IN THE UNITED STATES COURT OF APPEALS
United States Court of Appeals
FOR THE FIFTH CIRCUIT Fifth Circuit
FILED
November 13, 2007
Charles R. Fulbruge III
No. 07-40487 Clerk
In The Matter Of: SCOTIA PACIFIC COMPANY LLC
Debtor
________________________________________________
AD HOC GROUP OF TIMBER NOTEHOLDERS
Appellant
v.
THE PACIFIC LUMBER CO.; SCOTIA PACIFIC COMPANY LLC
Appellees
Appeal from the United States District Court
for the Southern District of Texas
No. 07-40487
Before DAVIS, BARKSDALE, and PRADO, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
This is an appeal from a bankruptcy court order which was certified to this
Court pursuant to 28 U.S.C. § 158(d)(2). Appellant challenges the bankruptcy
court’s holding that Scotia Pacific Company LLC (“Scopac”) was not a “single
asset real estate” (“SARE”) debtor under § 101(51B) of the Bankruptcy Code and
was therefore not subject to expedited reorganization procedures set forth in §
362(d)(3) of the Code. We affirm.
I.
A.
Scopac is a limited liability company which was formed as a “special
purpose” subsidiary of Pacific Lumber Company (“Palco”). Palco transferred to
Scopac approximately 200,000 acres of timberlands in Humboldt County in
Northern California as well as the contractual right to harvest timber on an
additional 10,500 acres owned by its affiliates. Scopac’s business is to derive
maximum revenue from the timber grown on these lands (“Scopac Timber”)
while maintaining sustainable forests. Scopac plans, manages, and implements
Timber Harvesting Plans relating to the Scopac Timber. It also conducts the
sale of the standing timber and then re-plants and manages future timber
stands. Additionally, Scopac attends to the varying harvesting requirements
and environmental prescriptions of each of the nine watersheds on the Scopac
land.1 However, Palco harvests the timber from the timberland.
Scopac currently has over sixty employees, the majority of whom are
scientists employed within the forestry program. The bankruptcy court’s order
contains detailed findings of fact regarding Scopac’s operations and the activities
1
A watershed is an area of land draining into a stream. Each watershed is a distinct
area with unique characteristics that require the application of watershed-specific forestry
management techniques.
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No. 07-40487
of its employees. The following is a summary description of the specialized work
done by the Scopac employees. Scopac performs timberlands analysis and
inventory through its own employees and outside contractors. It also ensures
compliance with various laws and rules including its habitat conservation plan,
the California Forest Practice Rules, and the Clean Water and Porter-Cologne
Acts. Scopac also develops a Timber Harvesting Plan, submits it for approval,
and implements the Plan. This includes road planning, design, and engineering.
Scopac also supervises harvesting by Palco personnel to ensure compliance with
the Timber Harvesting Plan and applicable regulations. Additionally, Scopac
prepares and submits permit applications including those regarding water
quality, Erosion Control Plan development and implementation, and a
Streambed Alteration Agreement. Further, Scopac is involved in individual
programs in a variety of specialized fields such as watershed analysis and other
scientific studies as well as litigation support. After harvesting by Palco, Scopac
performs post-harvest site preparation, replanting, vegetation management
efforts, and streambed remediation.
Scopac borrowed funds in the capital markets from investors in the
amount of $867 million to fund its business. The Timber Notes Scopac executed
are senior secured obligations of Scopac and are secured by the land and the
income generated through the harvesting and sale of timber.
B.
Scopac (and several affiliated companies) filed a Chapter 11 bankruptcy
petition to avoid foreclosure proceedings by the indenture trustee of the Timber
Notes. The Ad Hoc Group of Timber Noteholders (“Noteholders”) moved the
bankruptcy court to expedite the bankruptcy proceedings pursuant to §
3
No. 07-40487
362(d)(3)2 of the Bankruptcy Code arguing that Scopac is a SARE debtor. The
bankruptcy court denied the Noteholders’ motion.
The bankruptcy court made extensive factual findings and concluded that
Scopac does not meet the definition of SARE set forth in § 101(51B) of the
Bankruptcy Code. The court concluded that because Scopac operates substantial
business on the property, it is not a SARE:
Scopac is also engaged in a “substantial business” other than
operating the real property. This Court agrees with Judge Rhoades’
interpretation [in In re Club Golf Partners, L.P.] of the definition
“according to an active-versus-passive criterion that inquires into
the nature of revenue generation on and by the property, that is,
whether the revenue is the product of entrepreneurial, active labor
and effort — and thus is not single asset real estate — or is simply
and passively received as investment income by the debtor as the
property’s owner — and thus is single asset real estate . . . . Real
property that, for the generation of revenues, requires the active,
day-to-day employment of workers and managers other than or
additional to the principals of the debtor, and that would not
generate substantial revenue without such labor and efforts, should
not be regarded as single asset real estate.”
In re Scotia Dev., L.L.C., No. 07-20027, 2007 WL 2727130, at *12 (Bankr. S.D.
Tex. Apr. 5, 2007) (quoting In re Club Golf Partners L.P., No. 07-40096-BTR-11,
2
Section 362(d)(3) provides: “On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided under subsection (a) of this section,
such as by terminating, annulling, modifying, or conditioning such stay . . . with respect to a
stay of an act against single asset real estate under subsection (a), by a creditor whose claim
is secured by an interest in such real estate, unless, not later than the date that is 90 days
after the entry of the order for relief (or such later date as the court may determine for cause
by order entered within that 90–day period) or 30 days after the court determines that the
debtor in subject to this paragraph, whichever is later — (A) the debtor has filed a plan of
reorganization that has a reasonable possibility of being confirmed within a reasonable time;
or (B) the debtor has commenced monthly payments that — (i) may, in the debtor’s sole
discretion, notwithstanding section 363(c)(2), be made from rents or other income generated
before, on, or after the date of the commencement of the case by or from the property to each
creditor whose claim is secured by such real estate (other than a claim secured by a judgment
lien or by an unmatured statutory lien); and (ii) are in an amount equal to interest at the then
applicable nondefault contract rate of interest on the value of the creditor’s interest in the real
estate . . . .” 11 U.S.C. § 362(d).
4
No. 07-40487
2007 WL 1176010, at *4 (E.D. Tex. Feb. 15, 2007)). Thus, the bankruptcy court
concluded: “Scopac is clearly engaged in an active economic enterprise on its . .
. property.” Id. at *9.3
The Noteholders appealed the order to the district court and moved the
bankruptcy court to certify the appeal to this Court pursuant to 28 U.S.C. §
158(d)(2). The bankruptcy court initially denied certification of the appeal but
three days later entered an order vacating the order denying certification and
recommended that the district court certify the appeal. The district court then
entered an order certifying the appeal to this Court. In response to the district
court’s certification order, we accepted this appeal.
Two issues are presented in this appeal. First, whether this Court should
exercise appellate jurisdiction in this case notwithstanding the fact that the case
was certified to this Court by the district court while it was still technically
pending before the bankruptcy court; second, whether Scopac is a SARE. We
consider these issues below.
II.
This Court applies the same standard in reviewing decisions of a
bankruptcy court as does the district court. Nesco Acceptance Corp. v. Jay (In
re Jay), 432 F.3d 323, 325 (5th Cir. 2005). “A bankruptcy court’s findings of fact
are reviewed for clear error and its conclusions of law de novo.” Id. “This Court
may affirm if there are any grounds in the record to support the judgment, even
if those grounds were not relied upon by the courts below.” Bonneville Power
Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 245 (5th Cir. 2006)
(internal quotations omitted).
III.
3
The bankruptcy court held that Scopac did not meet any of the three prongs of the test
in § 101(51B); however, because we only reach the third prong — whether Scopac conducts
substantial business other than operating the real property — we refer only to the bankruptcy
court’s analysis on this point.
5
No. 07-40487
A.
Scopac argues first that this Court should not entertain this appeal
because the case was not certified to this Court in accordance with the applicable
rules. More particularly, Scopac contends that because the appeal was pending
in the bankruptcy court when the district court certified it, the wrong court
certified it for appeal, and consequently we should not consider the appeal.
The certification of bankruptcy cases for appeal from the bankruptcy court
to the Court of Appeals under § 158 is a new procedure added by the Bankruptcy
Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005.4 The
procedure to be followed in such certification is supplied by Interim Federal Rule
of Bankruptcy Procedure 8001(f) (which has been adopted by the Southern
District of Texas) which provides that a bankruptcy court shall make the
certification while the matter is pending in the bankruptcy court. FED. R.
BANKR. P. 8001(f) [Interim].5 It is uncontested that when the district court
certified this case for appeal it had not yet been docketed in the district court
and therefore was still “pending” in the bankruptcy court according to Interim
4
28 U.S.C. § 158(d)(2)(A) provides: “The appropriate court of appeals shall have
jurisdiction of appeals described in the first sentence of subsection (a) if the bankruptcy court,
the district court, or the bankruptcy appellate panel involved . . . certif[ies] that — (i) the
judgment, order, or decree involves a question of law as to which there is no controlling
decision of the court of appeals for the circuit or of the Supreme Court of the United States .
. . and if the court of appeals authorizes the direct appeal of the judgment, order, or decree.”
28 U.S.C. § 158. Subsection (a) mentioned within (d)(2)(A) pertinently provides for jurisdiction
to hear appeals from final judgments, orders, and decrees. Id.
5
Interim Federal Rule of Bankruptcy Procedure 8001(f) pertinently provides: “A
certification that a circumstance specified in 28 U.S.C. § 158(d)(2)(A)(i)–(iii) exists shall be filed
in the court in which a matter is pending for purposes of 28 U.S.C. § 158(d)(2) and this rule.
A matter is pending in a bankruptcy court until the docketing, in accordance with Rule
8007(b), of an appeal taken under 28 U.S.C. § 158(a)(1) or (2), or the grant of leave to appeal
under 28 U.S.C. § 158(a)(3). A matter is pending in a district court or bankruptcy appellate
panel after the docketing, in accordance with Rule 8007(b), of an appeal taken under 28 U.S.C.
§ 158(a)(1) or (2), or the grant of leave to appeal under 28 U.S.C. § 158(a)(3). (A) . . . (i) . . .
Only a bankruptcy court may make a certification on request or on its own initiative while the
matter is pending in the bankruptcy court. ” FED. R. BANKR. P. 8001(f)(2) [Interim].
6
No. 07-40487
Rule 8001(f)(2). Thus, it is clear that the proper court to certify the appeal from
the bankruptcy court judgment was the bankruptcy court rather than the
district court.
Because the procedure for certification of judgments in bankruptcy cases
is a court-promulgated rule and not governed by statute, certification by the
district court in this case did not deprive this Court of jurisdiction. See Bowles
v. Russell, 127 S. Ct. 2360, 2364-65 (2007). The Supreme Court in Bowles, in
considering the effect of a violation of procedural rules which were adopted by
a court rather than by statute, stated: “On the other hand, we have treated the
rule-based time limit for criminal cases differently, stating that it may be waived
because ‘[t]he procedural rules adopted by the Court for the orderly transaction
of its business are not jurisdictional and can be relaxed by the Court in the
exercise of its discretion . . . .’” Id. at 2365. See also Kontrick v. Ryan, 540 U.S.
443, 453 (2004) (Bankruptcy Rules adopted by the court for the orderly
transaction of its business are not jurisdictional).
Scopac does not argue that the certification of this case by the district
court rather than the bankruptcy court deprives us of jurisdiction, and we agree
with Noteholders that this procedural glitch does not deprive us of jurisdiction.
The only question is whether we should consider the merits of this appeal
despite the procedural mistake.
The record makes it clear in this case that both the bankruptcy court and
the district court sought to certify the bankruptcy court judgment to this Court
for appeal. After the bankruptcy court judgment was appealed to the district
court, the bankruptcy court recommended certification to the district court. The
fact that the bankruptcy court and the district court overlooked the fact that the
case was still technically pending in the bankruptcy court under Interim
Bankruptcy Rule 8001(f)(2) apparently prompted the district court to certify the
judgment for appeal. Under these circumstances, where both courts wish to
7
No. 07-40487
certify the case to this Court for appeal, this error is technical in nature, does not
affect the substantial rights of the parties, and prompts us to exercise our
discretion in favor of proceeding to the merits of this appeal.
B.
Turning to the merits, the Noteholders argue that the bankruptcy court
erred in concluding that Scopac was not a SARE. In determining whether
Scopac is a SARE, we turn first to the statutory definition in § 101(51B) of the
Bankruptcy Code:
The term “single asset real estate” means real property constituting
a single property or project, other than residential real property
with fewer than 4 residential units, which generates substantially
all of the gross income of a debtor who is not a family farmer and on
which no substantial business is being conducted by a debtor other
than the business of operating the real property and activities
incidental.
11 U.S.C. § 101(51B) (2006). Three requirements emerge from this definition
which must all be met for a debtor to be considered a SARE debtor: (1) the debtor
must have real property constituting a single property or project (other than
residential real property with fewer than 4 residential units), (2) which
generates substantially all of the gross income of the debtor, and (3) on which no
substantial business is conducted other than the business of operating the real
property and activities incidental thereto. If a debtor fails to meet any prong, it
is not a SARE.
The Noteholders argue that Scopac should be considered a SARE because
it meets all three prongs of § 101(51B) of the Bankruptcy Code. Scopac argues
that it does not qualify as a SARE under any of the § 101(51B) prongs. We find
it unnecessary to consider whether Scopac qualifies under the first two prongs
because we conclude that it clearly does not qualify under the third prong — it
conducts substantial business other than operation of the real estate.
1.
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No. 07-40487
The term “SARE” was added to the Bankruptcy Code in 1994. See In re
Kkemko, Inc., 181 B.R. 47, 49 (Bankr. S.D. Ohio 1995). Courts that have
considered whether a debtor is a SARE under the 1994 amendment to the
Bankruptcy Code have examined various types of businesses in the context of
whether they conduct substantial business other than operating the real
property. The most frequently cited case for the discussion of this issue is In re
Kkemko. Id. The bankruptcy court in that case considered whether a debtor
that operated a marina was a SARE. Id. at 48–49. The court explained that
“the business of the marina is something more than simply rental of moorings.
It stores, repairs, and winterizes boats.” Id. at 51. The marina also provides
showers as well as activities for those using the marina, and it sells gas and
other amenities. Id. The court held that these diverse activities supported the
conclusion that the debtor’s marina did not come within the definition of SARE.
Id.
In a recent case, In re Club Golf Partners, L.P., the Eastern District of
Texas held that a golf club which conducted substantial business other than
operating the real property was not a SARE. 2007 WL 1176010, at *6. The
court explained that “in the years between 1994 and 2005, bankruptcy courts .
. . took a practical view of the concept [of single asset real estate] in their
interpretations of § 101(51B), including within its ambit only those debtors who
have no revenue from their property except the passive collection of rent from
tenants and excluding from its reach those entities that undertake and pursue
various sorts of active economic, commercial, and business activities on the
property.” Id. at *2.6 Further:
6
See also Kara Homes, Inc. v. National City Bank, et al. (In re Kara Homes Inc.), 363
B.R. 399, 405–06 (Bankr. D.N.J. 2007) (citing In re Whispering Pines Estate, Inc., 341 B.R. 134
(Bankr. D.N.H. 2006); In re Prairie Hills Golf & Ski Club, Inc., 255 B.R. 228 (Bankr. D. Neb.
2000); Banc of America Commercial Finance Corp. v. CGE Chattuck, L.L.C. (In re CGE
Shattuck L.L.C.), Nos. 99-12287-JMD, CM 99-747, 1999 WL 33457789 (Bankr. D.N.H. 1999);
9
No. 07-40487
In order to be single asset real estate, the revenues received by the
owner must be passive in nature; the owner must not be conducting
any active business, other than merely operating the real property
and activities incidental thereto. Under the prior jurisprudence,
those passive types of activities are the mere receipt of rent and
truly incidental activities such as arranging for maintenance or
perhaps some marketing activity, or . . . mowing the grass and
waiting for the market to turn.
Id. at *5 (internal quotations omitted). The court explained that the debtor golf
club was not a SARE because in addition to owning real estate, it also operated
a variety of revenue-producing activities. Id. at *6. These included the debtor’s
employment of third-party employees, the sale of memberships, the charging of
fees for access to the golf course and other amenities, and the sale of
merchandise, food, and beverages in its pro shop and restaurant. Id.
Because its business activities are variegated and multiple and are
dependent on the entrepreneurial efforts and ongoing hard work of
its principals and its other employees, and because it does not
simply lease its property to tenants as the owner of true single asset
real estate such as an apartment house does, the Debtor’s golf
course does not fall within the scope of the definition of single asset
real estate . . . .
Id. (internal quotations omitted).
In In re Prairie Hills Golf & Ski Club, Inc., a bankruptcy court held that
the debtor, an operator of a golf and ski club, was not a SARE because it
conducted substantial business on the property. 255 B.R. at 230. The court
explained that the debtor does not simply “hold a passive real-estate investment”
and “does not merely own income-producing buildings and raw land. Rather, it
is involved in other significant income-producing activities.” Id. These activities
included building and maintaining roads on the land, developing the golf and ski
In re Larry Goodwin Golf, Inc., 219 B.R. 391 (Bankr. M.D.N.C. 1997); Centofante v. CBJ Dev.,
Inc. (In re CBJ Dev. Inc.), 202 B.R. 467 (B.A.P. 9th Cir. 1996)).
10
No. 07-40487
areas, and operating the farmland on the property. Id. See also Commerce Bank
and Trust Co. v. Perry Hollow Golf Club, Inc. (In re Perry Hollow Mgmt., Co.),
Nos. 99-13373-MWV, CM 00-127, 2000 WL 33679447, at *2 (Bankr. D.N.H.
2000) (“[R]unning a golf course is a substantial business other than the
operation of the real property itself” which includes the operation of a pro shop,
a food and beverage operation, rental of carts, collection of fees, and maintenance
of a labor force.); In re CGE Shattuck, 1999 WL 33457789, at *7 (business of a
golf course including pro shop, golf cart rentals, and other golf-related services
constituted substantial business other than operation of the real property); In
re Larry Goodwin Golf, Inc., 219 B.R. at 393 (golf course which rents golf carts,
has a pool, provides concessions, and owns adjacent land for sale conducts
substantial business other than operating the real estate).
The Ninth Circuit Bankruptcy Appellate Panel in In re CBJ Development
held that a hotel was not a SARE because it conducted substantial business
other than operation of the real estate. 202 B.R. at 473–74. The court concluded
that the operation of a hotel — including employment of a substantial number
of people to clean rooms, sheets, and towels and to provide services — requires
“substantially more day to day activity than does the operation of an apartment
complex. Accordingly, the operation of the Hotel is sufficiently active in nature
to constitute a business other than the mere operation of property.” Id. at 472.
See also In re Whispering Pines, Inc., 341 B.R. at 136 (a full service hotel with
eighty-nine rooms, cleaning and laundry services, and other guest amenities is
not a SARE because it conducts substantial business other than operating the
real estate); but see In re 5877 Poplar, L.P., 268 B.R. 140, 142, 144 (Bankr. W.D.
Tenn. 2001) (assuming that debtor who owned, operated, and collected rents
from a 126-unit Comfort Inn is a SARE).
The Noteholders contend that this Court should find that Scopac is not a
SARE based on a recent bankruptcy court case from New Jersey: In re Kara
11
No. 07-40487
Homes, Inc., 363 B.R. 399. In that case, the debtor owned real estate and was
engaged in the construction and sale of single-family homes and condominiums.
Id. at 400–01. The court considered the activities of the debtor to determine
whether the business operations were sufficiently active such that the debtor
should not be deemed a SARE. Id. at 405–07. The debtor’s business included
the acquisition of land, the design of homes and condominiums for that land,
arranging for the construction of homes, the marketing and sale of homes, and
finally, the building of a common space, amenities, and roadways. Id. at 402.
The court explained that a business would not be a SARE if “a reasonable and
prudent business person would expect to generate substantial revenues from the
operation activities — separate and apart from the sale or lease of the underlying
real estate.” Id. at 406 (emphasis added). In Kara Homes, the court found that
the debtor was a SARE because the debtor’s activities “reflective of business
operations [we]re merely incidental to [its] efforts to sell the[] homes or
condominium[s]” and thus did not constitute substantial business. Id. (internal
quotations omitted). “In order to build and sell homes, it is often necessary to
acquire the land on which to build the homes, and plan the community in which
they lie; likewise, it is necessary to market those homes for sale and maintain
the properties.” Id. The Noteholders contend that the activities in Kara Homes
are very similar to Scopac’s, and thus Scopac should be deemed a SARE. We
disagree. The construction and sale of homes (and the land on which they are
built) is within the traditional scope of the SARE definition, and the sale of
homes includes the sale of the real estate. Scopac, on the other hand, performs
its business on the real estate for the purpose of selling timber — not the
underlying real estate. Thus we find the Noteholders’ reliance on Kara Homes
unpersuasive.
The above discussed cases are representative of those discussing the third
prong of the SARE definition: what constitutes substantial business other than
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No. 07-40487
operating the real estate. The record in the case demonstrates that Scopac’s
business activities discussed above are much more extensive and diverse than
the activities of golf clubs, marinas, and hotels considered in the above cases.7
2.
Scopac also points out that although § 101(51B) added the term SARE as
a statutory term in 1994, the term already had a well established meaning in the
bankruptcy jurisprudence. Scopac argues that the pre-1994 meaning attached
to this term is helpful in interpreting its statutory meaning. Several post-1994
cases agree. See, e.g., In re Kkemko, 181 B.R. at 50. These cases point out that
before 1994, courts recognized that SARE debtors more often than debtors
generally, filed abusive Chapter 11 petitions to stave off creditors when they had
no hope of reorganizing. One such case from this Circuit explained generally
how we defined such debtors before the introduction of the statutory definition
and why these debtors deserved special attention to prevent abusive petitions:
The debtor has one asset, such as a tract of undeveloped or
developed real property. The secured creditors’ liens encumber this
tract. There are generally no employees except for the principals,
little or no cash flow, and no available sources of income to sustain
a plan of reorganization or to make adequate protection payments
. . . . Typically, there are only a few, if any, unsecured creditors
whose claims are relatively small. The property has usually been
posted for foreclosure because of arrearages on the debt and the
debtor has been unsuccessful in defending actions against the
foreclosure in state court.
7
The meaning attached to the statutory term SARE is consistent with the legislative
history of the 1994 Act. The legislative history of the 1994 inclusion of SARE in the
Bankruptcy Code indicates that SARE refers to property held for passive investment — not
property used in an active business enterprise. “We commonly think of a single asset case as
one of a debtor with a single apartment house or condo complex or a single piece of real estate.
However, this could include a debtor . . . such as a real estate investment trust. . . .” 138 Cong.
Rec. S8241-01, *S8264 (daily ed. June 16, 1992) (statement of Sen. Reid). The Senate Report
for the Bankruptcy Reform Act of 1994 further explains that the “definition is limited to
investment property of the debtor.” S. Rep. No. 168, 103rd Cong., 1st Sess. (October 28, 1993).
13
No. 07-40487
Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev.
Co.), 779 F.2d 1068, 1073 (5th Cir. 1986).
We find similar reasoning in a number of cases using the pre-1994
meaning to assist in interpreting the statutory term. See, e.g., In re CBJ Dev.
Co., 202 B.R. at 471 (looking to pre- 1994 cases for guidance); In re Kkemko, 181
B.R. at 50 (“[T]he Bankruptcy Reform Act of 1994 did not introduce the phrase
‘single asset real estate’ into bankruptcy cognizance. It is, indeed, a common
term in bankruptcy, and has been used for many years in the bankruptcy area.”);
In re Philmont Dev. Co., 181 B.R. 220, 223 (Bankr. E.D.Pa. 1995) (“The drafters
of sections 101(51B) and 362(d)(3) were aware of the colloquial use of the phrase
‘single asset real estate,’ and the Court believes that their intention in using that
phrase grew out of its previous colloquial and common usage.”). We agree with
Scopac that the pre-1994 meaning of SARE is helpful in determining the
meaning Congress intended to give the term.
3.
The Noteholders also rely on the 2005 BAPCPA amendments to support
the argument that Scopac should be considered a SARE. In 2005, § 101(51B)
was amended by BAPCPA to exclude family farmers and to remove the existing
$4 million cap on businesses that could qualify as SAREs.8
The Noteholders’ main argument on this point is that by excluding family
farmers as SAREs, Congress implied that the definition included large farming
operations such as Scopac’s tree farming operation. To draw this inference, we
8
The following redlined version of § 101(51B) shows, through underlined additions and
stricken-through deletions, the changes made by the 2005 amendment: “The term single asset
real estate means real property constituting a single property or project, other than residential
real property with fewer than 4 residential units, which generates substantially all of the gross
income of a debtor who is not a family farmer and on which no substantial business is being
conducted by a debtor other than the business of operating the real property and activities
incidental thereto having aggregate noncontingent, liquidated secured debts in amount no
more than $4,000,000.”
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No. 07-40487
would presumably need to accept that Congress by excluding family farmers
intended to include other farms regardless of size and regardless of the extent
and diversity of their active operations. We are unable to accept the notion that
Congress intended to adopt one model for SAREs that applies only to farms and
another to all other types of businesses. It is much more reasonable to assume
that Congress sought to avoid a conflict with Chapter 12 of the Bankruptcy
Code.
The Noteholders also point to the removal of the $4 million cap and argue
that this makes it clear that Congress intended to include large enterprises
within the scope of the SARE definition. However, including large enterprises
does not mean Congress intended to otherwise abandon the statutory definition
of SARE or overrule the established court interpretations of the term. We find
no merit to this argument.
IV.
We agree with the bankruptcy court’s holding that Scopac conducts
substantial business other than operating the real property and activities
incidental thereto. Scopac’s timberland is clearly more than a passive
investment. Scopac has over sixty employees and at times hires additional
independent contractors to assist in conducting its business. Sophisticated
operations take place on the timberland such as planning, growing, and
maintaining the timber as well as building and maintenance of roads on the real
estate which constitute substantial business other than the operation of the real
property and activities incidental thereto. Furthermore, Scopac’s sale of timber
is an activity which extends beyond the sale or lease of the underlying land.9
9
The sale of Scopac timber to Palco is not a sale of the real estate itself. None of the
SARE cases have held a sale of timber to be a sale of the real estate itself. Further, under the
California Civil Code, timber, as appurtenant to the land, would be considered part of the real
property unless “for the purposes of sale, emblements, industrial growing crops and things
attached to or forming part of the land, which are agreed to be severed before sale or under the
contract of sale, shall be treated as goods . . . .” Cal. Civil Code § 658; see also Cal. Comm. Code
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No. 07-40487
We are also convinced that a holding that Scopac is a SARE would violate
the plain language of the statute and is inconsistent with the meaning (both pre-
and post-1994) given that term by the courts. Section 101(51B) severely limits
the class of debtors which qualify as SAREs, and we have no warrant to expand
that definition. SARE debtors are carved out and subjected to stringent
requirements in § 362(d)(3) which expedite the time for SARE debtors to file a
plan of reorganization or commence making monthly payments, failing which
the automatic stay is promptly lifted. See 11 U.S.C. § 362(d)(3). If Scopac is
considered a SARE debtor, this narrow exception to the ordinary bankruptcy
process would sweep broadly and require us to include such entities as owners
of land or mineral interests who operate sophisticated businesses such as
mining, oil and gas drilling, and large commercial farms simply by virtue of the
debtor owning the land. Such a result is obviously contrary to the plain
language of §101(51B).
For the above reasons, we agree with the bankruptcy court that Scopac is
not a SARE debtor and affirm its judgment.
AFFIRMED.
§ 2107 (“A contract for the sale apart from the land of . . . timber to be cut is a contract for the
sale of goods within this division whether the subject matter is to be severed by the buyer or
by the seller even though it forms part of the realty at the time of contracting, and the parties
can by identification effect a present sale before severance.”). We are therefore unpersuaded
that “real estate” for the purposes of bankruptcy law would include this timber contracted for
sale to Palco. See In re Kkemko, Inc., 181 B.R. at 51 (“[I]t is clear to us that it is bankruptcy
law which is determinative . . . not a consideration of what is real estate for purposes of state
real estate law.”).
16