Mike Markham on Chapter 11 – Part 2 of 10 – Single Asset Real Estate

Part 2 – Single Asset Real Estate


The next kind of Chapter 11 case is called a Single Asset Real Estate case, which has, in fact, become a term of art under the Bankruptcy Code. People have probably heard about single asset cases or bad faith filings, as they are called.  For example, it could be a company that just owns an entity that owns a single asset. Maybe they own an office building or maybe they own a mobile home park, or a hotel or a piece of land, whatever it might be. It is, in essence, a single asset that generates income and doesn’t really have separate operations. Maybe it has a couple of people on payroll, but generally it has a third party management company, and really has one main creditor which is the mortgage holder. It probably has some individual creditors – typical unsecured creditors, but in a lot of single asset cases, the only unsecured creditors they have is whoever got caught up in the filing when the Chapter 11 was filed and in that last thirty day time frame didn’t get paid.


There are special rules that apply. One of the rules, generally speaking, is that the debtor has to do one of two things within the first 90 days of the case. They either have to start making interest payments at the non-default contract rate, which some single asset debtors can do and others can’t, depending on their operations and their cash flow. Or, they have to file a plan that has a reasonable chance of confirmation within that same 90-day time frame. Now, you can imagine what a plan would look like and whether a debtor would think it has a reasonable chance of success and/or whether the creditor would think it has a reasonable chance of success. It is up to the judge to decide whether or not that plan does have a chance for success.


The problem one usually has in a single asset case is that the secured debt is greater than the value of the underlying collateral. So, for example, if the creditor is owed $10,000,000, and the asset is worth $8,000,000, then bankruptcy would bifurcate that debt into two claims, an $8,000,000 secured claim, and a $2,000,000 unsecured claim. Now you’ve got to deal with both of these claims in separate classes, and if the creditor votes no as a secured creditor and votes no as an unsecured creditor, which you can assume it is going to do, there is probably not sufficient other creditors to stop that unsecured deficiency claim from controlling the unsecured class. So that is why single asset cases can be difficult. Single asset cases, if they are going to work, need to have another secured debt of some kind. One of the things you must have in order to confirm a plan is at least one impaired class of creditors who vote in favor of your plan. So you’ve got a secured debt, maybe in a case you’ve got more than one secured creditors. It is helpful if you do, because that can be the impaired class that gets to vote on your plan, which allows you to move forward to a cramdown.


The law is clear that past due taxes, ad valorem real estate taxes can’t be used to constitute an impaired class. This use to work many years ago, but no longer.


Single asset cases can work, but again, I think when they are very upside down on the debt versus the value of the land, you have a difficult situation on your hands.


Since starting with the Johnson Pope Bokor Ruppel & Burns firm in 1988, Michael’s practice has concentrated on bankruptcy and insolvency related Litigation.
Michael has represented corporate and individual debtors, secured creditors, equipment lenders, landlords, creditor’s committees, trustees and petitioning creditors in involuntary bankruptcies.
Michael also has substantial experience in receivership cases.