Guest Writer – Eli O. Columbus, Winstead PC

What is a SARE case?
SARE stands for Single Asset Real Estate and is commonly used to describe bankruptcy cases involving debtors who own a single real estate parcel or project.  Given the economic climate, we have seen a recent surge in SARE bankruptcy filings and Winstead currently represents numerous secured lenders in SARE bankruptcy cases.

What is special about a SARE case?
The 2005 amendments brought several changes to the Bankruptcy Code’s treatment of SARE cases.  First, Congress removed the $4 million dollar maximum secured debt limit in order to qualify as a SARE.  Accordingly, the SARE designation can now apply to both large and small debtors alike.  This has opened the door for more (and larger) entities to meet the criteria of a SARE debtor.

Congress also expanded a special adequate protection rule for SARE cases.  The SARE amendments responded to complaints by secured creditors that real estate cases were often abusive and filed only for purposes of delay while debtors hoped for a local real estate market recovery.  The SARE provisions are designed to ameliorate this problem by forcing the debtor in such cases either to propose a workable plan promptly or to start making monthly interest payments to the secured creditor.  Failure to do either will lead to a lifting or modifying of the automatic stay.  The Bankruptcy Code now provides for a lifting of the stay if by the later of: (i) 90 days after entry of the order of relief (generally the bankruptcy filing date); or (ii) 30 days after the court determines the debtor should be designated as a SARE, the debtor has not filed a plan of reorganization that has a reasonable likelihood of being approved within a reasonable time or commenced monthly interest payments to the secured creditor.

What are the effects of the amendments on current bankruptcy litigation?
A SARE debtor should designate itself as a SARE debtor when it files for bankruptcy.  However, there has been a significant amount of recent litigation ensuing when such a designation has not been made, usually as a result of a motion filed on behalf of the secured lender seeking to designate a case as a SARE case.  This upward trend in litigation will likely continue as debtors attempt to bypass the SARE protections afforded to secured lenders under the Code.  SARE designation can be a little tricky since the property in question must be "passive income" in order to qualify for SARE designation.  For example, hotels, generally do not qualify for SARE treatment due to the "business" nature of the income.  Since the SARE lift stay provisions are measured from the later of 90 days after the bankruptcy case is filed or 30 days after the date the court determines a debtor is a SARE debtor, Winstead has advised its secured creditor clients in SARE bankruptcy cases to quickly file a motion to designate the case as a SARE case in order to avoid any uncertainty as to whether the SARE restrictions and deadlines apply.