/>iOften times some of the most ethically charged and legally nuanced bankruptcy cases involve a single piece of real estate. These so-called ‘single asset real estate (SARE)’ cases are deceptively complex and the legal and ethical issues they raise can trip up even experienced professionals.
What Is a SARE Case?
A SARE case usually involves a debtor whose primary asset is a piece of real estate, often held in a limited liability company (LLC), that generates nearly all their income. The twist? No substantial business is being conducted outside of operating that real estate.
Under the Bankruptcy Code, SARE is defined in 11 U.S.C. §101(51B), and its classification has significant implications. If a property qualifies as a SARE, the debtor faces stricter rules to reorganize under Chapter 11. This means quicker deadlines, increased scrutiny, and fewer chances to make mistakes.
As Mark Silverman of Troutman Pepper Locke puts it, “SARE debtors are under a microscope. Courts want to know: Is there really a reorganization plan or just a stall tactic?”
To better understand this, consider how courts assess whether a property fits the SARE definition. Factors include how income is derived (passively or actively), whether any business is being conducted beyond managing the property, and whether the property consists of one or multiple parcels.
Why Do These Cases Matter?
Consider this typical scenario: A borrower is days away from foreclosure. At the last moment, they file for bankruptcy. This invokes the automatic stay under Section 362 of the Bankruptcy Code, which halts creditor actions. The clock stops, and the debtor gets breathing room.
From the debtor’s perspective, it’s a second chance. From the lender’s perspective, it’s a stall tactic. And from the judge’s bench, it’s a question of motive. Timing and intention matter enormously.
David Levy of Keen-Summit Capital Partners describes it well: “Sometimes it’s about genuine attempts to reorganize. Sometimes it’s a means to buy time. The court has to figure out which.”
Adding to the challenge, SARE debtors have just 90 days to file a plan of reorganization or start making interest payments to secured creditors. This tight timeline forces courts to assess the legitimacy of the debtor’s plan very quickly.
Ethical Considerations in SARE Cases
Attorneys involved in SARE cases must walk a tightrope, balancing zealous advocacy with ethical obligations. Several ABA Model Rules of Professional Conduct come into play including:
- Rule 1.7: Conflict of Interest – Current Clients
- Rule 3.1: Meritorious Claims and Contentions
- Rule 4.3: Dealing with Unrepresented Persons
These rules guide how lawyers assess the merit of filings, navigate loyalty to clients, and communicate with non-clients.
As Samantha Ruben of Dentons notes, “These cases force lawyers to think about who their client really is, whether the filing has merit, and how they deal with stakeholders especially when they’re not represented.”
In practice, a lawyer might face a situation where a bankruptcy filing is technically legal but ethically gray, such as where a debtor lacks a viable reorganization plan. Rule 3.1 cautions against pursuing cases without a proper legal basis, while Rule 1.7 addresses conflicts where the lawyer’s duty to one client may be compromised by duties to others.
SARE Case Studies
Orchard Hills Baptist Church
In the Matter of Orchard Hills Baptist Church, the church filed for bankruptcy on the day a foreclosure sale was set to occur. While the court found several red flags, including that it was essentially a two-party dispute, it didn’t dismiss the case. Instead, it lifted the automatic stay because the church owed more than the value of the property.
What tipped the scales? According to the court, this was the church’s first bankruptcy filing, and there was no evidence of misconduct. Matt Christensen of Johnson May points out that bad faith isn’t always present, even when the timing looks suspicious.
Fairfield TIC, LLC
In contrast, Fairfield TIC got no such pass. In In re Fairfield Tic, LLC the debtor owned a 66% share in a mall, filed days before foreclosure, and had no control over mall operations. Worse, they didn’t join the other owners in the filing. The court saw it as both objectively futile and subjectively in bad faith. The takeaway? You can’t file for bankruptcy if you have no viable plan or power to effectuate it. And without the support of other stakeholders, especially in joint ventures, the filing may backfire.
Intervention Energy Holdings
In In re Intervention Energy Holdings, LLC a creditor used a clever maneuver: acquiring a single voting share in an LLC and amending the agreement to require unanimous consent for a bankruptcy filing. When the debtor filed anyway, the creditor moved to dismiss.
The court wasn’t impressed. It ruled that such tactics violated public policy. Ethical concerns under the ABA Model Rules of Professional Conduct Rule 1.7 (conflict of interest) were front and center: when creditors act like owners, who’s really in control?
This case underscores the danger of manipulating governance to suppress a debtor’s bankruptcy rights. Attorneys involved in drafting such provisions must consider whether they’re not just clever but ethical and enforceable.
Lessons for Practitioners
SARE cases are fertile ground for strategic filings and ethical landmines. Whether you’re advising a distressed property owner or representing a secured lender, clarity of purpose and ethical compliance are paramount.
Ask yourself: Is there a legitimate business purpose to the filing? Is the debtor acting in good faith? Have you clearly documented your rationale? These questions should guide every move.
As Ruben reminds us, “Bankruptcy isn’t just a tool; it’s a process governed by rules. If we bend them too far, we risk breaking trust with the Court and our bankruptcy bar colleagues.”
To learn more about this topic, view Single Asset Real Estate Cases. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about single asset real estate.
This article was originally published here.
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