment of
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.
The Court in
In re Philmont Dev. Co., supra,
noted that “single asset real estate” encompassed a real estate project “owned by an entity whose sole purpose was to operate that real estate with monies generаted by the real estate.”
Philmont, supra
Section 101(51B) enumerates four criteria which must exist before a bankruptcy case falls within the scope of section 101(51B). First, real property constituting a single property or project, other than residential real property with fewer than four residential units, falls within thе scope of 101(51B). Second, that real property must generate substantially all of the income of the debtor. Third, the debtor must not be involved in any substantial business other than the operation of its real property and the activities incidental thereto. Fourth, the debtor’s aggregate non-contingent liquidated secured debt must be less than $4,000,000.
Id at 223.
The last of the four criteria was eliminated as a result of the BAPCPA. With respect to the first criteria, there is no dispute that each of the thirty-two Affiliated Debtors are single real estate projects. Each Affiliated Debtor consists of a deve-lopable piece of land and a housing plan that rests upon it. Thus, the first criteria is satisfied.
The second requirement, that the real property must generate substantially all of the income of the debtor, is also satisfied. At the hearing for interim approval of the DIP Finanсing, Mandarino, testified as follows:
Q: Do you know how the debtors derive their revenue?
A: Yes
Q: And how do they derive revenue?
A: From the sale of homes, primarily.
Q: Are there any other ways that the debtors derive revenue.
A: Well, they could sell — they could sell land. They could buy land and then flip it.
Q: So, essentially, the debtors derive revenue through sale of homes or sale of other real estate?
A: Primarily, yes.
Q: Do the debtors also derive revenue from the proceeds of loans received from lenders?
A: No.
Q: Do the debtors receive funds necessary for operаtions from advances made by lenders?
A: Yes
Q: Are you aware of any other basis besides advances from lenders or sales of assets that the debtorswould derive funds necessary to pay post-petition employee wage claims?
A: Theoretically or actually?
Q: Actually.
A: I’m not aware of how they got that money. I don’t know.
Transcript of Hearing, November 16, 2006 at pp. 71-72 ¶ 14-25,1-11.
There has not been any testimony, evidence, arguments or otherwise that contradict Mandarino’s testimony that the Affiliated Debtors primary sourcе of income, if not it’s only source, is “from the sale of homes.” Instead, pursuant to the SOFA for each of Affiliated Debtors, in response to Question # 1 regarding the income from operation of business, Mandarino certifies that the income for 2004 and 2005 was derived from “combined sales revenue for all entities.” No other revenue stemming from any other operation of the Affiliated Debtors is listed therein. It is clear that the Affiliated Debtоrs derive substantially all of their income through the sale of the real property. Thus, the second criteria is likewise satisfied.
The true point of contention in this matter rests with the third criteria set forth in
Pkilmont, supra,
whether the debtor is involved in any substantial business other than the operation of its real property and activities incidental thereto. The Affiliated Debtors argue that they are not single asset real estate entities because substаntial business other than the business of operating the real estate and activities incidental thereto are conducted on the property of each Affiliated Debtor. The Debtors maintain that in addition to holding the real estate, each affiliate researches and purchases developable land, conducts planning and construction of homes, markets and sells the homes and maintains each devеlopment. These activities, according to the Affiliated Debtors, constitute “substantial business” and not “activities incidental” to the operation of the business. The Affiliated Debtors rely on
Kkemko, supra,
to support this contention. In
Kkemko,
the debtor operated a marina that not only provided moorings for boats but the storage, repair and win-terization of boats, showers, food, fuel, a pool and activities for boaters. The Court, noting the distinction established in
In re Mayer Pollock Steel Corp.
Similarly, other courts have followed a similar analysis, in declining to find a “single asset real estate” case where the real estate was not just a passive investment, but the site of various income producing activities.
See, In re Prairie Hills Golf & Ski Club,
The Affiliated Debtors are in the business of constructing and selling single family homes on the parcels of real estate owned by the Affiliated Debtors. In order to build and sell homes, it is often necessary to acquire the land on which to build the homes, and plan the community in which they lie; likewise, it is necessary to market those homes for sale and maintain the properties. All of the activities identified by the Debtors as reflective of “business operations” are merely incidental to the Affiliated Debtors efforts to sell the these homes or condominium units and do not constitute substantial business, as illustrated in Kkemko. Thus, the Court finds that the Affiliated Debtors fall within the definition of “single asset real estate” debtors and, as such, 11 USC § 362(d)(3) applies.
In reaching it’s conclusion, the Court has taken a pragmatic approach to gauging the substantiality of the Debtors’ business operations unrelated to the real estate. Simply put, 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. By way of example, with a country club or hotel, one could reasonably anticipate generating significant revenues from catering events, operating restaurants or casinos, providing services or selling merchandise-whether or not the operator wаs the owner of the real estate. In marked contrast, no one could reasonably expect to generate income from the activities undertaken by the Affiliated Debtors if the eventual sale of the real estate were not possible. 5
V. STAY RELIEF
11 USC § 362(d)(3) provides for expedited relief against debtors determined to be single asset real estate entities. That section states:
(d) On request of a party in interest and after nоtice 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 90days 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 hen); and
(ii) are in an amount equal to interest at the then applicable nonde-fault contract rate of interest on the value of the creditor’s interest in the real estate; or
Pursuant to 11 USC § 362(d)(3), the Affiliated Debtors, as single asset rеal estate debtors, have thirty (30) days from the entry of the Order on the within motions to either file a plan of reorganization or commence making interest payments to the secured lenders, since the initial ninety (90) day period has long since expired. Accordingly, Defendants’ motions for summary judgment are granted and Debtors’ cross-motion for summary judgment is denied. Additionally, the Debtors’ motion seeking an extension of time for filing the plans is also denied. Appropriate orders will be entered.
Notes
. The Kara Homes, Inc. affiliates that filed petitions pursuant to Chapter 11 of Title 11 of the United States Code are: Bergen Mills Estates, LLC, 06-19758; Country Club Estates by Kara, LLC, 06-19744; Estates at GallowayWoods, LLC, 06-19746; Hartley Estates by Kara, LLC, 06-19759; Horizons at Birch Hill, LLC, 06-19767; Horizons at Woodlake Greens, LLC, 06-19745; Horizons at Woods Landing, LLC 06-19760; Kara at Buckley Estates, LLC, 06-19742; Kara at Crine West, LLC, 06-19770; Kara at Dayna Court, LLC, 06-19743; Kara at Glen Eyre, LLC, 06-19765; Kara at Hawkins Ridge, LLC, 06-19757; Kara at Lacey, LLC, 06-19738; Kara at Mt. Arlington I, LLC, 06-19780; Kara at Mt. Arlington II, LLC, 06-19782; Kara at Navasink, LLC, 06-19737; Kara at Park Ridge Estates, LLC, 06-19783; Kara at The Tradewinds, LLC, 06-19741; Sterling Acres at Monroe, LLC, 06-19774; The Landings at Manahawkin, LLC, 06-19740; Winding Run Estates by Kara, LLC, 06-19764, Woodland Estates at North Edison LLC, 06-21512, Kara at Monroe, LLC, 06-21513; Kara Homes at Enclave II, LLC, 06-22341, Kara at Atlantic Hills, LLC, 07-10489; Horizons at Shrewsbury Commons, LLC, 07-11496; Forest Edge Estates by Kara, LLC, 07-11941; Kara at Farrington Ridge, LLC, 07-11939; Limerick Estates by Kara, LLC, 07-11937; Kara at Orchard Meadows, LLC, 07-11932; Summerfield Estates by Kara, LLC, 07-11928; and Kara at Freehold, LLC, 07-11924.
. On February 20, 2007, the Debtors filed a Motion for Expanded Joint Administration to include the Affiliated Debtors that filed on and after January 12, 2007. The Motion is scheduled to be heard on March 19, 2007 at 1 pm.
. The Complaint was subsequently amended to add Credit Suisse and substitute WCP Real Estate Strategies Fund LP for North Fork Bank.
. Bank of America was the first of the Lenders to file it's Motion for Summary Judgment and nearly all other Lenders joined in and/or adopted the arguments set forth therein. On the scheduled hearing date for this matter, Bank of America withdrew its Motion having settled its disputes with the Debtors, pending Court approval. Since most other Lenders relied on the arguments in Bank of America's Motion, those arguments will be considered incorporated by reference into the remaining Lenders' papers. Thus, this matter remains ripe for determination by this Court at this time.
. Clearly, the planning, design, marketing, mаintenance and other activities in which the Affiliated Debtors are engaged, are examples of such services which can generate income when performed for third parties; however, this is not the case here, where the Debtors do not perform such activities for other home builders. It follows suit, therefore, that Kara, which does engage in these activities for the affiliates, but does not own real estate, cannot be classified as a “single asset real estate” debtor.