Postpetition Sale: What Happens If the Debtor Won’t Perform (Not Much)?

In Re Engels, 536 B.R. 529 (Bankr. N.D. N.Y. 2015)

Postpetition a chapter 13 debtor signed an asset purchase agreement to sell certain real estate subject to court approval. However, the debtor never sought approval – not even after the buyer obtained a state court judgment directing the debtor to file a motion seeking bankruptcy court approval.

The schedules filed by the debtor in his bankruptcy identified the real estate. He valued the property at $90,000 (even though it had an assessed value of only $52,000) because of the buyer’s interest. Notwithstanding this fact, the plan proposed by the debtor did not address the real estate or his intent to sell it. The plan as confirmed proposed to pay allowed claims in full. However, not all of the claims were identified.

In the meantime, the debtor’s broker contacted the buyer and the parties began negotiations. They ultimately signed an asset purchase agreement (APA) a couple of months after the plan was confirmed. The debtor agreed to sell the property for $150,000 and was to receive an additional $175,000 for a covenant not to compete for total consideration of $325,000. The APA also addressed responsibilities of the parties for environmental conditions. The buyer later agreed to take over remediation from the debtor in exchange for a $50,000 reduction in the purchase price.

When the debtor failed to seek bankruptcy court approval as required by the APA, the buyer brought a state court action seeking specific performance of the obligation to obtain approval and close the sale. When the debtor still failed to file a motion requesting bankruptcy court approval after being directed to do so by the state court, the buyer brought a bankruptcy court action seeking to compel the debtor to sell the property.

The buyer argued that (1) “cause” existed for modification of stay, (2) the sale was in the best interest of the debtor and his creditors, and (3) the debtor was permitted to sell assets free and clear under Section 363(f). In terms of the debtor’s response, the court noted that it consisted of repeated requests for adjournment and other delay tactics.

With respect to the stay, the bankruptcy court concluded that the automatic stay was not applicable to the buyer’s actions since the buyer only sought to obtain judgment on a postpetition claim and was not necessarily seeking to enforce it. So, the question was whether the court could compel the debtor to sell property in the absence of a sale motion by the debtor.

Normally a court reaches a decision based on whether a sale is fair and equitable, whether there is a good business reason and whether the sale is in good faith. However, Section 1303 of the Bankruptcy Code provides: “Subject to any limitations on the trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(l) [regarding sale of property], of this title.” Further, Section 1306 provides that the debtor remains in possession of property of the estate unless a confirmed plan or confirmation order provides otherwise.

In this case the confirmation order provided that “no article of property real or personal, with any value of more than $2,500.00 may be sold, transferred or otherwise disposed of, without prior order of this court.” Consequently, the debtor’s right to sell the property was contingent on receiving court approval. However, that did not mean that the court could compel the debtor to sell.

The bankruptcy court rejected the buyer’s arguments based on the state court judgment because it had exclusive jurisdiction over property of the estate. It also was not persuaded by cases that compelled a debtor to seek approval of a settlement.

Consequently, the court concluded that while the debtor remained in chapter 13 the court could not force him to sell the property w unless he filed a motion seeking court approval. The court found the debtor’s behavior particularly troubling in light of the fact that over the previous 20 years he had filed 11 petitions for relief under chapter 13 and one petition for relief under chapter 7 – all of which were dismissed.

It is a little surprising that the court could not find a way to make the sale happen. It agreed that the sale was in the best interests of creditors, since it would allow a 100% plan that paid creditors in full, in contrast to being subject dismissal for unfeasibility. And the debtor’s perspective, without the sale he faced the loss of bankruptcy protection, a claim for return of the $30,000 good faith deposit, and retaining responsibility for environmental remediation at an estimated cost of ~$158,000. However, the court felt that its decision was mandated by the current state of law.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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