Called for sale of land that debtor allegedly doesn’t own
Massachusetts Lawyers Weekly
Eric T. Berkman
November 24, 2023
A U.S. Bankruptcy Court judge has rejected a Chapter 11 plan that contemplated a sale of real property while a dispute was pending in Land Court between the debtor and a creditor over whether the debtor actually owned any of the property in question.
The debtor, Worcester Country Club Acres, developed a condominium community in Worcester. In 2021, the condominium’s trust filed an action in Land Court asserting that except for the units themselves, all land that the debtor owned at the creation of the master deed comprised common areas owned by the unit owners as tenants in common, and that any development rights the debtor may have had regarding that property had expired.
“Now you have two judges who say something different on sales free and clear in bankruptcy, one who is retired and one who is not.”
In June 2023, with the ownership dispute still pending, the debtor sought Chapter 11 protection and filed a plan proposing it sell the disputed property and development rights to fund the plan. The debtor asserted that §363(f)(4) of the U.S. Bankruptcy Code, which allows a trustee to sell property free and clear of certain interests in a bona fide dispute, permitted such a sale.
In opposing the plan, the trust emphasized that §363(b) and (c) allow a debtor only to sell “property of the estate.” Because the property was subject to a dispute over ownership, the trust argued, §363(f)(4) did not permit the sale without confirmation that the property was, in fact, the estate’s to sell.
Judge Elizabeth D. Katz agreed.
“[T]he Debtor says that requiring a resolution of ownership disputes prior to authorizing a sale under § 363 will render subsection (f)(4) ‘meaningless,’” Katz wrote, ruling that the plan was unconfirmable. “But interests in property take myriad forms, many of which a debtor may sell free and clear of pursuant to § 363(f)(4), so long as the dispute is not as to the fundamental question of whether the property is property of the bankruptcy estate.”
The nine-page decision is In Re: Worcester Country Club Acres, LLC, Lawyers Weekly No. 04-008-23.
Kate E. Nicholson of Cambridge, who represented the trust in the bankruptcy matter, said the case is unique because instead of a situation in which the estate owns disputed claims about the property, her client was arguing that the debtor had no ownership interest in the land at all and that there were no development rights for the debtor to sell.
“It’s not like my client was saying, ‘Actually, we own those development rights.’ They were saying, ‘Those rights don’t exist,’” Nicholson said. “If the court had allowed the sale free and clear, it would have eliminated my client’s ability to make that argument. It was really kind of a zero-sum game in that regard.”
More broadly, Nicholson said, the Bankruptcy Code is very powerful and allows for many great things.
“It’s not like my client was saying, ‘Actually, we own those development rights.’ They were saying, ‘Those rights don’t exist.’ If the court had allowed the sale free and clear, it would have eliminated my client’s ability to make that argument.”
“But selling someone else’s property is not one of them, and the court saw that,” she said.
Quincy condominium lawyer Thomas O. Moriarty, who is representing the trust in the pending Land Court litigation, said a decision the other way would result in a division of common area land that could wreak havoc with regard to zoning and title.
“It’s critical that [§363(f)(4)] couldn’t be used as a way to essentially create unreasonable jeopardy for an association or for unit owners and the association when having a dispute about the status of common area land,” he said.
Edmund A. Allcock of Braintree, one of the debtor’s attorneys, said his client was disappointed with the decision, as there was a bona fide dispute as to ownership of the land.
“The purpose of the Bankruptcy Code provision at issue was to allow for a sale of the disputed property, reducing it to proceeds so that the ultimate prevailing party would be entitled to the proceeds,” Allcock said, noting that his client intends to appeal. “We believe that requiring the dispute to first be decided, which, following a trial and appeals, could take years, losing the opportunity for all parties to realize value, defeats the purpose of the code.”
Needham bankruptcy lawyer Donald R. Lassman, who represented the trust at an earlier stage in the case, thought the decision was interesting because it departed from In re: Genesys Research Institute, Inc., a 2016 decision in which U.S. Bankruptcy Court Judge Joan N. Feeney ruled that property could be sold pursuant to §363(f)(4) if there was a bona fide dispute as to whether it was property of the bankruptcy estate.
“Now you have two judges who say something different on sales free and clear in bankruptcy, one who is retired and one who is not,” Lassman said. “The Genesys case scared me, but Judge Katz departed from it. Had it gone the other way, the impact on unit owners would be pretty messed up, because what if three years later, the Land Court judge says to the unit owners, ‘Oh yeah, it’s yours.’ What are you going to do? It’s been developed.”
Austin O’Toole of Boston, who practices both condominium and bankruptcy law, noted that important procedural factors came into play in the case.
First, he said, the bankruptcy judge had given leave for the Land Court to resolve the ownership dispute, so it would make no sense for the Bankruptcy Court to then allow the property to be sold while that action was pending.
Additionally, O’Toole said, the Land Court action preceded the bankruptcy.
“It would seem unjust that a legitimate dispute over ownership could be scuttled in favor of a doubtful owner simply by marching into Bankruptcy Court and having that disputed interest sold as part of the bankruptcy estate,” he said. “That puts the cart before the horse and incentivizes bankruptcy filings for the wrong reasons.”
The debtor acquired land on East Mountain Street in Worcester in 2004 to develop an age-restricted condo community.
In September 2005, the debtor recorded a master deed that created the Country Club Acres Condominium and, in a declaration of trust recorded with the deed, established The Country Club Acres Trust, which was vested with rights and powers in the common areas.
THE ISSUE: Could the U.S. Bankruptcy Court confirm a Chapter 11 plan that contemplated a sale of real property while a dispute was pending in Land Court between the debtor and a creditor over whether the debtor actually owned any of the property in question?
DECISION: No (U.S. Bankruptcy Court)
LAWYERS: Kimberly A. Bielan, Laura White Brandow and Thomas O. Moriarty, of Moriarty, Troyer & Mallow, Quincy; Kate E. Nicholson of Cambridge (creditor) Edmund A. Allcock of Allcock & Marcus, Braintree; D. Ethan Jeffery and Andrew G. Lizotte, of Murphy & King, Boston (debtor)
The trust filed suit against the debtor in Land Court in 2021, asserting that all land owned by the debtor at the creation of the master deed, except for the units themselves, were common areas owned by the unit owners.
The suit also alleged that the debtor no longer had development rights in the property because they expired.
The debtor countered that the master deed submitted only part of the land to the condominium, that it continued to own the remaining land, and that its development rights had been extended through September 2025.
In June 2023, the debtor filed for Chapter 11 bankruptcy.
The Bankruptcy Court granted relief from the automatic stay to allow the parties to continue the Land Court matter.
Shortly afterward, the debtor filed a plan proposing that it sell the disputed land and development rights pursuant to 363(f)(4) and provide a distribution for creditors.
The trust, along with certain unit owners, objected to approval, arguing the plan was unconfirmable because it relied solely on funding from property owned by the unit owners without their consent.
Katz ruled in the trust’s favor, rejecting the debtor’s entreaties that she apply Genesys and construe “property of the estate” broadly to include speculative or disputed property interests.
“Where this Court parts ways with the Genesys analysis … is the use of §363(f)(4) to allow a sale when the dispute, however bona fide, regards whether the interest to be sold is indeed property of the estate to begin with,” Katz wrote. “By its very structure, the Bankruptcy Code requires a determination of whether property is property of the estate (and thus may be sold) prior to any analysis as to whether a particular interest in property is in bona fide dispute under subsection (f)(4).”
Katz acknowledged that had the debtor proposed to sell merely its contingent or disputed interests in the disputed land and development rights, the sale would likely be permissible.
But because the plan contemplated a sale of property before a determination that the debtor owned it, the judge concluded that the “the Plan, in its current form and under the current circumstances, cannot be confirmed.”