1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: : CASE NO. 12-05710 4 : MJS LAS CROABAS PROPERTIES, INC. : CHAPTER 11 5 : Debtor : 6 ____________________________________: 7 8 OPINION AND ORDER 9 This case is before the court upon the motion for an order to determine that MJS Las Croabas 10 Properties, Inc. (hereinafter referred to as the “Debtor”) is a single asset real estate property or project 11 as defined in the Bankruptcy Code, 11 U.S.C. §101(51B), filed by the Federal Deposit Insurance 12 Corporation’s, as Receiver for Weternbank Puerto Rico, (hereinafter referred to as the “FDIC-R”). 13 For the reasons set forth below this court determines that Debtor is a single real estate property or 14 project pursuant to §101(51B) of the Bankruptcy Code, and that, as such, Debtor is subject to 15 §362(d)(3) of the Bankruptcy Code. 16 Facts and Procedural Background 17 The Debtor filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on July 19, 18 2012. The Debtor listed the following properties in Schedule A (Real Property); (i) 64 apartment 19 units, 28 boat parking spaces and 48 storage units that have an indeterminate current value and a 20 secured claim in the amount of $20,203,938; (ii) lots #7266, 15498, 1723, 2597, 11831, 111832 of 21 which no current value is listed, no amount of secured claim is listed and also the nature of Debtor’s 22 interest in the property is left blank; (iii) lot of land #15,144 with 71.17 square meters (vacant land) 23 with indeterminate value and no secured claim attached to the same; and (iv) lot of land #12,229 with 24 3.63 “cuerdas” for future development of 106 apartment units, 29 boat parking spaces, 19 jet ski 25 parking spaces and 1 storage room pending construction with indeterminate value and no secured 26 claim attached to the same. The FDIC-R’s claim was included in Debtor’s Schedule D (Creditors 27 Holding Secured Claims) as having been incurred in the year 2004 with a lien consisting of an 28 inventory loan and secured by lands and buildings in the amount of $20,203,938, which is 1 unliquidated. The 341 meeting of the creditors was held and closed on August 27, 2012 (Docket No. 2 45). 3 The FDIC-R filed proof of claim #5-1 on November 6, 2012 in the amount of $20,478,204.36, 4 of which $6,700,000 is secured (which is the same as the value of the property as included by the 5 FDIC-R) and the remaining $13,778,204.36 as unsecured. On November 30, 2012, Debtor filed an 6 objection to the secured portion of the FDIC-R’S proof of claim #5 alleging that the FDIC failed to 7 produce documentation evincing that it has a perfected lien over Debtor’s real property (Docket No. 8 132). The FDIC-R also filed proof of claim #6-1 on November 6, 2012 and amended proof of claim 9 #6-2 on November 20, 2012. The FDIC-R’s amended proof of claim #6-2 is for an unsecured claim 10 in the amount of $40,709,406.59 and the basis for perfection is collateral assignment of sales 11 agreements and options. On November 30, 2012 the Debtor objected to amended proof of claim #6-2 12 because the claim against the Debtor is related to another entity, Sabana del Palmar, Inc. and the FDIC 13 failed to include the documents which demonstrate that Debtor is responsible for the obligations of 14 Sabana del Palmar, Inc. Whether or not the FDIC-R is a secured creditor does not affect the 15 determination that Debtor meets the definition of a single asset real estate (“SARE”). 16 On August 31, 2012, the FDIC-R filed a “Motion to Determine that Debtor’s Property is a 17 Single Asset Real Estate Pursuant to 11 U.S.C. §101(51B)” alleging that Debtor satisfies the three 18 prong test in the statutory definition, and as a SARE, Debtor is subject to 11 U.S.C. § 362(d)(3) 19 (Docket No. 48). On August 31, 2012, the FDIC-R filed a motion submitting exhibits to the motion 20 to determine that Debtor is a SARE under 11 U.S.C. §101(51B) (Docket No. 49). 21 Debtor filed its “...Response to the FDIC-[R]’s Motion to Declare the Debtor a Single Asset 22 Real Estate under the Bankruptcy Code and Proposal” on September 28, 2012 proposing the 23 following to avoid excessive litigation and ensure its right to reorganize; namely; (i) that the court 24 order Triglid Incorporated (“Triglid”), pre-petition Receiver appointed by the United States District 25 Court for the District of Puerto Rico (“District Court”) in a foreclosure case, to return its property to 26 resume administration of the same and in exchange the Debtor will not contest the SARE designation 27 as long as the Debtor has 90 days from the date that possession and administration of its property is 28 returned to Debtor; (ii) if the court determined that Debtor is a SARE to provide the Debtor 90 days 2 1 from the date of such order to submit a disclosure statement and continue to allow the Debtor to be 2 protected by the automatic stay provisions “...due to the fact that the administration of the pre-petition 3 [r]eceiver has already slowed the Debtor’s reorganization”(Docket No. 64). On October 10, 2012, 4 the FDIC-R filed its “...Reply to Debtor’s Response to FDIC-R’s Motion for the Court to Determine 5 the Debtor is Subject to 11 U.S.C. §362(d)(3)” by which it reaffirms its position that Debtor is a 6 SARE and argues that despite the fact that Debtor currently is not in possession of the property or of 7 its administration, it is aware of the operations of the same because the pre-petition receiver is 8 providing monthly reports regarding the management and operations of the same in compliance with 9 the receivership Order from the District Court, thus Debtor is able to create a plan and disclosure 10 statement (Docket No. 77). 11 On October 26, 2012, Debtor filed a “Motion to Inform Regarding Its Opposition to the 12 FDIC’s Effort to Designate the Debtor as a Single Asset Real Estate Project under the Bankruptcy 13 Code” by which it argues that Debtor is not a SARE due to the following: (i) Debtor’s property is not 14 a single property because there is pending the construction of Phase 2 of the first project and has 15 identified future projects; (ii) Phase 2 has not begun, but the permits for the construction of 106 16 residential units have already been obtained; (iii) “...Debtor’s business is not the passive collection 17 of rents or the proceeds from sales, the Debtor’s activities include the analysis of possible uses of 18 Phase 2 including the marketing and selling of the permits to other parties, identifying financing to 19 construct more residential units on the premises of Phase 2, an analysis of market trends to develop 20 alternative business models for Phase 2, and other activities and future projects;” and (iv) the Debtor 21 alleges that two of the prongs necessary for a SARE determination are inapplicable in the instant case 22 (Docket No. 97-1). 23 Applicable Law and Analysis 24 Single Asset Real Estate Cases (“SARE”) 25 Section 101(51B) of the Bankruptcy Code defines the term “single asset real estate” as, 26 “... real property constituting a single property or project, other than residential real property with 27 fewer than 4 residential units, which generates substantially all of the gross income of a debtor who 28 is not a family farmer and on which no substantial business is being conducted by a debtor other than 3 1 the business of operating the real property and activities incidental.” 11 U.S.C.
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: : CASE NO. 12-05710 4 : MJS LAS CROABAS PROPERTIES, INC. : CHAPTER 11 5 : Debtor : 6 ____________________________________: 7 8 OPINION AND ORDER 9 This case is before the court upon the motion for an order to determine that MJS Las Croabas 10 Properties, Inc. (hereinafter referred to as the “Debtor”) is a single asset real estate property or project 11 as defined in the Bankruptcy Code, 11 U.S.C. §101(51B), filed by the Federal Deposit Insurance 12 Corporation’s, as Receiver for Weternbank Puerto Rico, (hereinafter referred to as the “FDIC-R”). 13 For the reasons set forth below this court determines that Debtor is a single real estate property or 14 project pursuant to §101(51B) of the Bankruptcy Code, and that, as such, Debtor is subject to 15 §362(d)(3) of the Bankruptcy Code. 16 Facts and Procedural Background 17 The Debtor filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on July 19, 18 2012. The Debtor listed the following properties in Schedule A (Real Property); (i) 64 apartment 19 units, 28 boat parking spaces and 48 storage units that have an indeterminate current value and a 20 secured claim in the amount of $20,203,938; (ii) lots #7266, 15498, 1723, 2597, 11831, 111832 of 21 which no current value is listed, no amount of secured claim is listed and also the nature of Debtor’s 22 interest in the property is left blank; (iii) lot of land #15,144 with 71.17 square meters (vacant land) 23 with indeterminate value and no secured claim attached to the same; and (iv) lot of land #12,229 with 24 3.63 “cuerdas” for future development of 106 apartment units, 29 boat parking spaces, 19 jet ski 25 parking spaces and 1 storage room pending construction with indeterminate value and no secured 26 claim attached to the same. The FDIC-R’s claim was included in Debtor’s Schedule D (Creditors 27 Holding Secured Claims) as having been incurred in the year 2004 with a lien consisting of an 28 inventory loan and secured by lands and buildings in the amount of $20,203,938, which is 1 unliquidated. The 341 meeting of the creditors was held and closed on August 27, 2012 (Docket No. 2 45). 3 The FDIC-R filed proof of claim #5-1 on November 6, 2012 in the amount of $20,478,204.36, 4 of which $6,700,000 is secured (which is the same as the value of the property as included by the 5 FDIC-R) and the remaining $13,778,204.36 as unsecured. On November 30, 2012, Debtor filed an 6 objection to the secured portion of the FDIC-R’S proof of claim #5 alleging that the FDIC failed to 7 produce documentation evincing that it has a perfected lien over Debtor’s real property (Docket No. 8 132). The FDIC-R also filed proof of claim #6-1 on November 6, 2012 and amended proof of claim 9 #6-2 on November 20, 2012. The FDIC-R’s amended proof of claim #6-2 is for an unsecured claim 10 in the amount of $40,709,406.59 and the basis for perfection is collateral assignment of sales 11 agreements and options. On November 30, 2012 the Debtor objected to amended proof of claim #6-2 12 because the claim against the Debtor is related to another entity, Sabana del Palmar, Inc. and the FDIC 13 failed to include the documents which demonstrate that Debtor is responsible for the obligations of 14 Sabana del Palmar, Inc. Whether or not the FDIC-R is a secured creditor does not affect the 15 determination that Debtor meets the definition of a single asset real estate (“SARE”). 16 On August 31, 2012, the FDIC-R filed a “Motion to Determine that Debtor’s Property is a 17 Single Asset Real Estate Pursuant to 11 U.S.C. §101(51B)” alleging that Debtor satisfies the three 18 prong test in the statutory definition, and as a SARE, Debtor is subject to 11 U.S.C. § 362(d)(3) 19 (Docket No. 48). On August 31, 2012, the FDIC-R filed a motion submitting exhibits to the motion 20 to determine that Debtor is a SARE under 11 U.S.C. §101(51B) (Docket No. 49). 21 Debtor filed its “...Response to the FDIC-[R]’s Motion to Declare the Debtor a Single Asset 22 Real Estate under the Bankruptcy Code and Proposal” on September 28, 2012 proposing the 23 following to avoid excessive litigation and ensure its right to reorganize; namely; (i) that the court 24 order Triglid Incorporated (“Triglid”), pre-petition Receiver appointed by the United States District 25 Court for the District of Puerto Rico (“District Court”) in a foreclosure case, to return its property to 26 resume administration of the same and in exchange the Debtor will not contest the SARE designation 27 as long as the Debtor has 90 days from the date that possession and administration of its property is 28 returned to Debtor; (ii) if the court determined that Debtor is a SARE to provide the Debtor 90 days 2 1 from the date of such order to submit a disclosure statement and continue to allow the Debtor to be 2 protected by the automatic stay provisions “...due to the fact that the administration of the pre-petition 3 [r]eceiver has already slowed the Debtor’s reorganization”(Docket No. 64). On October 10, 2012, 4 the FDIC-R filed its “...Reply to Debtor’s Response to FDIC-R’s Motion for the Court to Determine 5 the Debtor is Subject to 11 U.S.C. §362(d)(3)” by which it reaffirms its position that Debtor is a 6 SARE and argues that despite the fact that Debtor currently is not in possession of the property or of 7 its administration, it is aware of the operations of the same because the pre-petition receiver is 8 providing monthly reports regarding the management and operations of the same in compliance with 9 the receivership Order from the District Court, thus Debtor is able to create a plan and disclosure 10 statement (Docket No. 77). 11 On October 26, 2012, Debtor filed a “Motion to Inform Regarding Its Opposition to the 12 FDIC’s Effort to Designate the Debtor as a Single Asset Real Estate Project under the Bankruptcy 13 Code” by which it argues that Debtor is not a SARE due to the following: (i) Debtor’s property is not 14 a single property because there is pending the construction of Phase 2 of the first project and has 15 identified future projects; (ii) Phase 2 has not begun, but the permits for the construction of 106 16 residential units have already been obtained; (iii) “...Debtor’s business is not the passive collection 17 of rents or the proceeds from sales, the Debtor’s activities include the analysis of possible uses of 18 Phase 2 including the marketing and selling of the permits to other parties, identifying financing to 19 construct more residential units on the premises of Phase 2, an analysis of market trends to develop 20 alternative business models for Phase 2, and other activities and future projects;” and (iv) the Debtor 21 alleges that two of the prongs necessary for a SARE determination are inapplicable in the instant case 22 (Docket No. 97-1). 23 Applicable Law and Analysis 24 Single Asset Real Estate Cases (“SARE”) 25 Section 101(51B) of the Bankruptcy Code defines the term “single asset real estate” as, 26 “... real property constituting a single property or project, other than residential real property with 27 fewer than 4 residential units, which generates substantially all of the gross income of a debtor who 28 is not a family farmer and on which no substantial business is being conducted by a debtor other than 3 1 the business of operating the real property and activities incidental.” 11 U.S.C. § 101(51B). Pursuant 2 to Section 101(51B) in order for a bankruptcy case to fall under the definition of a SARE it must 3 satisfy the following three (3) factors: (i) the real property must constitute a single property or 4 project, other than residential real property with fewer than four residential units; (ii) the real property 5 must generate substantially all of the debtor’s gross income; and (iii) debtor must not be involved in 6 any substantial business other than the operation of its real property and incidental activities. In re 7 Philmont Dev. Co., 181 B.R. 220, 223 (Bankr. E.D. Pa. 1995). 8 The first factor which the bankruptcy case must satisfy is whether the real property constitutes 9 a single property or project, other than residential real property with fewer than four residential units. 10 Apartment buildings and residential projects are within the scope of Section 101(51B). In re 11 Kkemko, Inc., 181 B.R. 47, 50 (Bankr. S.D. Ohio 1995); In re Philmont Dev. Co., 181 B.R. at 224. 12 In the instant case, Debtor acquired title to certain parcels located in Fajardo, Puerto Rico. Debtor 13 developed certain property into a residential condominium project known as “The Ocean Club at 14 Seven Seas” (“Ocean Club”) located in Las Croabas Ward in Fajardo, Puerto Rico. Ocean Club 15 consists of 300 residential condominium units of which 64 units remain unsold. Ocean Club is located 16 through out several parcels. As of this date, Ocean Club is the only project actually developed by the 17 Debtor. The Debtor is in the process of analyzing whether Phase 2 of the Project will consist of the 18 sale of the construction permits to other parties or in seeking financing to construct more residential 19 units on the premises of Phase 2. Debtor is presently in the business of selling the remaining 20 residential units of Ocean Club. This court finds that Ocean Club satisfies the first prong of the 21 SARE test, as it is a single project located throughout several parcels that consists of 300 residential 22 units. Furthermore, the financing for Ocean Club was treated as one project by the Debtor, given that 23 the construction loan was used primarily to finance the construction of Ocean Club and repayment 24 of the principal of the same was based on the net sales proceeds generated from the sale of the 25 residential units from Ocean Club (Docket No. 49, Exhibits 4(i) & 4(ii)). 26 The second prong of the SARE test is whether the real property generates substantially all of 27 the Debtor’s gross income. The only source of Debtor’s income is generated from the sale of 28 residential units. Debtor has not indicated that it derives income from any other source such as the 4 1 |joperation of a golf club, the operation of a marina or the operation of a hotel. Thus, Debtor satisfies 2 second prong of the SARE test. 3 The third and remaining prong of the SARE test is whether the Debtor has any other 4 |substantial business activities other than the operation of its real property, namely the Ocean Club 5 |lproject. In In re Kkemko, the court noted that in common usage the term single asset real estate 6 ||generally referred to buildings or raw land which were intended to be income producing. In re 7 |Kkhemko, 181 B.R. at 49. The Debtor has only indicated that, at this point, it is considering 8 jlalternatives for Phase 2 of the Project which may materialize in the sale of the construction permits 9 ||to other parties or in seeking financing to construct more residential units on the premises of Phase 10 2. These are only potential business activities which have not been developed. In In Centofante v. 11 |CBJ Dev. Un re CBJ Dev.), the court noted that, “[t]he use of the present tense by Congress in 12 ]§101(51B) suggests that only current activities may be considered in determining whether the debtor 13 conducting substantial business activities other than the operation of the property.” In Centofante 14 CBJ Dev. (In re CBJ Dev.), 202 B.R. 467, 472 (B.A.P. 9" Cir. 1996). The other substantial 15 |/business activities or operations a debtor carries out must be separate and distinct from owning and 16 |lmanaging real estate. See Ad Hoc Group of Timber Noteholders v. Pacific Lumber Co. (In re Scotia 17 ||Pacific Co., LLC), 508 F. 3d 214, 217 (5" Cir. 2007). This court finds that Debtor is not involved 18 jin any substantial business other than owning and managing the Ocean Club project, thus satisfying 19 third prong of the SARE test. 20 Conclusion 21 In view of the foregoing, the court concludes that Debtor satisfies all three (3) prongs of the 22 |ISARE test, and, as such, is a single asset real estate case and is subject to 11 U.S.C. § 362(d)(3). 23 SO ORDERED. 24 In San Juan, Puerto Rico, this 5" day of December 2012. 25
unitdh states Rankruptey Judge 27 28