Daily Development for
Friday, March 17, 2000
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
Here are two basically
unrelated recent bankruptcy decisions dealing with aspects of the debtor's
estate. No one likes to think much about bankruptcy, but it is always lurking
just beyond the shadows. I periodically throw in a few real estate related bankruptcy
cases to remind us that our clients expect us to know something about it, even
though we need to refer them to experts when the event really occurs. Our
bankruptcy reporter is Jim Stillman of Murphy, Sheneman, Julian & Rogers in
Los Angeles.
BANKRUPTCY; SALE FREE AND
CLEAR OF LIENS; ADEQUATE PROTECTION AGREEMENTS: A secured creditor may
informally bargain for a "superpriority" claim, to cover certain
costs, as a measure of adequate protection in exchange for its consent to a
sale of real property "free and clear" of the creditor's lien.
In re Kids Creek Partners,
L.P., 233 B.R. 409 (N.D.Ill.1999).
Pursuant to a handshake
deal made in the Bankruptcy Court hallway while the sale hearing was underway,
the trustee and the creditor agreed that (1) the lien would be paid in full,
while (2) the creditor would post in favor of the estate a letter of credit to
reimburse the estate in the event its claim were subsequently disallowed in
whole or in part in litigation to be filed by the estate, so long as (3) if the
trustee did not prevail, all of the secured creditor's attorney's fees and
costs incurred in such litigation would be recoverable from the estate as a
"superpriority" claim, that as, first in payment ahead of all other
claims, including the trustee's own claim for fees and costs. Come the
trustee's unfortunate loss in the claims litigation, the secured creditor filed
is superpriority administrative claim for fees and costs amounting to more than
$1.6 million, which rendered the estate administratively insolvent. The trustee
was bound to its deal, not only because the oral agreement had been entered in
the record at the hearing on the sale motion, but because the secured creditor
had altered its position in reliance on the deal. The creditor correctly argued
the doctrine of "mend the hold," a species of estoppel in which a
party may not, in subsequent litigation against a party, take a position
inconsistent with that maintained with the party in a contract.
Reporter's Comment: I
thought the case presented a good example of "horsetrading on the
courthouse steps," which while common in all litigation is a special art
in bankruptcy proceedings. The handshake deal to obtain consent to the sale
free and clear looked like a good bet all around. Was it?
BANKRUPTCY; PROPERTY OF
THE ESTATE; REAL ESTATE BROKERS; EMBEZZLEMENT: Moneys that the debtor
wrongfully withdrew from a real estate corporation, in breach of his fiduciary
duties under state law, did not become property of his bankruptcy estate
because he held the money as a fiduciary pursuant to state law.
In re Newpower, 229 B.R.
691 (W.D.Mich.1999).
But the proceeds of money
the debtor received from his investors (and diverted) before the corporation
was formed would stay in the estate, because the exception from bankruptcy
administration in Section 541(d) for property as to which the debtor's only
interest is as trustee applies only where the debtor was "a trustee before
the wrong and without reference thereto." (at p. 702.) The court held that
a constructive trust, even if appropriate on these facts as a state law remedy,
is not sufficient to constitute the kind of statutory or express trust which
must exist in order to except from administration property that came into the
debtor's hands.
Reporter's Comments: The
debtor, a licensed Michigan real estate broker, "turned himself in to
authorities, pleaded guilty to embezzlement, and was sentenced to sixtoten
years in prison" (p. 694), after spending his outofstate investors' money
on a Corvette, a fourwheel drive pickup truck, a powerboat, a new house for one
girlfriend, and paying to produce a demo CD for another girlfriend, all the
while sending his investors copies of phony deeds and other misinformation.
This case demonstrates the rule that "bankruptcy courts generally have
been skeptical about allowing creditors to except property f rom a bankruptcy
estate by claiming that the debtor acquired it by theft." (At p. 699.)
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org
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