Bankr. E.D.N.C.- In re 255 NORTH FRONT STREET CONDOS, INC.- Single Asset Real Estate Entity

Summary:

In this Subchapter V eligibility skirmish, the United States Bankruptcy Court for the Eastern District of North Carolina tackled whether a condominium association—specifically, 255 North Front Street Condos, Inc.—qualified as a “single asset real estate” (SARE) entity under 11 U.S.C. § 101(51B), which would disqualify it from Subchapter V treatment as a “small business debtor.”

The Bankruptcy Administrator (joined by a purported creditor) objected to the Debtor’s Subchapter V designation, arguing that its operations—managing common elements of a condo project for two unit owner-members—met the definition of SARE because the real property (i.e., the common areas) supposedly generated substantially all of the Debtor’s income and no other substantial business was being conducted.

The court disagreed, holding that the Debtor’s income was not generated by the property itself (such as rent or proceeds of sale), but rather from services rendered by the Debtor—like maintenance, insurance, fire inspections, and accounting—to its members under the statutory duties imposed by the North Carolina Condominium Act. As such, the Debtor was not merely passively collecting income from real estate, but actively managing operations with meaningful effort. Thus, it did not meet the “no substantial business” or “gross income generated by the property” prongs of the SARE test.

Accordingly, the court overruled the objection and permitted the Debtor to proceed under Subchapter V.

Commentary:

In Front Street, Judge Warren emphasized that eligibility exclusions (like SARE or the Subchapter V bar) should be understood historically in light of Congress’s goal to stop strategic misuse, not to disqualify good-faith reorganizations by  debtors based on formalities.   

Similarly,   Chapter 13's debt limits, codified in § 109(e), have historically been justified as a gatekeeping function: Congress wanted Chapter 13 reserved for wage earners with modest debt loads, and not complex, high-debt business entities or wealthy individuals.   Arguably,  these  debt limits should  be interpreted not with rigid mathematical exclusion, but with consideration of whether the debtor fits the core profile Congress intended Chapter 13 to serve: a wage-earning individual capable of reorganization through a plan.   This perspective would support, for instance, courts excluding disputed or non-liquidated debts from the debt limit tally, especially where inclusion would push a debtor into more expensive or less appropriate chapters and also only enforcing debt limits when eligibility is actively challenged by a creditor rather than on a per se and automatic basis.

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