The hotels in difficulty can provide a night turndown service, cannot be refused for subchapter V Bankruptcy – Insolvency / Bankruptcy / Restructuring

United States: Struggling hotels can provide turndown service, cannot be turned down for subchapter V bankruptcy

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Subchapter V of Chapter 11 of the Bankruptcy Code, which came into effect in February 2020, creates a more streamlined and less costly Chapter 11 reorganization route for small business debtors.

It has proven popular during the COVID-19 pandemic, with more than 1,800 cases filed. Hotel owners have been hit particularly hard during the pandemic, with occupancy rates falling over the past year. But subchapter V is not available for “single asset real estate” debtors. Can a hotel reorganize itself under sub-chapter V or must it take the traditional route of chapter 11, which is cumbersome, more expensive and longer? According to a recent decision from a Florida bankruptcy court, a hotel is not a single real estate debtor as it provides services beyond renting rooms and, for this reason, can avail itself of subchapter V .

The case involved a dispute between a 79-room Econo Lodge Inn & Suites and its main creditor – State Bank of Texas. The bank was under-guaranteed, so it held secured and unsecured claims against the debtor. The bank sought to prevent the Econo Lodge from proceeding under Subchapter V because it contains provisions allowing a debtor to retain property without creditor support even if the debtor does not pay 100% of its debts not. guarantees.

Under the Bankruptcy Code, a single asset real estate is “real estate constituting a single asset or a single project, other than a residential building with less than 4 housing units, which generates almost all of the gross income of a debtor who is not a family farmer and on which no substantial business is carried on by a debtor other than the activity of operating the building and related activities. ”

According to the bankruptcy court, the three elements of a single asset real estate are (1) the ownership of real estate constituting a single good or project, (2) which generates almost all of the gross income of the debtor, and (3) on which no material business is conducted apart from the operation of the building and related ancillary activities.

The bankruptcy court noted that in addition to owning and maintaining the property, the debtor had 15 employees, cleaned the rooms daily, served breakfast, maintained a swimming pool, fitness center and a business center, and provided laundry, internet and telephone services. These were additional services beyond “building operation and related activities”.

The bankruptcy court likened hotels to apartment buildings, where tenants sign leases and require little additional help. Hotels involve a lot more daily activities than apartments – from the 24 hour front desk, night turndown service, maintenance, updating and refurbishment of rooms to comply with the requirements of franchise. These additional amenities and services, even if they do not generate additional income, will remove a hotel from the category of single asset real estate.

The bottom line is that at least according to a bankruptcy court, hotel and motel owners considering bankruptcy can file a subchapter V complaint that is more favorable to debtors. banks and other accommodation industry creditors should remember this during pre-bankruptcy negotiations and practice sessions.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.

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