By: Anna Drynda
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently, the United States Bankruptcy Court for District of New Jersey in In re Kara Homes, Inc. held that affiliated Chapter 11 debtors, each owning separate real estate development projects for the construction of single family residences and condominiums, qualified as single asset real estate (“SARE”) cases, a holding that allowed the lenders expedited relief from automatic stay.
The case focused on whether the debtors conducted “substantial business” other than operating the real property sufficient to exclude them from the SARE provisions.
Adopting a “pragmatic approach,” the Court held that even if the business activities would qualify had the debtors performed them for third parties, such activities when performed for the debtor itself, or one of its affiliates, do not constitute substantial business.
The residential home building business, although involving real estate, arguably has more similarity to a manufacturing operation than to the on-going property management operations of many SARE debtors. The Kara Homes approach makes it very difficult for real estate developers to reorganize in bankruptcy.