NACBA Amicus Opposes “Carve-Out” Agreement

Posted by NCBRC - January 22, 2013

NACBA has filed an amicus brief in the Fourth Circuit case of In re Reeves, No. 12-2127. In that case the trustee, claiming authority under section 724(b), sought to sell the debtor’s fully encumbered residential property to give effect to an agreement the trustee had entered into with the IRS, a lienholder, under which the IRS agreed to “carve out” a portion of its share of the proceeds from any sale of the property. That portion would then go toward administrative costs and unsecured creditors.

In its brief, NACBA argues first that pursuant to its plain text, and supported by its legislative history, section 724(b) does not empower the trustee to sell estate property. Rather, it prioritizes payment of certain claims over payment of tax liens that would otherwise be paid first. The trustee’s authority to sell estate property arises solely from section 363 and is subject to that provision’s carefully crafted limitations. Second, NACBA argues that even if there was a statutory basis for the trustee to sell the property, he could not do so here where the property is fully encumbered and the estate, therefore, lacks equity in it. Where property is of no value to the estate beyond compensating the trustee, it should be abandoned pursuant to section 554 rather than sold pursuant to section 363. Furthermore, where standard traditional treatment of the liens would result in negligible value to the estate thereby precluding sale by the trustee, there is no authority for the trustee and a creditor to conspire to circumvent the Code by creating a “carve out” agreement. A chapter 7 trustee is not a liquidating agent for a creditor as that role would contravene the trustee’s position as representative of the estate for the benefit of unsecured creditors.

NACBA’s brief was authored by Ray DiGiuseppe.

Reeves NACBA amicus


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