Opinion
Case No. 12-60454
03-05-2014
IN RE: Robert G. Carney, Debtor.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
__________
C. Kathryn Preston
United States Bankruptcy Judge
Chapter 7
Judge C. Kathryn Preston
ORDER DENYING TRUSTEE'S MOTION TO SELL REAL
ESTATE FREE AND CLEAR OF LIENS AND TRUSTEE'S APPLICATION
TO EMPLOY REALTOR
This matter came before the Court on November 26, 2013 for hearing upon Trustee's Motion to Sell Real Estate Free and Clear of Liens (Doc. 35) ("Motion"), filed August 7, 2013, and Trustee's support documents (Docs. 39 and 40), filed October 10, 2013, and October 18, 2013, respectively. In connection with the Motion, Trustee filed an Application to Employ Steve McCarthy and McCarthy Real Living Real Estate (Doc. 37) ("Application") on September 30, 2013. At the hearing, the Court indicated that it would hold the Application in abeyance pending the outcome of Trustee's Motion.
I. Background
The Motion requests that, pursuant to 11 U.S.C. § 363(f), Trustee be permitted to sell the real property located at 1704 Righteous Ridge Road, Waterford, Ohio 45786 ("Property") free and clear of all liens to Frank S. Mounts ("Mr. Mounts"), the holder of the first mortgage on the Property. According to the Motion, the balance of the first mortgage loan is $15,779.49. The Property is also subject to a tax lien of the Internal Revenue Service in the amount of $13,170, a judgment lien of State Farm Mutual Insurance Company in the amount of $1,336.55, and a state tax lien in favor of the Ohio Department of Taxation in the amount of $1,589 (collectively, "Junior Lienholders"). Mr. Mounts has agreed to purchase the Property for total consideration of $19,779.49, funded by a credit bid of $15,779.49 and a $4,000 cash payment. The Motion classifies the $4,000 payment as a fee paid by Mr. Mounts to the estate for facilitating the sale and allowing him to avoid a state court foreclosure process.
At the hearing, the Court called into question whether the $4,000 payment could properly inure to the benefit of the estate. The Court suggested that such payment may constitute proceeds of the sale, and therefore would be subject to the interests of the Junior Lienholders. In response to the Court's concern, Trustee filed an additional support document (Doc. 46) ("Support Document") after the hearing. In his Support Document, Trustee argues that (1) the $4,000 payment is a fee to the estate for facilitating the sale, and is not proceeds of the sale; (2) the $4,000 payment does not exceed the extent of Mr. Mounts' first mortgage lien, as a credit-bid is not a payment of money, and therefore, the first mortgage lien is not reduced by the amount of the credit-bid; and (3) the $4,000 payment was noticed as a fee to the estate and there has not been any objection by a party in interest.
II. Law and Analysis
A. The Motion to Sell Real Estate
Section 363(b) of the Bankruptcy Code permits the trustee to "use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b). Pursuant to § 363(f), the trustee, in certain situations, may sell the property free and clear of any interest in such property. Upon a sale under § 363(f), all valid liens against the property are transferred to proceeds of the sale. See In re Laines, 352 B.R. 410, 415 (Bankr. E.D. Va. 2005). "At a sale . . . of property that is subject to a lien that secures an allowed claim, . . . the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property." 11 U.S.C. § 363(k).
In the instant case, there is no dispute that Trustee has met the requirements of § 363(f), and is therefore entitled to sell the Property free and clear of the interests of the Junior Lienholders. Further, pursuant to § 363(k), Mr. Mounts may properly utilize his credit-bid to purchase the Property, offsetting the purchase price to the extent of his secured claim. However, as stated above, the Court is concerned that the $4,000 payment may constitute proceeds of the sale which should be subject to the interests of the Junior Lienholders.
(i) The $4,000 payment constitutes proceeds of the sale.
In his Support Document, Trustee first argues that the $4,000 payment is not proceeds of the sale, but is a fee paid by Mr. Mounts for facilitating the sale and allowing him to avoid the expense of a state court foreclosure proceeding. Trustee likens the $4,000 payment to other fees used to facilitate asset sales under § 363, such as break-up fees which are primarily used in Chapter 11 cases. Alternatively, Trustee suggests that the payment is a "buyer's premium" payable to the bankruptcy estate.
It appears that Trustee misinterprets the usage of break-up fees. First, contrary to Trustee's assertion, break-up fees are not paid by a secured creditor to facilitate a sale; they are a form of protection offered by the estate to stalking horse bidders. The purpose of offering a break-up fee is to induce a potential initial bidder to lay the groundwork and conduct due diligence upon which subsequent bidders may rely. Should the stalking horse not win the bid, then the break-up fee is paid by the estate to the stalking horse bidder as compensation for conducting the due diligence. In the instant case, the $4,000 payment is not a fee paid by the estate should the transaction break-up; it is a fee paid to the estate, purportedly for facilitating the sale. Accordingly, the Court does not find Trustee's first argument persuasive.
Nor is Trustee's characterization of the payment as a buyer's premium availing. Typically a buyer's premium is a percentage based fee charged to the winning bidder at an auction. Such fee is retained by the auctioneer and used to cover the expenses associated with administering the auction. Trustee, however, is the seller of the Property, not an auctioneer; therefore, a buyer's premium has no role in his proposed sale of the Property. Moreover, case law suggests that a payment by a secured creditor to facilitate a sale under § 363 is more properly treated as sale proceeds and is therefore subject to any junior interests in the property.
The court in In re Wilson, 494 B.R. 502 (Bankr. C.D. Cal. 2013) addressed whether the debtor's claimed exemptions attached to fees paid by secured lenders for facilitating a sale under § 363 of the Bankruptcy Code. In that case, the debtor owned two parcels of real property, each fully encumbered by deeds of trust. At the time of filing, the debtor did not claim an exemption in either property. The Chapter 7 trustee sought to sell each property pursuant to § 363, and in return, the lenders offered to pay the estate a fee of $15,000 for one property and $21,250 for the other. As described by the bankruptcy court,
[T]he Trustee desires to make an arrangement with Bank of America and Wachovia to undertake short sales for the Properties under Section 363 of the Bankruptcy Code and receive a piece of the action. Put another way, apparently the lenders are willing to "tip" the estate so that they will not have to foreclose on these Properties.Id. at 505. Prior to the sale, the debtor filed an amended Schedule C, claiming a "wild card" exemption in both properties, asserting that she was entitled to be paid her exemption amounts from the fees generated by the estate. The trustee objected to the exemptions on basis that the debtor was attempting to claim exemptions in assets that did not exist at the commencement of the case - namely, the fees generated from the sale. The court overruled the trustee's objection, holding that "[t]he 'carve-out' is not the asset upon which the [d]ebtor holds exemptions; it is the Properties upon which the exemptions are held." Id. The court further stated:
[T]he Trustee is intending to sell the Properties pursuant to Section 363 of the Bankruptcy Code. Those proposed sales are subject to all attached interests on those Properties, whether valid voluntary secured liens, tax liens, other statutory liens, judicial liens, or valid exemptions. Those interests, as validly claimed by the interest holders, must be paid over to the interest holders upon sale under Section 363. Upon such sale, Bank of America will receive its payoff, Wachovia will receive its payoff, and the Debtor will receive her exemptions, up to the amount validly held. It does not matter how funds are generated by the estate through a Section 363 sale, including if derived from a "tip" from Bank of America or Wachovia so that they will not have to undertake a foreclosure proceeding under California law.Wilson, 494 B.R. at 505-06 (emphasis added).
Although the Wilson case dealt with exemptions claimed by the debtor, and not liens held by third parties, the concept is the same. Like in Wilson, Trustee has negotiated a "tip" from the first mortgage holder so he will not have to undertake a foreclosure proceeding under state law. The "tip" is funds generated by the estate from the sale of the Property under § 363, and is therefore subject to any interests which encumbered the property, whether it is an exemption claimed by the debtor, or junior liens held by third parties. Accordingly, the $4,000 payment constitutes proceeds of the sale.
(ii) A purchase by credit-bid is tantamount to a purchase with cash.
Trustee next argues that Mr. Mounts' credit-bid does not constitute a payment of money, and therefore, the extent of the first mortgage lien should not be reduced by the amount of the credit-bid. Accordingly, Trustee contends that the interests of the Junior Lienholders cannot attach to the $4,000 payment, as the payment does not exceed the extent of Mr. Mounts' lien. In support of this proposition, Trustee cites In re Hokulani Square, Inc., 460 B.R. 763 (B.A.P. 9th Cir. 2011), which held that a secured creditor's credit-bid did not constitute "money disbursed" for purposes of calculating the trustee's fee under § 326(a). Id. at 769. Trustee's theory misses the mark: while a credit-bid may not equate to "money" for purposes of calculating a trustee's fee, in an asset sale under § 363, purchase by credit-bid is the equivalent of a cash purchase, and the credit-bid purchaser's lien is reduced by the amount of the credit-bid.
The court in In re Spillman Dev. Grp., Ltd., 401 B.R. 240 (Bankr. W.D. Tex. 2009), addressed the effect of a credit-bid on a non-debtor's guaranty obligation. Quoting Lexington Coal Co., LLC v. Miller, Buckfire, Lewis Ying & Co., LLC (In re HNRC Dissolution Co.), 340 B.R. 818, 824-25 (Bankr. E.D. Ky. 2006), the court stated:
"[C]learly 11 USC § 363(k) treats credit bids as a method of payment-the same as if the secured creditor has paid cash and then immediately reclaimed that cash in payment of the secured debt."Spillman Dev. Grp., Ltd., 401 B.R. at 253 (citations omitted). The court ultimately held that the credit-bid extinguished the debtor's underlying debt obligation, thereby extinguishing the obligation of the guarantor. Id. at 256.
...
[A] credit bid by the secured lender, whether in the context of state law foreclosure or of a § 363(k) bid, is payment on the debt. It can, in fact, be nothing else.
Applying Spillman to the instant case, Mr. Mounts' purchase of the Property by credit-bid constitutes payment in full of the mortgage obligation, thereby extinguishing his mortgage interest. Accordingly, any funds paid in excess of the credit-bid are treated just as if the Property had been purchased entirely with cash. Therefore, the $4,000 payment is subject to the interests of the Junior Lienholders as proceeds of the sale in excess of the first mortgage.
(iii) Lack of objection does not render the $4,000 payment to the estate proper.
Lastly, the trustee argues that the sale should be approved because the $4,000 payment was noticed to all parties as a fee to the estate, and none of the Junior Lienholders objected. However, the Court is not inclined to authorize a sale of property simply because the motion is uncontested; such sale must be proper under the Bankruptcy Code and other applicable law. The proposed fee is, in reality, a carve-out from the sale proceeds. A carve-out from sale proceeds is simply improper absent the consent of all of the lien holders. In the instant case, applicable law requires liens against the Property to attach to the $4,000 payment in the order of priority. As the terms of the sale provide otherwise, the Court must deny Trustee's Motion.
B. The Application to Employ Steve McCarthy
According to the Application, Trustee seeks to employ Steve McCarthy and McCarthy Real Living Real Estate ("Mr. McCarthy") as a realtor and appraiser for the bankruptcy estate. Trustee proposes to compensate Mr. McCarthy $1,000 for helping to facilitate the proposed sale of the Property. However, inasmuch as Trustee's Application appears to hinge on the approval of the sale, the Application must be denied. Nonetheless, should Trustee choose to employ Mr. McCarthy for purposes of listing the Property for sale, Trustee may file a subsequent application to employ Mr. McCarthy in accordance with the Federal Rules of Bankruptcy Procedure and the Local Bankruptcy Rules.
III. Conclusion
In accordance with the foregoing, it is
ORDERED AND ADJUDGED that Trustee's Motion to Sell Real Estate Free and Clear of Liens (Doc. 35) is DENIED. It is further
ORDERED AND ADJUDGED that Trustee's Application to Employ Steve McCarthy and McCarthy Real Living Real Estate (Doc. 37) is DENIED without prejudice to further application should Trustee deem it appropriate.
IT IS SO ORDERED.
COPIES TO: Default List Daniel Patrick Corcoran
(via CM/ECF)
Brian M. Gianangeli
(via CM/ECF)
Frank S. Mounts
7630 Catawaba Place
Dublin, OH 43017
Internal Revenue Service
P.O. Box 7346
Philadelphia, PA 19101-7346
State Farm Mutual Insurance Co.
c/o Zeehandelar, Sabatino & Associates, LLC
471 East Broad Street, Ste. 1500
Columbus, OH 43215
State Farm Mutual Insurance Co.
471 East Broad St., Ste. 1200
Columbus, OH 43215
Ohio Department of Taxation
Bankruptcy Division
P.O. Box 530
Columbus, OH 43216