  |
  |
  |
    
  
   |
 | |||
|
|
|
|
| |||
* Ad Hoc Group of Timber Noteholders v. Pac. Lumber Co. (In re Scotia Pac. Co.), 508 F.3d 214 (5th Cir. Nov. 2007) (Davis, J.)
The entities that actually fit within the definition of a "single asset real estate" debtor (SARE) are becoming fewer and farther between. Certain noteholders sought to lift the stay under section 362(d)(3), which provides for prompt relief from stay if a SARE debtor fails to file a plan of reorganization on an expedited basis. The bankruptcy court denied the noteholders' relief, holding instead that the debtor was not a SARE debtor. The district court certified the appeal to the Fifth Circuit. The Fifth Circuit provided the three-prong test for defining a SARE debtor. The failure of any one prong would disqualify the debtor from the definition (thus precluding the creditors from section 362(d)(3)'s prompt relief). The court of appeals in this case focused on the third prong, which determines whether the debtor conducts substantial business on its real property other than mere operation, maintenance, and the like.
Specifically, the court of appeals held that the debtor was not a SARE debtor because, in fact, it was engaged in substantial business that could not be considered mere maintenance, operation, and activities incidental thereto.1 The Fifth Circuit recognized that the term should be construed narrowly to encompass only to those entities with few, if any, employees other than a few principals, little or no cash flow, no available source of income to sustain a plan of reorganization, and no secured creditors encumbering the real estate.2 Because the debtor in this case did substantially more business than mere operations and maintenance of real estate, the Fifth Circuit affirmed the bankruptcy court's decision denying relief from the automatic stay.
* W.R. Grace & Co. v. Campbell (In re W.R. Grace & Co.), 384 B.R. 678 (Bankr. D. Del. Apr. 2008) (Fitzgerald, J.)
State of New Jersey's post-petition law suit for civil fines did not fit within the police and regulatory exception of section 362(b)(4) and so violated the automatic stay. Four years after the commencement of the debtor's bankruptcy case, the State of New Jersey commenced a state court action against the debtor and two former officers for falsifying reports regarding contamination of public waste sites in New Jersey. The debtor filed an action in the bankruptcy court seeking a declaratory judgment that the State's lawsuit violated the automatic stay. The State moved to dismiss, arguing that its lawsuit was an exception to the stay under section 362(b)(4)'s police and regulatory powers exception. The court disagreed, concluding that the State's action "seeking a fine with respect to an allegedly false report, particularly where the cleanup has been completed by a federal agency [the EPA], where the action is not to
1 Because the debtor was not a SARE debtor under the third prong of the definition, the court of appeals did not discuss the other two: (1) the debtor has real property constituting a single property or project (other than residential real property with fewer than four units); and (2) the property generates substantially all of the debtor's gross income
2 The court concluded that the 1994 and 2005 amendments to the definition did not alter its past analysis of a typical SARE debtor. See Little Creek Development Co. v. Commonwealth Mortgage Corp. (In re Little Creek Development Co.), 779 F.2d 1068, 1073 (5th Cir. 1986).
