Daily Development for Friday, December 10, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Yes, yes, times are good, and most folks can pay there debts. But most of us can remember recent history when all real estate lawyers became part time (sometimes full time) bankruptcy advisors. Here are three recent bankruptcy opinions that provide small lessons to be taken into account in bankruptcy planning. Our Reporter is Jim Stillman of the Los Angeles bar.

BANKRUPTCY; TAX LIENS; POSTPETITION PROPERTY: Mandatory distributions from a preexisting spendthrift trust received after the debtor had been discharged in a Chapter 7 Bankruptcy case remained subject to a prepetition tax lien held by the IRS under §6321 of the Tax Code. In re Orr, 180 F.3d 656 (5th Cir. 1999). The debtor had a property interest both legal and equitable, under Texas law, that existed prepetition in the right to receive future distributions from the trust. (180 F.3d 656, 661.) While the spendthrift clause made that interest plainly unmarketable, the Fifth Circuit Court of Appeals holds that transferability should not be an element of the definition of property for purposes of the Section 6321 tax collection lien, thereby departing form the rule in the 3rd, 6th, 8th, 9th and 11th Circuits. (at p. 663.) A broader definition of property, which would allow the tax lien to have attached to property prepetition and thus to "ride through" the chapter 7 case, is "consistent with the imperative nature of tax collection." (Id.) The Chapter 7 discharge prevented the Service from taking any action to collect the tax as a general, personal liability of the debtor after bankruptcy.

BANKRUPTCY; REAL PROPERTY SALES; TRANSFER TAX EXEMPTIONS: Section 1146(c) of the Bankruptcy Code allows the debtor an exemption from transfer taxes only for sales of property that are effectuated in a confirmed Chapter 11 plan and not for sales that occurred during the case.

In re NVR Homes, Inc., 1999 U.S.App. LEXIS 15499, 34 B.C.D. 837 (4th Cir. 1999). The debtor, a leading homebuilder, sought exemption for $8,349,103 in transfer taxes paid in connection with 5,571 transfers that took place during its 17 month bankruptcy case. The States of Maryland and Pennsylvania, which received the bulk of the taxes, were not liable for returning the taxes in any event at the behest of a federal bankruptcy court, the Court of Appeals held, on the grounds of Eleventh Amendment immunuity as recently, vigorously interpreted in Seminole Tribe v. Florida, 517 U.S. 44, 116 S.Ct. 1114 (1996). While local governments do not enjoy such immunity, Section 1146(c) should not be interpreted to provide for exemptions applicable to any governmental agencies in connection with preconfirmation transfers. The Fourth Circuit Court of Appeals rejected other approaches to the exemption question, such as analyzing whether a preconfirmation transfer was "necessary to the consummation of a plan." 1999 U.S.App. LEXIS 15499, at *29.

BANKRUPTCY; REORGANIZATION; VALUATION: In valuing the Debtor's large HUD project for the purpose of determining whether the debtor had a protectible interest at confirmation, the Bankruptcy Court was not required to calculate a "reorganization value" of the property to give the debtor the benefit of discounts and special financing terms arising under a creditor's plan to which the debtor objected. In re Westpoint, L.P., 44 F.Supp2d 431, 234 B.R. 431 (E.D.Mo. 1999).

The absolute priority rule was not offended by the plan's provision for completely washing out equity because the rule "does not look towards the protection of debtor interests, but rather toward the protection of dissenting creditor interests, absent the value of the ongoing business being large enough to support protection of the debtors." (44 F.Supp at 437.) Here, "it is clear that the trier of fact carefully evaluated a voluminous record" on the question of value (at p. 436), using settled principles of the Income Capitalization Method, and its results would not be disturbed on appeal. Nor did the debtor have any right to contest HUD's security interest in $9,337,390.61 of postpetition rents, because the interest was perfected by the recordation of the mortgage "under federal common law." (at p. 437).

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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