In re Hamilton Rd. Realty LLC

In re: Hamilton Road Realty LLC, Debtor.

Case No. 8-19-72596-reg

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

April 26, 2021

Chapter 7

MEMORANDUM DECISION GRANTING THE TRUSTEE'S MOTION PURSUANT TO SECTIONS 105(a), 363 AND 704 OF THE BANKRUPTCY CODE AUTHORIZING AND APPROVING THE SALE OF THE DEBTOR'S REAL PROPERTY FREE AND CLEAR OF ALL LIENS, CLAIMS AND ENCUMBRANCES

This matter is before the Court pursuant to the motion ("Motion") by Allan B. Mendelsohn, the Chapter 7 trustee ("Trustee") to approve the sale of the non-residential real property ("Property") owned by Hamilton Road Realty LLC ("Debtor") to a third party for $1,920,000, free and clear of all liens, claims and encumbrances pursuant to Bankruptcy Code §§ 363(b) and 363(f), subject to higher and better offers. The Motion is opposed solely by the Debtor on the basis that the Trustee cannot satisfy the requirements of § 363(f) with respect to judicial liens and tax liens encumbering the Property.¹ The Court agrees with the Debtor that the Debtor has standing to object to the Motion and the Trustee cannot utilize § 363(f)(3) because the face amount of the liens encumbering the Property exceed the sale price. Nevertheless, the Trustee has satisfied § 363(f)(5) as to the judicial liens and tax liens.

The case before the Court presents the question of whether, in a chapter 7 liquidation, a trustee may utilize § 363(f)(5) to sell property free and clear of nonconsensual judicial liens. TheCourt's finding that the Trustee has met the requirements of § 363(f) is to a significant degree predicated on the specific facts and circumstances of this case, which involve a transfer of the Property from the principal of the Debtor, who held the Property in his individual name, to the corporate Debtor on the eve of the filing of this bankruptcy petition. At the time the Property was transferred it was subject to numerous liens that were not disclosed on the Debtor's schedules. Several of these judicial liens were placed on the Property to secure judgments obtained against the principal of the Debtor. While the judicial liens constitute "claims" in this Chapter 7 liquidation, the Debtor's principal and/or his spouse's liability under the judgments and the rights of their judgment creditors are unaffected by this bankruptcy. Because the nonconsensual judicial lienors could be compelled to take money in satisfaction of their liens and there are proceedings which could result in payment in full from a source separate and apart from the sale of the Property, the subject liens could, as a matter of law, be removed from the Property, thus fulfilling the requirements of § 363(f)(5).

Concomitantly, the Property may be sold free and clear of the tax liens pursuant to § 363(f)(5) because the Trustee may use § 724(b) to subordinate the tax liens, thereby compelling the tax lienors to accept money in satisfaction of their liens.

Facts

The Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 10, 2019 ("Petition Date"). According to the Debtor's Statement of Financial Affairs, the Debtor's equity holders are Sitara Khan and SMARS Holding LLC, each of whom own 50% of the Debtor.² Prior to the Petition Date, on May 30, 2006, Reza Naghavi and Sitara Khan (sometimes referred to herein as the "Original Obligors"), who are husband and wife, executed apromissory note in favor of JPMorgan Chase Bank, N.A. ("JPMorgan") in the original principal amount of $1,100,000. As security for the repayment of the note, JPMorgan was granted a mortgage ("First Mortgage") on the Property, which was owned by one of the Original Obligors at the time. The Mortgage was ultimately assigned to Select Portfolio Servicing, Inc. as servicer for U.S. Bank NA, as trustee for the Chase Mortgage Finance Corporation Multi-Class Mortgage Pass-Through Certificates, Series 2006 ("SPS"), which is the current mortgagee.

On or around September 7, 2007, Reza Naghavi deeded her interest in the Property to Sitara Khan, who became the sole owner of the Property. Adv. Proc. No. 20-8004, Complaint [ECF No. 1]. On October 23, 2013, the mortgagee at the time commenced a foreclosure proceeding with respect to the Property. On January 9, 2014, Sitara Khan transferred the Property to the Debtor pursuant to a deed. Adv. Proc. No. 20-8004 [ECF No. 1]. The deed transferring the Property to the Debtor was recorded on April 9, 2019, one day prior to the Petition Date. As a result, the Debtor's property is encumbered by the First Mortgage, and the Original Obligors remain personally liable for the debt.

On February 14, 2020, the Debtor's case was converted to a case under Chapter 7 and the Trustee was appointed. On June 30, 2020, SPS filed a motion to vacate the automatic stay with respect to the Property, which was granted by order entered on July 28, 2020 [ECF Nos. 137, 141].

The Trustee now seeks authority to sell the Property to third parties pursuant to 11 U.S.C. § § 363(b) and (f), free and clear of all liens, claims and encumbrances. The first Mortgagee has agreed to accept approximately $1,625,000 in full satisfaction of its claim and consents to the proposed sale, thus satisfying § 363(f)(2). JPMorgan Chase Bank, N.A. ("Chase") filed opposition to the Motion, stating that it holds a junior mortgage on the Property in the amount of$258,346.25. [ECF No. 173]. Chase has reached a settlement with the Trustee, and because Chase now consents to the proposed sale of the Property, the Trustee has satisfied § 363(f)(2) with respect Chase's lien against the Property.

The Debtor recently revealed that the Property is encumbered by the following judicial liens:

Madonna Management Services: $89,000.00

Madonna Management Services: $112,805.39

Madonna Management Services: $1,051.31

New York Commercial Bank: $345,399.40

New York Commercial Bank: $167,242.37

(collectively, the "Judicial Lienors"). Each encumbrance was incurred when the Property was owned by the principal of the Debtor. The Original Obligors remain indebted with respect to each debt owed to the Judicial Lienors, and therefore each lienholder has the right to collect the obligation from the Original Obligors. New York Commercial Bank filed a letter with the Court reflecting its consent to the sale of the Property by the Trustee. [ECF No. 192].

The Debtor also recently revealed that the Property is encumbered by the following tax liens:

United States of America - lien in amount of $275,772.37

United States of America - lien in amount of $38,062.00

(collectively, "Tax Lienors"). Like the claims of the Judicial Lienors, the claims of Tax Lienors are personal obligations of the Original Obligors which arose while the Property was owned by either the Original Obligors or by Sitara Khan. Aside from the Property, the Debtor's sole asset is a bank account which has funds in the amount of $46,954.86.

The Tax Lienors were served with the Motion and did not file responsive papers. The Judicial Lienors were not served with the Motion at the outset but based on the subsequent events of the case it appears that the Judicial Lienors have received notice of the Motion. TheDebtor opposes the Motion on the grounds that the Trustee cannot satisfy any subsection of § 363(f) with respect to each lienor, based on the facts and the relevant case law. The Trustee argues that the Debtor lacks standing to object to the Motion. In the alternative, the Trustee claims that either he has obtained the consent of the Judicial Lienors, thereby satisfying section 363(f)(2), or that the Trustee can satisfy sections 363(f)(3) and/or (5). Despite the Trustee's representation that the Judicial Lienors consent to the proposed sale, only counsel to New York Commercial Bank filed a letter reflecting such consent. Because Madonna Management Services has not indicated its consent to the proposed sale and the Debtor challenges whether the letter from New York Commercial Bank's counsel sufficiently indicates the consent necessary under subsection 363(f)(2), the Court will treat the Judicial Lienors as if they have not provided adequate consent to the proposed sale.

Discussion

a. The Debtor has standing to object to the proposed sale

As a threshold issue, the Trustee has raised whether the Debtor has standing to object to the sale of the Property. Under Second Circuit authority, in order to have standing, a party must be an 'aggrieved person,' a person 'directly and adversely affected pecuniarily' by the challenged order of the bankruptcy court." Licensing by Paolo v. Sinatra (In re Gucci), 126 F.3d 380, 388 (2d Cir. 1997) (quoting Kabro Assocs. v. Colony Hill Assocs. (In re Colony Hill Assocs.), 111 F.3d 269, 273 (2d Cir.1997)). A party is a person aggrieved if an order "diminishes their property, increases their burdens, or impairs their rights." Robb v. Harder (In re Robb), 534 B.R. 354, 357 (B.A.P. 8th Cir. 2015) (citing Williams v. Marlar (In re Marlar), 267 F.3d 749 (8th Cir. 2001)). Courts have found that in the context of a proposed sale, a chapter 7 debtor has standing to object if there is evidence that a surplus is a reasonablepossibility. See 60 E. 80th St. Equities, Inc. v. Sapir (In re 60 E. 80th St. Equities), 218 F.3d 109, 116 (2d Cir. 2000). The only possibility of a surplus in this case would be if the administration expenses of this case were reduced and/or if there were a successful objection to claims filed in the case. At this point, the dollar amount of administration expenses is not fixed, and it is not clear if there will be an objection to the claims filed in this case. While somewhat tenuous given the current liens on the Property, the Court finds that the Debtor has standing to object to the proposed sale. If the Trustee is asserting that sufficient equity exists to support a sale of the Property, then there is a possibility of a surplus for the benefit of the Debtor. This could be the case if the claims in the case were reduced via objection to claims, if...