Chapter 13 Debtors: Do Not Take It For Granted That a Chapter 13 Debtor Can Exercise Trustee Powers

Andrade v. Essenfeld (In re Andrade), 570 B.R. 121 (Bankr. D. Mass. 2017) –

The debtor owned real estate with her brother and sister as tenants-in-common. After she filed bankruptcy, she sought authority to sell both her interests and the interests of her co-owners in the property under section 363(h) of the Bankruptcy Code. Although the brother and sister did not respond, the court sua sponte dismissed the claim.

Section 363(h) provides that “the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant-in-common, joint tenant, or tenant by the entirety” (emphasis added) if certain conditions are met. The issue was whether a chapter 13 debtor is authorized to exercise the power of the trustee under this section.

In a chapter 13 case section 1303 provides that the debtor has “exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(l)” (emphasis added). Section 363 governs use, sale or lease of property:

  • subsection (b) deals with sales other than in the ordinary course of business;
  • subsection (d) addresses limits on nonprofits and makes a sale subject to any stay relief;
  • subsection (e) authorizes the court to provide adequate protection to affected parties;
  • subsection (f) authorizes sales free and clear of interests; and
  • subsection (l) permit sales notwithstanding ipso facto provisions in a contract, lease, or applicable law.

Section 363(h) is notably absent from the section 1303 list.

The bankruptcy court identified five published cases where a chapter 13 debtor was allowed to proceed with a forced sale of co-owner interests. In one case it was simply assumed without explanation that a chapter 13 debtor could proceed under 363(h). A second case relied on the 1978 Senate Report, which would have given chapter 13 debtors the right to proceed. However, section 363(h) was omitted in both the House version and the version of the Bankruptcy Code that was ultimately enacted.

That left three cases in which courts concluded that the reference in section 363(h) to subsections (b) and (c) could be read as incorporating those subsections by reference – thus bringing sales under 363(h) within the scope of section 1303. However, the bankruptcy court disagreed. While it is true that a sale involving forced disposition of co-owner interests will be subject to one of these subsections (i.e. the sale will be either in the ordinary course of business or other than in the ordinary course of business), the power to force co-owner disposition is separate. The court commented that the majority of recent cases have rejected this “incorporation” theory.

The Andrade court also rejected the incorporation theory and went with a plain language analysis instead. It held that a chapter 13 debtor may not force a sale of the co-owner’s interests and dismissed the applicable count of the debtor’s complaint. It noted that sua sponte dismissals are disfavored. However, this was the rare case where it was “crystal clear” that the debtor could not prevail and amending the complaint would be futile.

Section 1107 gives a chapter 11 debtor very broad authorization to exercise the rights and powers of a trustee. This makes it easy to forget that the debtor is not necessarily interchangeable with the trustee in sections granting trustee rights and powers. This case is a reminder that whenever a debtor proposes to exercise trustee rights and powers, it may be worth confirming the source of the debtor’s ability to do so – even in a Chapter 11 case.

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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