Relating to Real Estate

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Deal or No Deal: Court Approval Necessary When Buying and Selling Property in Bankruptcy

Bankruptcy sales are unique transactions in that an agreement reached with a Chapter 11 debtor or a Chapter 7 or 11 trustee is not a done deal until the bankruptcy court approves it. This is illustrated by the recent decision in Gluckstadt Holdings, L.L.C. v. VCR I, L.L.C. (In re VCR I, L.L.C.) 922 F.3d 323 (5th Cir. 2019).  

In that case, VCR filed a Chapter 11 case. Then it entered into an agreement with Gluckstadt, which agreed to purchase a VCR-owned property free and clear of liens for $612,500. The agreement required VCR to file a motion for authority to sell the property “as soon as possible.” Before such a motion was filed the case was converted to a Chapter 7 case, and a trustee was appointed.

The Chapter 7 trustee, believing the property was worth more that the agreed upon sales price, refused to move for approval of the agreement. Instead, the trustee moved for authority to sell the property at public auction. Gluckstadt objected on the basis that the trustee was obligated to move for approval of the previously executed sale agreement. The bankruptcy court overruled the objection and the Fifth Circuit affirmed.

In its opinion the Fifth Circuit first noted that Bankruptcy Code §363 requires court approval of any sale outside of the ordinary course of business after notice and a hearing. It found that by seeking approval for a public auction the trustee “was fulfilling his fiduciary duty to maximize the assets of the estate.” Quoting an opinion of the Ninth Circuit Bankruptcy Appellate Panel, the court stated that anyone that deals with a trustee in a non-ordinary course transaction “is charged with knowledge that the law may require court approval and that a trustee has an obligation to present all relevant facts to the court, including whether there is a more attractive solution than that which the trustee has negotiated.” In a footnote, the court further noted that the property sold at the auction for $2,325,000, almost four times the price that Gluckstadt offered.

Parties that deal with a Chapter 11 debtor or Chapter 7 or 11 trustee on a purchase of property owned by a bankruptcy estate should structure the transaction to provide protection against being outbid at the end of the process. It is common today for buyers to insist on a break-up fee, expense reimbursement, and overbid protection before entering into a contract to buy bankruptcy estate property. Interested buyers should realize that the rules of engagement applicable to sales outside of bankruptcy may not be applicable in bankruptcy notwithstanding the execution of a negotiated contract of sale.

For questions, contact Larry Coppel (410) 576-4238.