Judge Katz (Bankr. D. Mass): Estate’s Interest in Property Must Be Determined Prior to 363 Sale In prior posts, this firm discussed the reasons why
Judge Katz (Bankr. D. Mass): Estate’s Interest in Property Must Be Determined Prior to 363 Sale In prior posts, this firm discussed the reasons why
section 363 is a powerful tool in a reorganization or liquidation. Among those reasons is that section 363 allows the sale of estate property even if such property is encumbered by third-party interests, if one of the
conditions required by subsection (f) is met. One of these conditions is that the third-party’s interest in the property is in bone fide dispute. 11 U.S.C. §363(f)(4).
What happens, then, if there is a bone fide dispute between a third-party and the estate as to whether the estate even has an interest in the property? A recent decision by Judge Katz of the U.S. Bankruptcy court for the District of Massachusetts created an intra-district split in answering this question.
In that case, the debtor argued that “property of the estate” is broadly defined and includes speculative or disputed property interests. Thus, according to the debtor, section 363(f)(4) allows for the sale of disputed property which could become property of the bankruptcy estate.
On the other hand, the third-party who claimed ownership over the property at issue argued that, for property to be sold under section 363(f)(4), the property must be “property of the estate” to begin with.
Judge Katz agreed with the third-party. The court reasoned that “[b]y its very structure, the Bankruptcy Code requires a determination of whether property is property of the estate (and thus may be sold) prior to any analysis as to whether a particular interest in property is in bona fide dispute under subsection (f)(4).” In so concluding, the court expressly disagreed with, and declined to follow, Judge Feeney’s decision in In re Genesys Research Institute, Inc., Case No. 15-12794, 2016 WL 358229 (Bankr.
D. Mass. June 24, 2016).
In Genesys, Judge Feeney held that “Section 363(f)(4) does not contemplate or require that the court resolve or determine any dispute about ownership before a sale hearing, but rather requires only an examination of whether there is an objective basis for either a factual or legal dispute about ownership.” Bankruptcy practitioners in the First Circuit should keep an eye on this case in the event that Judge Katz’s opinion is appealed to see if the court of appeals eventually settles the issue.