A chapter 7 trustee commenced an adversary proceeding seeking authority to sell property that the debtor co-owned with his wife as tenants by the entirety free of the interests of the wife. The trustee brought a motion for summary judgment that was opposed by the wife.
The property was an income producing two family rental property that the debtor and his wife acquired from a related business of the debtor for one dollar. The debtor listed the property in his bankruptcy schedules with a value of $323,500, and described his ownership interest as “tenancy by the entirety.”
Section 363(h) of the Bankruptcy Code is a special provision applicable to property co-owned by the debtor where the debtor has “an undivided interest as a tenant in common, joint tenant, or tenant by the entirety.” Under this section the trustee can sell both the bankruptcy estate’s interest and the interest of the co-owner only if:
- partition of the property is impracticable,
- sale of just the bankruptcy estate’s undivided interest would realize significantly less than a sale free of the co-owner interests,
- the benefit of such a sale to the estate outweighs any detriment to the co-owner, and
- the property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.
In moving for summary judgment, the trustee submitted a statement of undisputed material facts, a memorandum of law, and an affidavit.
Under local rules a party opposing a motion for summary judgment was required to submit a statement of material facts that it contends are subject to a genuine issue to be tried. However, she did not submit any statement regarding the material facts. Consequently, the trustee’s facts were deemed admitted and the wife began with one strike against her.
The wife opposed the motion for summary judgment on the grounds that it was premature because discovery was not completed and because the trustee failed to satisfy the requirements of section 363(h). With respect to the discovery argument, a party must (1) explain why it does not have the facts, (2) give a plausible reason why it believes facts can be assembled in a reasonable time, and (3) describe how those facts would affect the outcome. Here the court found that the wife failed to demonstrate the required facts or circumstances.
That left an analysis of the section 363(h) elements. Generally, the trustee had the burden of proof. The trustee argued that the property could not be partitioned because state law prohibited partitioning property held as tenants by the entirety. The wife countered that the property could be converted into a condominium with two units. However, the court found that a condominium conversion was not a partition. Besides the two units would still be held as tenants by the entirety and conversion would be impracticable for the trustee.
With respect to the second element, the trustee first showed that there was equity in the property and then opined that selling only the estate’s undivided interest would generate substantially less than selling the property as a whole free of the separate co-owners’ interests. Since the impact on value was generally recognized and the wife failed to provide any opposing facts, the trustee prevailed on this element as well.
The question of whether the benefit to the estate outweighs the detriment to the opposing party involves a shifting burden. The trustee has the initial burden to show that there was a benefit to the estate. At that point the burden shifted to the wife to show her detriment. Once she showed her detriment, the burden would shift back to the trustee to show that the benefit to the estate outweighed the detriment to the wife.
The wife alleged that the sale “will cause a breakup of the marriage” and that she would lose the significant income derived from the property. The court seemed to ignore the allegation about a marriage breakup and concluded that she failed to quantify the alleged economic detriment and did not demonstrate how loss of the rental income would cause economic hardship. So, the court could not find that the wife would suffer a detriment from the sale.
Accordingly, the court granted the trustee’s motion for summary judgment.
As the court noted, a decision to allow a sale under section 363(h) is “an equitable judgment that is discretionary and fact driven.” Consequently, a party’s credibility is key. In this case the court went out of its way to comment in a footnote on the fact that the wife’s counsel cited an outdated version of an FRCP rule: “I assume counsel intended to refer to current rule Fed. R. Civ. P. 56(d).” It seems likely that the court’s decision was influenced by its perception of the counsel’s competence.
Vicki R Harding, Esq.