On November 10, 2008, DBSI, Inc. (“DBSI” or “Debtors”) filed petitions for chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. As reflected in the Declaration of DBSI’s CEO, Douglas Swenson, (read the DBSI Declaration here), the Debtors consist of a conglomerate of real estate entities valued at over $2.65 billion. From its beginnings in 1980, to the date that it filed for bankruptcy, DBSI had raised over $1.5 billion in capital, allowing it to operate numerous commercial real estate projects and businesses. DBSI employs 131 employees.

Not Your Ordinary Chapter 11 Bankruptcy

According to the Debtors’ bankruptcy petition, DBSI’s 50 largest unsecured creditors hold claims ranging from $26.7 million to $2.4 million (read the DBSI bankruptcy petition here). In a more “typical” bankruptcy, these creditors would consist of large trade vendors of the debtor, or unsecured lenders and stakeholders in the bankrupt company. For DBSI, however, all fifty of its largest unsecured creditors are individuals, not corporations.

The reason individuals have such large stakes in DBSI, instead of corporations, has to do with the nature of its business. DBSI generates revenue through the creation of tenants-in-common real estate transactions. Under such transactions, DBSI acquires an interest in commercial or residential real estate and then sells off fractional interests of the real estate to investors as tenants-in-common. DBSI then enters into a master lease with the tenants-in-common investors, subleasing the property to commercial tenants. DBSI collects rent from the tenants, pays the operating expenses for the venture, keeps a management fee for itself and distributes the proceeds to investors.

The Slide Into Bankruptcy

DBSI provides four reasons for its bankruptcy filing: the credit crisis, rising costs, a weakening real estate market and various activities by stakeholders. Without lenders providing capital, DBSI could not continue its real estate purchase and sales operations. Additionally, with costs rising, many of DBSI’s master lease programs became unprofitable. Next, the drop in real estate values interrupted DBSI’s ability to market land collateral for its bond and note debtor-entities. Finally, some of the Debtors’ investors commenced actions in court seeking temporary restraining orders against DBSI. Combined, these events led DBSI to seek restructuring in bankruptcy court.

DBSI’s Financials

Bonds issued March 2001 … $4,335,000 (mature Dec. 31, 2008)
Bonds issued June 2001 … $9,240,000 (mature Dec. 31, 2008)
Bonds issued November 2001 … $8,951,000 (mature Dec. 31, 2009)
Bonds issued February 2003 … $35,612,000 (mature Feb. 28, 2008)
Secured notes issued August 2005 … $54,138,018 (due Dec. 31, 2012)
Secured notes issued October 2006 … $74,824,251 (due Dec. 31, 2014)
Secured notes issued February 2008 … $88,673,374 (due Dec. 31, 2015)
“Put” option on partnerships … $25,000,000
Short-term fund offering … $24,703,000
Unsecured notes issued January 2007 … $34,997,282 (due Dec. 31, 2011)
Land option fund … $5,000,000

First Steps In Bankruptcy

Although DBSI’s business and financial structure may differ from more typical chapter 11 debtors, its initial motions are ordinary for a debtor of this size. DBSI’s “first day” bankruptcy motions seek orders from the court allowing it to provide adequate assurance to its utilities, pay pre-petition taxes, use DBSI’s cash management system and reject certain leases. DBSI’s bankruptcy proceeding was assigned to the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court.