SARE Manipulation: The Hurdles in Single-Asset Real Estate Cases

Section 1129 of the Bankruptcy Code allows a debtor to reorganize its plan. But a reorganization must first be approved by at least one “impaired class,” meaning one-half of those in the impaired class as well as two-thirds of the total amount of claims within the impaired class must vote “yes” to reorganization. Within this lens, the composition of the debtor’s classes has a substantial impact on whether a reorganization attempt will be successful. Clearly, this incentivizes debtors to group their claims in a way that maximizes their chances of gaining approval for reorganization. As such, courts are now divided on what constitutes permissible and impermissible reclassification. This issue is particularly common in Single-Asset Real Estate (SARE) cases, in which the debtor frequently attempts to classify a hostile mortgagee separately from other claims. This Article suggests a framework for courts to determine when claim reclassification runs afoul of the Bankruptcy Code’s intent and purpose. This Article argues that courts should consider whether the debtor acted in good faith when reclassifying claim groups. Specifically, in SARE cases, a presumption should exist that separate classification of deficiency claims or impairment of de minimis claims, when objected to by a creditor, is per se bad faith. The SARE debtor would bear the burden of overcoming this presumption by demonstrating legitimate business or financial reasons for the reclassification, and, if successful, the burden would shift to the creditor to demonstrate abuse