Bankruptcy - Sales Free and Clear of Liens
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Fall 2002, Volume 1, Number 3
Bankruptcy — Sales Free and Clear of Liens
by Richard Urban, Vice President and Massachusetts State Counsel
When a Trustee of a Chapter 7 bankruptcy estate presents you with various bankruptcy documents relative to a sale of the property free and clear of liens, how should you proceed? At a minimum, the following documents should be obtained and reviewed:
- A Clerk's Certificate
The clerk will usually provide a certificate indicating that the docket for the bankruptcy case includes the following information:
- The commencement of the bankruptcy case.
- The appointment, and name, of the Trustee.
- The filing, by the Trustee, of a Notice of Intended Sale of the Property.
- That Notice of the sale was given to all interested parties and that an affidavit of the mailing of said notice was filed with the Court.
- The receipt of any objections to the sale.
- The holding of any hearings.
- The allowance of the sale or approval of the underlying motion.
- The status of any appeals.
Most certificates will, at a minimum, provide the above information. Some may include additional detail such as the buyer's names, sale price, or the specific titles of the various notices/motions that were filed in the bankruptcy. In any event, a clerk's certificate should be available that demonstrates the Trustee's compliance with various Code requirements to effectuate a proper sale free and clear of liens.
- Notice of Intended Private Sale
Unless the court orders otherwise, the Trustee will give notice to "Creditors and Parties in Interest" (which includes the United States Trustee and parties who have filed appearances and requested service of filings) of the intent to sell the subject property. The purpose of the notice is to afford creditors and others an opportunity to object to the sale. It provides them the general details of the sale, a description of the property, the deadline for filing objections and the hearing date, time and place at which objections may be raised.
The notice will also include the request to sell the property "free and clear of liens." If no objections are filed, the court may cancel the scheduled hearing and approve the sale without hearing.
- Motion for Authority to Sell
Every Notice of Intended Private Sale is accompanied by a Motion for Authority to Sell within which the authorization to sell free and clear of liens will also be sought. It will provide additional detail relative to the marketing of the property and state why the sale is in the estate's best interest.
It must also identify the holder of any lien or interest associated with the property. In other words, it should be a mirror reflection of liens and interests disclosed by a title search of the property.
Occasionally, the essence of this motion is presented under a different guise or caption. For example, in lieu of a Motion for Authority to Sell you might be presented with a "Motion to Sell Free and Clear of Liens" or a "Motion to Approve Sale." The nomenclature is of less significance than the substance. So long as the subject motion includes sufficient detail to make the intent clear that the property will be sold free and clear of liens, substance should rule over form.
- Certificates of Service
The Trustee's Certificate of Service for the Notice and the Motion should be obtained and examined to make sure all record lien holders and interested parties received notice. Certificates should be readily available since they must be filed within 7 days of service.
Underwriting scenario no.1: An agent had requested Certificates of Service from the attorney for the Trustee in a Ch. 7 sale free and clear of liens. The first Certificate pertained to the Notice of Intended Private Sale and a variety of creditors and parties were named including the lienholders appearing in the title search of the underlying property.
The second Certificate concerned the Trustee's Motion for Authority to Sell and attached to it were the names of only three recipients: the United States Trustee, the Ch. 7 Trustee and the debtor's counsel. The names of no other parties or lienholders appeared on this Certificate. Rule 6004(c) of the Bankruptcy Rules of Procedure states in pertinent part that:
Sale Free and Clear of Liens and Other Interests. A motion for authority to sell property free and clear of liens or other interests shall be made in accordance with Rule 9014 and shall be served on the parties who have liens or other interests in the property to be sold.
Since the procedurally required notice was not given, we would not accept the bankruptcy order as being dispositive of any lienholder's lien. Ultimately, conventional payoffs and releases were made and the sale went forward.
Underwriting scenario no. 2: The Certificates of Service an agent procured from the attorney for the Trustee disclosed a fairly elaborate list of creditors, interested parties and lienholders. Included among them was the servicer for a mortgagee.
Unfortunately, the name of the record mortgagee did not appear in any Certificates. The Trustee's attorney argued that the servicer was the holder of the note and had identified itself as such in its own bankruptcy motion which sought relief from the automatic stay for purposes of foreclosing its mortgage.
A review of those filings revealed that the servicer, indeed, described itself as the owner of the indebtedness and holder of the mortgage. Yet the motion for relief from stay failed to support this statement. There was no assignment of the mortgage attached or referred to in the motion. A copy of the underlying promissory note was attached as an Exhibit but failed to describe any endorsement to the servicer. Finally, the servicer's own Certificate of Service with regard to its motion disclosed service not only to the record mortgagee but to its attorneys as well. Collectively, all of these elements made suspect any suggestion that the servicer held the mortgage. Consequently, we would not insure the transaction without exception for the mortgage.
The Trustee, with the consent and participation of the servicer, went back into court and obtained an order which made it unequivocally clear that any notice requirement to the mortgagee had been satisfied by notice to the servicer.
- Order Approving Sale
Ultimately an order should issue which approves the sale or allows the motion. Ideally, the order also reinforces the substance of the Trustee's goal to: 1) sell the property free and clear of liens, and/or 2) attach any liens to the proceeds of the sale.
Note: If the debtor is not the sole record owner of the property, a need exists to address the co-tenant's interest in the bankruptcy filings. Absent any such acknowledgement by the Trustee, the bankruptcy order may prove to be dispositive of the liens and encumbrances attaching to the debtor's interest, but it would leave unresolved the effect of the order on the co-tenant's liens. The co-tenant's interest must be addressed.
An original Clerk's Certificate should be obtained and recorded along with certified copies of the Motion, Certificate of Service for same, and Order. Copies of the Notice and its Certificate of Service should be retained in your file.
Finally, discussions should be held as early as possible with the Trustee to determine the manner in which municipal bills (i.e. taxes, water, sewer, etc.) will be paid. Conventional payment by the closing attorney for matters such as these should be requested.
Underwriting scenario no. 3: In these days of budget and fiscal constraints, municipalities are aggressively, and sometimes inappropriately, demanding payment of back charges. We have had several claims in which a town or city has included an item on a municipal lien certificate for which it was clearly not entitled. It would come to no surprise if a municipality chose to ignore the application of a bankruptcy order and continued to insist that certain back taxes were still due and owed. As equally unsettling is the prospect of relying on a third party such as a Trustee or its attorney to tender payment. It is a far better practice to make any payments for municipal charges directly from the closing.