Part 2 – The Whole Business Enterprise Exception
In my prior post on this topic, I noted that a “single asset real estate” debtor has but a very limited window in which to hide in bankruptcy before the inevitable unfolds. The Congressional history for this change that added the “single asset real estate” provisions to the Bankruptcy Code states that it was intended “to put additional responsibility on a single asset real estate debtor and prevent a perceived abuse of the bankruptcy process.” 93 S. Rep. No. 168, 103d Cong. 1st Sess. (1993). The history also notes that these provisions were intended to prevent real estate debtors from filing bankruptcy for the sole purpose of delaying mortgage foreclosure. Id.
Initially, this new structure within the Bankruptcy Code, was limited to mortgage loans of less than $4 million; however, the 2005 amendment to the Bankruptcy Code removed this limitation. Not to be outdone, developers responded with the tactic of placing their various “single asset real estate” projects under the control of a single, over-arching entity. This strategy -- called the “whole business enterprise” – was proposed as an exception to the single asset real estate structure. This, then, gets us to the Ninth Circuit opinion.
In Meruelo Maddux Properties – 760 S. Hill Street, LLC v. Bank of America, N.A. (In re Meruelo Maddux Properties, Inc.) No. 10-56128 (9th Cir. Jan. 27, 2012), the debtor Meruelo Maddox owned a 92-unit apartment complex in Los Angeles. Debtor’s parent operated not only Meruelo Maddox but also 52 other subsidiaries, and it consolidated their revenues into a single operating account. In 2009, the parent took Meruelo Maddox, the 52 subsidiaries, and itself into separate voluntary Chapter 11 bankruptcies.
Bank of America had loaned $28 million to Meruelo Maddox, and it took high offense at the institution of bankruptcy. It promptly moved for a declaration that Meruelo Maddox was a single asset real estate entity and therefore had to start making those monthly interest payments. Meruelo Maddox argued that it was not so obligated, because it was not a “single project” under the Bankruptcy Code. Rather, its parent’s consolidated management team and consolidated cash management system meant that Meruelo Maddox was, together with its parent and sister subsidiaries, instead a “whole business enterprise” and that the “single asset real estate: provisions did not apply. The Ninth Circuit rejected this. It found no such exception in the definition under the Bankruptcy Code. It looked, simply [perhaps too simply], to the fact that Meruelo Maddox was a single property, generating substantially all of its gross income from the property, and conducting no substantial business other than operating the property.
The impact of this decision, assuming that it is followed nationwide, is not to be underestimated. In the parry and thrust of debtor-creditor relations, the Meruelo Maddox decision will substantially strengthen the ability of mortgage lenders to get to the value of their collateral more rapidly.