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Analysis of Recent Real Estate Sector Bankruptcy Rulings
Continuing to provide analysis on distressed real estate cases, we decided to report on two cases that present different issues. One involves the debtor's sale of real estate over the objection of the secured lender, which was approved. The other involves a debtor's attempt to enjoin a construction bond company from continuing to pay claims by subcontractors after the filing of the bankruptcy case, which was denied.
Real Estate Sale Permitted Over Objection by Allegedly Undersecured Lender
The first case is in In re Lee, Case No. 19-71337- JTL (Bankr. M.D. Ga. 2024), where the debtor sought bankruptcy court approval of a sale of real property over the objection of a lender with an undisputed lien against the property. According to the opinion, the lender filed a proof of claim for $244,234.76, secured by the debtor's real property, which consisted of a home on 43 acres of land. The debtor proposed to sell 15 of the 43 acres to a third party for $265,000. The motion stated the lender's lien would attach to the proceeds of the sale, and the lender would retain its lien in the remaining 28 acres. The lender objected, claiming the amount owed by the debtor was $294,915.99.
The court began its analysis by noting that a debtor may sell property free and clear of interests pursuant to Section 363(b) of the Bankruptcy Code if any of the five subsections of Section 363(f)(1)-(5) are met. The only subsections at issue were 363(f)(3) and 363(f)(4). Section 363(f)(3) authorizes a sale free and clear of liens "only if such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property." See, 11 U.S.C. Section 363(f)(3). The lender argued that the sale price of the property — $265,000 — was less than the value of its lien — $294,915. The court ruled that the sale proceeds would satisfy the lender's lien because the proposed sale proceeds exceeded the amount of its filed proof of claim, and the lender had failed to provide evidence in support of the amounts it claimed it was owed. The court also found that the sale was authorized under Section 363(f)(4), which states that a sale may proceed free and clear of an interest that is in bona fide dispute. The debtor testified that the lender was owed only $241,976.23, and had filed an objection to the lender's proof of claim, disputing amounts charged for taxes, escrow payments, inspection fees and broker price options. The court found the lender's claim was in bona fide dispute.
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