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Massachusetts Agencies

Chapter 11 Bankruptcy: Taking Title from Debtor in Possession

Bankruptcy

A debtor in possession in a Chapter 11 proceeding has all the powers of a trustee in bankruptcy regarding matters in the "ordinary course of business," but in most cases sales by debtors of real estate require specific court authority, or at least a standing order. Unlike a Chapter 7 proceeding where property is liquidated, in a Chapter 13 proceeding there is a plan for reorganization. In taking title from a debtor in possession, observance of the provisions of the plan and the status thereof must be reviewed. Following is a check List of the things to keep in mind when taking title from a debtor in possession in bankruptcy.

If the plan has been confirmed and includes the property and the specifics as to a sale of the same, there's no problem.

Requirements of plan:

Debtor has exclusive right to file plan for up to 120 days after filing petition

After 120 day period creditors may file proposed plans

Once the plan is filed a disclosure statement concerning the same is sent to all creditors

The creditors vote to accept or reject the plan

The debtor in possession will serve as its own trustee (debtor in possession), provided that no trustee has been appointed)

The plan must be confirmed by the court

If no plan filed or the debtor defaults on the plan the case will be converted to a Chapter 7 case

Sales under the plan

Sales Subject to Liens

  • The sale of the property must be covered by the plan
  • If the plan has not been confirmed or if the property is not covered by the plan there is a necessity for a twenty-day notice, (right to a hearing) and (if there's an objection) an order
    • Title will be conveyed subject to all liens

Sales "Free and Clear" of Liens

  • The sale of the property must be covered by the plan
  • If the plan has not been confirmed or if the property is not covered by the plan there is a necessity for a twenty-day notice, (right to a hearing) and (if there's an objection) an order
  • Sometimes the plan itself makes provision for the sale of property free and clear of liens
  • If a sale free and clear of liens not provided for in the plan, and order is required
  • Only those liens specifically listed as being the subject of the sale free and clear will be divested from the property. Many times real estate taxes, first mortgages of record and federal tax liens are not included in the listing.
  • An order for a sale free and clear of liens is available if one or more of the following apply (Section 363(f))—
  • (A) Other laws permit sales free and clear of liens

    (B) Third party lienholder consents to sale free and clear if lien

    (C) Sales price exceeds amount of all liens

    (D) Third party could be legally compelled to accept money

    (E) Interest of third party is subject to bona fide dispute

  • Motion requesting an Order authorizing sale free and clear
  • Motion served on each party whose interest will be affected
  • Motion should contain description of property, describe each lien to be affected, asserted basis of sale free and clear of liens under Section 363(f)
  • Evidence of service - return of service or certificate of mailing
    • Twenty days notice prior to sale is still required to be given to all creditors, indicating date of hearing and time within which objections must be filed. Rule 2002.
    • Order should recite:
    • (A) Court has jurisdiction over parties

      (B) Each lienholder to be affected has been served

      (C) Proper notice has been given

      (D) Finding that one of the five bases for sale free and clear exists under Section 363(f)

  • Appeals from Order
  • (A) Ten-day appeal period

    (B) Can be longer, if extensions granted

    (C) Runs from time Order docketed (not from time judge announced or signed Order)

    Sales in the "Ordinary Course of Business"

  • If the sale is in "the ordinary course of business," the requirement of notice and hearing can generally be waived. What's makes for a sale in the ordinary course of business can sometimes be difficult to determine.
  • Form of Deed should be from "John Jones, Debtor in Possession . . ."
  • No affect on liens or encumbrances