In its recent decision in Meruelo Maddux Properties, Inc., the Court of Appeals for the Ninth Circuit held that an entity that meets the definition of a “single real estate” debtor under the Bankruptcy Code may not escape the consequences of such designation simply because it is a subsidiary of a group of companies with integrated and intert-wined relationships among them. The decision may provide powerful rights not only to lenders to such entities in general, but could significantly enhance the rights of creditors of real estate owning single purpose entities.

The MMPI Case

Meruelo Maddux Properties, Inc. (“MMPI”) is the parent company to more than fifty subsidiaries that filed chapter 11 bankruptcy petitions in Los Angeles in March of 2009. MMPI and its subsidiar-ies own and develop real property in the Los Angeles area. Their business is operated on a consolidated basis, cash is swept into a general operating account that is also used to pay all of the entities’ expenses and they prepare and file consolidated financial reports with the SEC as well as consolidated tax returns with the IRS.

The subsidiary in question, Meruelo Maddux Properties-760 S. Hill Street LLC (“MMP Hill”), owned an apartment complex. Bank of America loaned MMP Hill $28.72 million and took a lien in the real estate....

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