Bankruptcy Sales: Consider All of the Facts

In re Moreno, 554 B.R. 504 (Bankr. D. N.M. 2016)

A chapter 7 trustee sought authority to sell real property in which the debtor had an interest as a tenant in common. Although the sale was to a relative of the debtor for a price that was only a fraction of the original listing price and the co-tenant objected, the bankruptcy court approved the sale.

The debtor had a one half interest in a rural rental property as a tenant in common. More than 6 years after the bankruptcy was filed, a chapter 7 trustee moved for authority to sell the property free and clear of liens and interests. Initially he proposed to sell only the debtor’s one half interest, but ultimately received authority to sell both the bankruptcy estate’s interest and the interest of the co-tenant.

When the debtor filed his schedules he listed the property with a value of$ $0, contending that he had “no interest” and the property was in his name solely for probate purposes. However, the bankruptcy court determined that the debtor had an interest as a tenant in common, and authorized sale of the property including interests of both the debtor and his co-tenant.

The trustee originally listed the property with a real estate broker for $70,000. Eventually the listing price was dropped to $55,000. The only offer of $20,000 came from a relative and neighbor. The trustee countered with $30,000. Rather than accepting the counteroffer, the purchaser obtained quotes for repairs and upgrades that he contended were necessary totaling ~$48,500.

The co-tenant opposed the sale claiming that the price was too low and objecting to the purchaser. The purchaser was the co-tenant’s brother-in-law and owned other property nearby. The co-tenant testified that she had had ongoing trouble with the purchaser involving water surface.

The court noted that the primary role of a chapter 7 trustee is to liquidate property for the benefit of unsecured creditors. It is authorized to sell property outside the ordinary course of business after notice and hearing.

The trustee must show that there are “sound business reasons” in order to obtain approval of a sale. Factors for the court to consider in making a determination include (1) whether there is any improper motive, (2) whether the transaction is arm’s-length and the price fair and reasonable, and (3) whether the sale procedures were adequate.

The court considered the circumstances: The property was located in a rural area on a dirt road. It needed a new water main, 2 water meters, 2 septic tanks, and some stucco repair. The proposed purchaser claimed that the house also required a new roof. Thus, the offer to purchase “as is” and “with all faults” provided significant value. In fact, the $20,000 offer combined with estimated costs to be incurred by the purchaser was close to original listing price of $70,000.

In reviewing the factors, including the price, the court determined that they weighed in favor of approving the proposed sale. One other consideration was that the debtor’s share of the proceeds would be sufficient to allow payment of unsecured creditors in full.

The co-tenant contended that she maintained the property over the years so that eventually her grandson could own it. Post-petition she recorded a “transfer on death” deed to her grandson. However, the court determined that under state law the deed did not create any interest in the property while the grantor was still alive. So the deed would not encumber the property and would have no further force or effect sale once the property was sold.

One final consideration arose from the fact that when a bankruptcy sale involves sale of both the debtor’s interest and the interest of a co-tenant, the co-tenant is given a right of 1st refusal. So, if she thought the price was too low, she had a right to buy the property herself.

Consequently, the court approved the sale free and clear of liens and other interest. One half of the proceeds were to be paid to the co-tenant as compensation for her interest, and liens and other interests were transferred to the debtor’s proceeds.

Taken out of context a relative’s $20,000 offer to purchase property that had been listed for $70,000 sounds like a bad deal. However, it seems reasonable given the facts. Although the trustee’s position seems perfectly appropriate, I always wonder how parties are able to sustain the cost of litigation when relatively low dollar amounts are at stake.

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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