Sale to Vulture Fails Business Judgment Test

Posted by NCBRC - April 21, 2016

Comparing the potential purchaser to a vulture, a bankruptcy court disapproved a sale of estate property as not passing the business judgment test. In re Pervine, 2016 Bankr. LEXIS 712, No. 13-2289 (Bankr. E.D. N.C. March 7, 2016).

Geraldene Sue Pervine filed chapter 13 bankruptcy. She and Carl M. Pervine owned her residence, valued at approximately $160,000.00, as tenants in the entirety. The property was undersecured by two mortgages and Ms. Pervine’s plan provided that she would maintain payments on those mortgages outside the plan. When she moved out of the property and failed to keep up with payments, the court lifted the stay to allow JP Morgan Chase Bank, the first mortgage holder, to foreclose. Ms. Pervine moved the court to approve a sale of the property to TDD Enterprises, LLC (“TDD”) for $142,300.00, subject to the liens of Chase and Wells Fargo and with a “Repair Credit” of $40,000.00. The agreement proposed that TDD would assume the mortgages paying $9,400.00 to the mortgagees to bring the mortgages current. The debtor and her husband would each receive approximately $4,500.00 from the sale. A representative from TDD testified about the proposed repairs, including updating bathrooms and kitchen, repairing a leaky roof and refinishing floors, and TDD’s expectation of reselling the property for $190,000.00.

Section 1303 permits a debtor to the exercise the powers of the trustee provided by section 363(b)(1), including selling estate property. In determining whether a sale of estate property should go forward a court applies a business judgment standard considering whether: 1) there is a sound business reason for the sale, 2) the price is fair, 3) the debtor has provided adequate notice of the sale, and 4) the purchaser has acted in good faith. The court found the sale to TDD did not satisfy this test. With the purchase price, minus the allowance for repairs, the sale price would be approximately $100,000.00—far less than the value of the property. The court was further troubled by the fact that because TDD would actually pay only to have the loans made current, it would have a very small monetary investment in the property. The court found the proposed repairs were largely cosmetic and would not appreciably raise the value of the property. “Offering a desperate debtor a meager $4,500.00 when TDD stands to make a potential $90,000.00 profit will never pass muster in this court.” The court determined the sale was not proposed in good faith and, in fact, was an insult to the debtor, the bankruptcy process and the court.

Pervine Bankr ED NC March 2016 opinion


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