In re Chen Foundation Inc.

Bankruptcy Judge John P. Mastando, III¹ MEMORANDUM OPINION AND ORDER ON MOTION TO DETERMINE DEBTOR’S SARE STATUS Before the Court is the Motion to Determine Debtor’s SARE Status (the “Motion”) filed by Shanghai Commercial Bank Ltd., New York Branch (“SCB”), and The Shanghai Commercial & Savings Bank, Ltd. (“SCSB”, and collectively with SCB, the “Lenders”). [Doc. 24]. The Motion seeks a determination as to whether the Debtor is a single asset real estate (“SARE”) debtor within the meaning of Section 101(51B) of the Bankruptcy Code. See [Doc. 24, p. 1]. In response to the Motion is the Debtor’s Opposition to Motion to Determine Debtor’s SARE Status (the “Objection”) filed by Chen Foundation, Inc. (the “Debtor”). [Doc. 34]. The Objection argues generally that the Debtor is not a SARE debtor because it “presently operates with affiliated parties an art gallery on the fifth floor of [its] Property.” [Doc. 34, p. 1-2]. After careful consideration, and for the reasons set forth below, the Court finds that the Debtor is not a SARE debtor within the meaning of 11 U.S.C. §101(51B). Accordingly, the Motion is DENIED. I. BACKGROUND The Debtor is a corporation formed in 1996 under the laws of Nevada. [Doc. 11, p. 1]. As relevant here, the Debtor’s primary asset is real property located at 250 Lafayette Street, New York, New York (the “Property”). [Doc. 1, p. 1]. The Property is presently subject to a lien in favor of the Lenders. See Claim no. 4-1. The following facts regarding the Property are undisputed: (i) the Property was first purchased in 1994 for the purpose of displaying and selling the artwork of T.F. Chen,² see [Doc. 34, pp. 1-2] (describing T.F. Chen as the “patriarch of the Chen family” and “a world-renowned artist”); [Doc. 37, p. 3]; (ii) the Property operated for several years entirely as a “Cultural Center and Art Gallery” by non-Debtor entities (the “Non-Debtor Affiliates”) that are themselves owned and operated by the Debtor’s principals,³ see [Doc. 34, pp. 1-2]; [Doc. 37, p. 3]; (iii) in 2001, the Debtor converted certain floors of the Property to commercial rental space because “revenues from the art gallery could no longer support the operating expenses of the entire building,” see [Doc. 38, p.2]; [Doc. 37, p. 4]; (iv) notwithstanding the Property’s conversion, the art gallery and cultural center has continually operated on various floors of the Property that were not leased out as a commercial rental space, see [Doc. 34, p. 2]; [Doc. 37, p. 4]; (v) although the art gallery continues to display and market the artwork of T.F. Chen, the Debtor’s predominant source of income has for several years been the revenue derived from its commercial leases, see [Doc. 34, pp. 2-4] (noting that “[u]nfortunately, [] T.F. Chen artwork has not sold in many years in the United States”); [Doc. 37, p. 2]. The Debtor filed a petition for chapter 11 relief on March 18, 2024. See generally [Doc. 1]. Although the Property is the Debtor’s primary asset, the Debtor’s petition did not designate this proceeding as a SARE proceeding. See id. The Lenders filed the instant Motion on May 9, 2024, arguing that “[t]he Debtor is subject to the SARE Provisions [of the Bankruptcy Code]…[because] the Property generates substantially all of the Debtor’s gross income, and the Debtor operates no substantial business other than the management and leasing of the Property.” See [Doc. 24, pp. 3-4]. The Debtor filed its Objection on May 24, 2024, maintaining that “the Debtor is not a SARE [Debtor] as defined under the Bankruptcy Code, because since its inception and opening of the Property in 1996, the Debtor has always operated a cultural center and art gallery for the display of the artwork of T.F. Chen.” [Doc. 34, pp. 1, 5] (noting further that “[t]he Debtor purchased the Property in 1994 and renovated the [] building to be operated as a Cultural Center and Art Gallery when it opened in 1996″). The Lenders filed a reply on May 28, 2024. See generally [Doc 37]. ANALYSIS II. SINGLE ASSET REAL ESTATE a. Section 101(51B) Under title 11 of the Bankruptcy Code, a SARE designation allows certain secured creditors relief from the automatic stay unless, within a specific period of time, “(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 [to creditors].” 11 U.S.C. §362(d)(3); see also In re Nuovo Ciao-Di, LLC, 650 B.R. 785, 788 (Bankr. S.D.N.Y. 2023) (noting that the Bankruptcy Code’s SARE provisions “create[ed] an expedited process for ‘single asset real estate’ cases”). A SARE property is defined in Section 101(51B) of the Bankruptcy Code as: 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…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. 11 U.S.C §101(51B). Accordingly, to qualify as a SARE property, a debtor must engage in only: (i) the “business of operating [] real property;” and (ii) other activities incidental to that business. Id. “Incidental activities” are those that are “intrinsic to owning and developing the real estate.” In re Vargas Realty Enterprises Inc., No. 09-10402 (SMB), 2009 WL 2929258, at *4 (Bankr. S.D.N.Y. July 23, 2009) (quoting In re Kara Homes, Inc., 363 B.R. 399, 406 (Bankr. D.N.J. 2007) (concluding that incidental activities are what “a reasonable and prudent business person would expect to generate substantial revenues from”)); see also In re Club Golf Partners, L.P., No. 07-40096-BTR-11, 2007 WL 1176010, at *5 (E.D. Tex. Feb. 15, 2007) (noting that the income generated through incidental activities must be passive). It is well-established that “incidental activities” include, inter alia, the lease and maintenance of rental property. See In re Vargas Realty Enterprises Inc., No. 09-10402(SMB), 2009 WL 2929258, at *4. In In re Vargas Realty Enterprises Inc., for example, the debtors owned an apartment building. Id. at *1. In addition to leasing the building, the debtors managed all property repairs and improvements, and made repairs aimed solely at increasing the building’s rental income. Id. The court ruled that such maintenance was “intrinsic to owning and developing the real estate” and, therefore, incidental. Id. (citing Kara Homes, 363 B.R. at 406). In contrast, a property is not a SARE property if it provides goods or services unrelated to the mere ownership of real estate. See, e.g., id. (discussing In re Club Golf Partners, L.P., No. 07-40096-BTR-11, 2007 WL 1176010, at *3 (E.D. Tex. Feb. 15, 2007) (finding that a golf course was not a SARE property because of additional amenities not intrinsic to its ownership)); see also In re Prairie Hills Golf & Ski Club, Inc., 255 B.R. 228, 230 (Bankr. D. Neb. 2000) (concluding that a golf and ski club was not a SARE property because it “involve[s] [] other significant incomeproducing activities”); In re Larry Goodwin Golf, Inc., 219 B.R. 391, 393 (Bankr. M.D.N.C. 1997) (holding that a debtor is not a SARE debtor because it “operates a golf course with associated golf car rentals, a pool, provides concessions, and owns [] land [] for sale”); In re CBJ Dev., Inc., 202 B.R. 467, 472-473 (B.A.P. 9th Cir. 1996) (“[T]he [Debtor's] gift shop, restaurant, bar, and [] bus tours…are all business other than the business of operating the property.”); In re Kkemko, Inc., 181 B.R. 47, 51 (Bankr. S.D. Ohio 1995) (holding that the marina is not a SARE property because it offers services “more than simply rental of moorings”); In re Scotia Pac. Co., LLC, 508 F.3d 214, 224-25 (5th Cir. 2007) (finding that the timberland was not a SARE property because planting, growing, maintaining, and selling timbers makes it “more than a passive investment”). Here, the presence of the cultural center and art gallery on the Property push the Debtor outside the purview of 11 U.S.C §101(51B). First, the Debtor did not purchase the Property as a commercial rental space in 1994.⁴ [Doc. 34, p. 1-2]. The Property has contained a cultural center and art gallery since 1996, and portions of the Property were not converted into commercial rental spaces until 2000. Id. These activities are clearly not “intrinsic to owning and developing” the Property. C.f., Vargas, No. 09-10402(SMB), 2009 WL 2929258, at *4 (“[E]ach debtor owns a building that leases apartments to tenants…[and] [t]he contracting, managing and leasing services that the debtors identified do not generate income except through the payment of increased rent, and [] are [therefore] incidental to the operation of the Properties.”). Similarly, the sale of art is an enterprise that “a reasonable and prudent business person would expect to generate substantial revenues from.” Kara Homes, 363 B.R. at 406. It is undisputed that the Debtor has regularly “held pop up events and conducted [] special showings of [] artwork” at the Property since its acquisition. [Doc. 34, p. 2-3] (noting that “officers of the Lenders were invited to gallery events at the Property and [had] regular visits to the Property”). Although T.F. Chen’s art has apparently not sold for some time, art sales have constituted at least some of the Debtor’s past income, and was in fact the Debtor’s sole source of income prior to 2001. [Doc. 34, p. 4]. Finally, although the cultural center and art gallery are to some degree operated by the Non-Debtor Affiliates, those entities were “formed [solely] for tax purposes and to operate the art gallery and cultural center in partnership [] with the Debtor….” [Doc. 34-1, p. 4] (emphasis added); see also [Doc. 34, p. 4-5]. Indeed, both Non-Debtor Affiliates are owned by the same principals as the Debtor,⁵ and — notwithstanding their use of significant portions of the Property — neither entity pays the Debtor rent. [Doc. 34-1, pp. 3-4]; [Doc. 34, p. 4-5]; [Doc. 32]. The Debtor and its Non-Debtor Affiliates are thus engaged in a joint commercial enterprise that operates at the direction of the same owners in pursuit of the same end: the sale of art.⁶ See [Doc. 34, p. 2-3] (the Debtor has “held pop up events and conducted multiple special showings of [T.F. Chen's] artwork”); see also [Doc. 34-1, pp. 3-4] (noting that T.F. Chen regularly “uses the space[] at [the Property] for his studio for painting”). CONCLUSION In conclusion, the Court finds that this bankruptcy proceeding falls outside the purview of 11 U.S.C §101(51B). Accordingly, the Motion is DENIED. IT IS SO ORDERED. Dated: July 17, 2024