Restructuring

Contributed by Doron P. Kenter.
Single asset real estate (SARE) debtors are subject to special provisions of the Bankruptcy Code that limit the protections otherwise applicable to ordinary chapter 11 debtors.  In particular, if a single asset real estate debtor does not begin making monthly payments to secured creditors, section 362(d)(3) of the Bankruptcy Code directs bankruptcy courts to grant relief from the automatic stay to allow secured creditors to institute actions against the debtor unless, within ninety days of the commencement of the bankruptcy case (or thirty days after the court determines that the debtor is a single asset real estate entity, whichever is later) “the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time.”
In In re Trigee Foundation, Inc., the SARE debtor owned an apartment building in Washington, DC.  The debtor commenced a chapter 11 case on September 13, 2012.  Because all parties agreed that the debtor was a single asset real estate entity, Trigee had until December 12, 2012 to file a plan of reorganization or begin making payments to its secured creditors.  Within those 90 days, Trigee did not make any payments to its secured creditors, but it did file a plan of reorganization before the statutory period expired.  But while it filed the plan in time, the debtor did not file a disclosure statement, a step that must be taken before any plan could go out for a vote.
Blackburne and Brown Mortgage Fund I, a secured creditor of Trigee, then moved for relief from the automatic stay to foreclose on its collateral.  Blackburne argued that, because Trigee had not filed a disclosure statement, the confirmation process could not proceed, and the debtor had not “filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time,” as is required by section 362(d)(3).  Trigee, on the other hand, argued that the Bankruptcy Code does not require a single asset real estate debtor to file a disclosure statement within the prescribed time period, only that it file a plan.
In siding with Blackburne, the court observed that seven months had elapsed since Trigee commenced its chapter 11 case, and that confirmation of its plan had been delayed due to the debtor’s own failure to file a disclosure statement, without which it had no hope of confirmation.  Moreover, the court noted that in the absence of a disclosure statement, the court (and, presumably, other parties in interest) had virtually no information regarding the debtor’s projections, and could not assess the feasibility of the debtor’s plan.  Recognizing that a determination regarding what constitutes “a reasonable time” to confirm a plan (especially in the absence of a disclosure statement) “will be affected by the degree to which the possibility of the plan being confirmed approaches being not just a reasonable possibility but instead a near certainty[,]” the court observed that the debtor had provided no real evidence of its ability to come close to confirming its plan.  Specifically, the debtor had no source of financing for its proposed renovations (other than cash collateral, which it had no permission to use), had failed to escrow the required amounts for taxes, and had failed to properly classify certain secured claims.  Moreover, the debtor’s initial cash collateral order required the debtor to file a plan within the first 90 days of its chapter 11 case.  Even though the debtor had filed a placeholder plan on that date, it had always been on notice of its 90-day window to explore its options and articulate a confirmable plan.  To file a plan without a disclosure statement was plainly outside the parties’ agreed understanding regarding how long a “breathing space” it would be afforded.
Rather than lifting the stay to allow Blackburne to foreclose on its collateral, though, the court gave a junior lienor 14 days to file a liquidation plan for Trigee, and 90 days to confirm that plan.  In fashioning this relief, the court recognized that the chapter 11 process benefited not only the debtor, but other parties in interest, who should be afforded at least some opportunity to protect their investments.
The court’s decision in Trigee is notable for several reasons.  First, the court recognized that, even though section 362(d)(3) only requires that a single asset real estate debtor file a plan within a specified period of time, that section also requires that the debtor show that any such plan is more than a placeholder, and is at least “reasonably confirmable” within a “reasonable period of time.”  Notably, that burden appears to be on the debtor, rather than on any party seeking to obtain relief from the stay.  Second, the court observed that these definitions of “reasonably confirmable” and “reasonable period of time” are flexible, and may have very different meanings depending on the specific facts and circumstances of any given case.  Lastly, even though the Bankruptcy Code provides that the court “shall” grant relief from the stay, the court in Trigee recognized that single asset real estate cases are not simply two-party disputes, that relief from the stay may not always be appropriate, and that a creative remedy (or an opportunity to explore such alternatives) may be in the best interests of all stakeholders, regardless of the plain language of the statute.  Accordingly, the court’s decision in Trigee may provide guidance to parties in interest in single asset real estate cases, even outside the limited fact pattern of the “placeholder plan” that was at issue in this case.