In re Worcester Country Club Acres, LLC, Case No. 23-40446-EDK: The Limitations of a Section 363 Sale

In re Worcester Country Club Acres, LLC, Case No. 23-40446-EDK: The Limitations of a Section 363 Sale

Section 363 of the U.S. Bankruptcy Code allows a trustee or debtor to sell, lease, or use an organization's assets outside of normal business operations, which is known as a “Section 363 Sale.” The goal of a Section 363 Sale is to help debtors pay their debts to creditors by selling assets and using the proceeds to settle their debts. But what happens when the debtor is the declarant of a condominium, and there are questions as to ownership of the property being sold and existence of development rights?

The Court emphasized that while § 363(f)(4) allows for sales of disputed property interests, it cannot authorize a sale of property that may not be owned by the Debtor at all.

In In re Worcester Country Club Acres, LLC, Case No. 23-40446-EDK, Moriarty Bielan & Malloy LLC prevailed in representing the interests of a condominium trust and certain unit owners in the Bankruptcy Court, where the condominium’s declarant sought to capitalize on the pendency of litigation in the Land Court and the filing of a voluntary bankruptcy petition in order to attempt to sell common area land, which is and has been owned by the unit owners, and development rights, which were never validly extended.

Overview:

In a recently dismissed case before the United States Bankruptcy Court for the District of Massachusetts, Central Division, Worcester Country Club Acres, LLC (the "Debtor") filed a motion seeking approval of an amended Disclosure Statement related to the amended plan filed in its Chapter 11 bankruptcy case. The Country Club Acres Trust (the “Trust”) objected to approval of the Disclosure Statement on grounds that the Plan was unconfirmable because it proposed the sale of real property, which the Debtor did not own, and the sale of development rights that did not exist. The Debtor argued that a sale may be authorized, as the interests asserted by the Trust were in bona fide dispute. The Court was tasked with determining whether 11 U.S.C. § 363(f)(4) would permit a sale prior to a final adjudication of the parties’ claims with respect to the property rights at issue.

The Court concluded that the Plan was unconfirmable, as it contemplated the sale of property prior to the resolution of whether the Debtor owned the disputed property and whether the development rights existed. Therefore, the Court denied the Debtor’s Motion to Approve the Disclosure Statement for the Plan.

The Case:

In early 2021, the Trust filed suit against the Debtor in the Massachusetts Land Court. Issues in the Land Court action include whether (1) all of the land owned by the Debtor at the time of creation of the Condominium (approximately 37.32 acres), with the exception of the units themselves, comprised the common areas of the Condominium and was submitted to condominium status to be owned by the Condominium’s unit owners as tenants in common; and (2) the Debtor continued to hold certain development rights with regard to the property.

In June of 2023, the Debtor commenced a bankruptcy case by filing a voluntary petition under Chapter 11 of the United States Bankruptcy Code, and in August, the Court granted relief from the automatic stay to allow the parties to continue to litigate the Land Court matter. Shortly after the petition date, the Debtor filed a Plan and Disclosure Statement, together with the Motion to Approve that was at issue in this Decision. The Debtor’s Plan proposed that the Debtor would sell the disputed land and the development rights to fund the Plan and provide a distribution for creditors, notwithstanding the unresolved Land Court matters. The Trust, together with certain unit owners, objected to approval of the Disclosure Statement on the ground that the Plan was unconfirmable because it relied on funding generated solely from property owned by the unit owners without their consent.

The Trust argued that the Plan could not be confirmed, and approval of the Disclosure Statement should be denied, because: the Debtor may only sell “property of the estate” under § 363(b) or (c) and, § 363(f)(4), which permits the sale of property free and clear of certain interests in bona fide dispute, does not permit the sale of property free and clear when the property is subject to disputes regarding ownership of the land or is subject to a claim that the property right simply does not exist (in the case of the development rights), and because the Plan contemplated the sale of property that the Debtor did not own.

The Debtor argued that, despite the Trust claims, there existed a bona fide dispute regarding disputed land and the development rights. Under § 363(f)(4) of the Bankruptcy Code, the Debtor argued that the property sale can proceed even with the ongoing litigation regarding the ownership of the land and expiration of the development rights.

After reviewing the arguments from both parties, the Bankruptcy Court ruled against approving the Debtor's disclosure statement and proposed Chapter 11 Plan. The Court emphasized that while § 363(f)(4) allows for sales of disputed property interests, it cannot authorize a sale of property that may not be owned by the Debtor at all. The Court emphasized the statutory requirement that property sold under Chapter 11 must be property of the estate, which necessitates a prior determination of ownership rights.

The Court referenced that it is well-established that the Bankruptcy Code mandates clarity on ownership before authorizing property sales under § 363. The Court rationalized that permitting the sale of disputed property without establishing ownership would contradict the purpose of Chapter 11, which is to facilitate reorganization based on clear ownership and asset valuation.

Key Takeaway:

The purpose of a § 363 sale is to allow for the property of an estate to be sold free and clear of interests that are disputed, so that the liquidation of the estate’s assets are not delayed while such disputes are being litigated. However, the purpose is not to allow a sale, which effectively prohibits a party from litigating an underlying dispute and dispositively resolves a claim against a creditor or interested party. In this instance, a sale free and clear of the Trust and unit owners’ claims would have deprived the Trust and unit owners of any meaningful recovery in the Land Court, as it effectively would have prevented the Trust and unit owners from obtaining a judgment invalidating the phasing right, or the Trust from establishing the land as part of the common area of the condominium.

Troy Tanzer Condo Law Blog

If you have any need for legal services related to this article, or any similar matter, you can email Troy at ttanzer@mbmllc.com or any of our other attorneys at Moriarty Bielan and Malloy LLC at 781-817-4900 or info@mbmllc.com.

Troy Tanzer