Linton Properties LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
LINTON PROPERTIES, LLC, et
al.,
Debtors.
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Case No. 08-00095
(Chapter 7)
Jointly Administered
For Publication in West’s
Bankruptcy Reporter
MEMORANDUM DECISION RE
TRUSTEE’S PROPOSED ABANDONMENT OF REAL PROPERTY
Chesapeake Bank & Trust Co. (“Chesapeake”) sought to compel
the Chapter 7 trustee of the bankruptcy estate of the debtor
Linton Properties, LLC (“Linton”) to complete an auction sale of
real property held by the debtor at the time it was serving as a
debtor in possession in this case prior to the conversion of the
case from Chapter 11 to Chapter 7. 	At the hearing on that
motion, the trustee persuaded me to permit him to attempt to
abandon the real property, which would have the effect of
depriving Chesapeake of its remedy of specific performance to
compel completion of the auction sale. 	When the trustee gave
notice of a proposed abandonment of the real property, Chesapeake
objected to the proposed abandonment, and the matter was heard on
The document below is hereby signed.
Signed: January 16, 2009.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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1 	The court’s ruling will not preclude the trustee’s
renewing the proposed abandonment of that unit (or obtaining an
amendment of the court’s order denying abandonment of that unit)
should the purchaser decide he no longer desires to complete the
purchase (or is willing not to complete the purchase so long as
the trustee agrees to return the deposit to him).
2
January 14, 2009. 	For reasons enunciated at the hearing of
January 14, 2009, and elaborated upon below, I will sustain
Chesapeake’s objection to the trustee’s proposed abandonment of
the real property.
I
By an order entered on June 13, 2008, the court authorized
the debtor in possession to sell certain condominium units (the
“Property”) located in Maryland at auction. 	The order did not
require that the court confirm the successful bids at the auction
sale as being in the best interest of creditors and the estate.
The auction sale was held on June 28, 2008, with Chesapeake being
the successful bidder for the Property except, as I understand
it, for one unit purchased by an individual who, the trustee has
not contested, desires to have the trustee complete the sale to
him. 	Chesapeake would receive the proceeds of the sale of that
unit pursuant to its prepetition lien, and thus has standing to
address whether that unit of the Property should be abandoned
despite the purchaser’s desiring to complete the purchase. 1
When the hammer fell at the auction sales, that gave rise to
binding contracts that were authorized by the court’s prior order
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authorizing the auction sale. 	Those contracts, entered into by
the debtor in possession exercising the powers of a trustee
pursuant to 11 U.S.C. § 1107(a), are binding upon the successor
trustee. 	Armstrong v. Norwest Bank, Minneapolis, N.A., 964 F.2d
797, 801 (8th Cir. 1992). 	The trustee has not filed a motion
under Fed. R. Bankr. P. 9024 (and Fed. R. Civ. P. 60) to set
aside the order authorizing the auction sale.
The decisions the trustee relies upon in contending that he
is not bound by the contracts of sale, In re Cmty. Hosp. of
Rockland County, 15 B.R. 785, 787 (Bankr. S.D.N.Y. 1981), and In
re Silver Mill Frozen Foods, Inc., 32 B.R. 783, 786 (Bankr. E.D.
Mich. 1983), are distinguishable or unpersuasive. 	They dealt
with whether a judgment in prior litigation between a debtor in
possession and a second party bars a successor trustee from
pursuing claims against the second party that were not raised in
the prior litigation. 	The judicial doctrine of claim preclusion
(res judicata), which is not involved in this matter, is a
flexible doctrine that arguably might be held inapplicable when a
debtor in possession is replaced with a trustee who has none of
the inherent conflicts that a debtor (whose interests as the
debtor–-versus his fiduciary interests as a debtor in possession-
-can diverge from the interests of creditors) may have when
participating in litigation as a debtor in possession. 	In
contrast, a contract entered into by a debtor in possession is a
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binding obligation of the estate, and under the reasoning of
Armstrong v. Norwest Bank should be binding on a successor
trustee. 	To the extent that In re Cmty. Hosp. of Rockland County
and In re Silver Mill Frozen Foods, Inc. could be read as
supporting a conclusion to the contrary, they are unpersuasive.
The trustee pointed to two adverse consequences which may
arise from completing the sale. 	The sale may subject the
bankruptcy estate to claims pursuant to warranties imposed by
Maryland law on any developer (like Linton) who sells condominium
property. 	It may also subject the bankruptcy estate to adverse
tax consequences. 	Creditors and the United States Trustee,
however, were given the opportunity to object to the proposed
auction sale, and did not object to it. 	Except in extraordinary
circumstances (such as fraud in obtaining the sale order or
collusive bidding), a successful bidder at a duly authorized
auction sale is entitled to assume that the agreement of sale
arising from that successful bid will be enforceable, without
parties in interest being allowed to revisit the pros and cons of
whether permitting an auction sale was in the best interest of
creditors and the estate.
II
The trustee contends that he ought to be allowed to abandon
the Property because of the burdens the estate would suffer were
he to complete the sales. 	If he abandons the Property,
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2 	Chesapeake contends that the equitable ownership of the
Property passed to the purchasers by reason of the contracts of
sale, with the trustee left with only legal title, but I need not
decide that issue.
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Chesapeake would be left with no ability to compel specific
performance by the trustee. 	Moreover, the trustee points out,
the debtor in possession executed contracts after the sale that
called for only a return of the purchasers’ deposits if the sales
were not completed, and obviously returning the deposits would
not impose a burden on the estate. 	In other words, the trustee
contends that the administrative claim for damages for not
performing the contract will be relatively harmless to the
estate.
I reject the trustee’s argument that he should be allowed to
abandon the Property and thereby avoid the burdens on the estate
that would arise from complying with the contracts. 	The trustee
can no more abandon the Property, over Chesapeake’s objection,
than he could enter into a contract of sale with a new purchaser
at a higher price.
The trustee surely could not sell the Property to a new
purchaser who would pay a greater amount than called for by the
existing contracts. 	True, 11 U.S.C. § 363 authorizes a trustee
to sell property of the estate upon approval of the court, and,
the trustee contends, the Property remains property of the
estate. 2 	But permitting the trustee, over objection of the
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purchasers under the existing contracts, to sell the Property to
a new purchaser would be inconsistent with the trustee’s binding
obligations under the existing contracts of sale, and it is
intuitive that he cannot be permitted to do so. 	The trustee
similarly ought not be permitted, over the objection of
Chesapeake, to abandon the property and thereby destroy the right
of the purchasers to seek specific performance as that is
similarly inconsistent with the trustee’s binding contractual
obligations. 	But why is it that the inconsistency of a new sale
or abandonment with the trustee’s binding contractual obligations
precludes such a new sale or an abandonment over Chesapeake’s
objection?
Under 28 U.S.C. § 959(b), a trustee:
shall manage and operate the property in his possession
as trustee . . . according to the requirements of the
valid laws of the State in which such property is
situated, in the same manner that the owner or
possessor thereof would be bound to do if in possession
thereof.
That provision supplies indirect support for the conclusion that
Chesapeake ought to be able to have the court bar an abandonment
of the property. 	If § 959(b) applied to a sale of the Property,
the attempted abandonment of the property would be viewed as
impermissible under § 959(b) because Maryland law would not
permit the trustee, over the objection of Chesapeake, to obtain a
court order frustrating the right of specific performance under
the subject contracts. 	Section 959(b) is not directly applicable
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because the trustee is not operating the Property as a business,
see Saravia v. 1736 18th Street, N.W. Ltd. Partnership, 844 F.2d
823, 827 (D.C. Cir. 1988), and, in any event, because a sale of
the Property is not an act of managing and operating the
Property. 	Nevertheless, § 959(b) furnishes evidence that
Congress did not intend that a bankruptcy trustee be allowed,
over the objection of an affected entity, to utilize her power of
sale under § 363 or her power of abandonment under § 554 to
frustrate the state law remedy of specific performance to which
she became subject after entering into a binding contract of
sale. 	Cf. Midlantic Nat. Bank v. New Jersey Dept. of
Environmental Protection, 474 U.S. 494, 505 (1986).
When a trustee is not operating the estate’s property as a
business and is only liquidating the estate’s property such that
§ 959(b) is inapplicable, her entry into a binding contract to
sell estate property nevertheless subjects her to nonbankruptcy
law governing that contract of sale. 	Section 363 may alter
nonbankruptcy law with respect to the steps leading to entering
into a binding contract for a sale of property, but with
exceptions (such as 11 U.S.C. § 363(n)) that are of no relevance
here, it does not purport to alter the law that will govern once
the trustee enters into that binding contract of sale.
Similarly, although 11 U.S.C. § 554 says that a trustee may
abandon burdensome property, it does not purport to alter the
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purchaser’s right, to which a trustee has subjected herself by
entering into a binding contract of sale, to request a court to
preclude the trustee from taking any step to frustrate the
purchaser’s right of specific performance.
Outside of bankruptcy, a purchaser under a contract of sale
would be entitled to enjoin any attempt by the seller to
frustrate the purchaser’s remedy of specific performance (such as
an attempt by the seller to convey the property to a new
purchaser). 	Nothing in the Bankruptcy Code precludes a purchaser
of property of the estate pursuant to a contract of sale entered
into with the bankruptcy trustee from similarly invoking the
purchaser’s rights under nonbankruptcy law to bar the trustee
from taking the step of abandoning the property in frustration of
the purchaser’s remedy of specific performance.
The trustee might argue that in one instance (inapplicable
here) the Bankruptcy Code expressly recognizes that a trustee may
use one of her statutory powers to evade the remedy of specific
performance with respect to an executory contract that became
binding on the trustee postpetition, and that this implies that a
trustee similarly may resort to the power of abandonment under
§ 554 to evade the remedy of specific performance with respect to
an executory contract entered into postpetition. 	Under 11
U.S.C. § 365(a), a trustee may assume or reject an executory
contract of the debtor. 	When the trustee assumes the executory
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contract it becomes binding on the trustee. 	Nevertheless, 11
U.S.C. § 365(g)(2), by addressing the time at which a breach of
an executory contract is deemed to have occurred when that
contract has been assumed but is later rejected, recognizes that
the trustee can invoke § 365(a) to reject an assumed contract.
Such rejection of the previously assumed contract makes the
remedy of specific performance unavailable to the other party to
the contract, leaving the party under § 365(g)(2) with only a
claim for breach (albeit an administrative claim for breach). 	If
the power of rejection can be brought to bear on an assumed
contract and the remedy of specific performance thereby evaded,
the argument would follow that a trustee is free as well to
invoke other statutory powers to evade the remedy of specific
performance with respect to a contract entered into by the
trustee postpetition.
But the express recognition in § 365(g)(2) that a trustee
has the right to reject an assumed contract and thereby evade
specific performance in the case of such an assumed contract
modifies the rights of the other party to the executory contract
that arose from assumption. 	Specifically, with respect to the
act of rejection, § 365(g)(2) makes unavailable to the other
party his right, under the nonbankruptcy law that became
applicable by reason of assumption, to bar the trustee from
taking any act to evade the remedy of specific performance.
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In contrast, when the trustee enters into a completely new
contract postpetition, she has no power to reject that contract
(as it is not a contract “of the debtor” under § 365(a)). 	In
turn, § 554 does not acknowledge a power to evade the right of
specific performance via abandonment, and thus does not negate
the other party’s right to invoke his right under nonbankruptcy
law (that came into place by reason of the trustee’s entering
into the contract) to bar the trustee from engaging in an act to
evade the remedy of specific performance. 	Thus, when a trustee
attempts to invoke § 554 to abandon the property that is the
subject of the contract, the other party is entitled to bar the
trustee from abandoning the property.
There is a sound reason why Congress would permit the
evasion of the remedy of specific performance in the case of an
assumed prepetition contract but not in the case of a contract
entered into postpetition. 	Were a court to permit a bankruptcy
trustee to abandon a property after having entered into a binding
contract of sale, that would likely lead to future bankruptcy
trustees’ sales of property yielding less than they would
otherwise because of the uncertainty that the trustee might
decide to abandon the property if she determines that completing
the sale will generate adverse consequences to the estate that
outweigh the benefit that the estate would realize by completing
the sale. 	This further supports the conclusion that the trustee
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3 	The trustee might also first abandon the property as
burdensome under 11 U.S.C. § 554, with rejection (instead of
assumption) of the executory contract being the step that
logically next follows. 	The abandonment of the property would
eliminate the remedy of specific performance even if the contract
were assumed.
11
here ought not be allowed, over the objection of Chesapeake, to
shirk his contractual obligation to perform under the contracts
of sale. 	It also distinguishes this case from the case of
rejection of an assumed executory contract of sale: such a
contract is necessarily one entered into prepetition, and
permitting the trustee to evade the remedy of specific
performance as to prepetition contracts will not lead to a
chilling of the amount that purchasers are willing to pay when a
trustee sells property postpetition.
III
This case is distinguishable from a trustee’s utilizing his
powers under the Bankruptcy Code to eliminate the rights to
specific performance held by a purchaser under a debtor’s
prepetition contract of sale. 	If a trustee invokes 11 U.S.C.
§ 365 to reject the contract of sale, the Bankruptcy Code
recognizes that although that step is inconsistent with what the
debtor had agreed to prepetition, it is not inconsistent with
conduct of the trustee. 3 	The rejection of a prepetition
executory contract that has not been assumed in the case
constitutes a breach of the contract immediately before the date
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4 	With respect to the time at which a breach is deemed to
have occurred, there is a caveat to this. 	If an executory
contract is assumed, and only later rejected, 11 U.S.C. §
365(g)(2) specifies a postpetition time at which the rejection is
deemed to constitute a breach of the contract.
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of the filing of the petition, 	11 U.S.C. § 365(g)(1), and gives
rise to a claim that is allowed “the same as if such claim had
arisen before the date of the filing of the petition.” 	11 U.S.C.
§ 502(g)(1). 	Accordingly, a purchaser entering into a contract
of sale outside of bankruptcy ought not make the mistake of
agreeing to a provision that fixes liquidated damages for breach
of the contract at a relatively small amount, thinking that he
can always obtain specific performance if the liquidated damages
provision would not make him whole. 	Contracts are written with
the bankruptcy laws being an element of the contract that will
govern what happens when bankruptcy intervenes, and the remedy of
specific performance under the prepetition contract of sale can
be eliminated through rejection of the executory contract. 	The
purchaser’s right under nonbankruptcy law to have a court prevent
the seller from frustrating its right to specific performance
does not come into play because the trustee is not bound by the
contract (other than with respect to a claim for breach as of the
petition date) if she rejects the contract. 4
But the contracts of purchase at issue here did not expose
Chesapeake to a risk that the trustee would be able, despite
objection by Chesapeake, to reject the contracts, or otherwise
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act to evade Chesapeake’s remedy of specific performance. 	The
contracts are not executory contracts “of the debtor” within the
meaning of 11 U.S.C. § 365 (a) that can be rejected pursuant to
that provision. 	Because the debtor in possession was exercising
the powers of a trustee pursuant to 11 U.S.C. § 1107(a) in
selling the property, the sales contracts were contracts of the
estate, not of the debtor. 	Moreover, the estate (through the
successor trustee) did not retain a right, over Chesapeake’s
objection, to abandon the Property. 	The binding contracts of
sale subjected the estate to Chesapeake’s right under
nonbankruptcy law to have the court bar any act by the trustee
that would destroy the purchasers’ rights to specific performance
of the contracts. 	In no way can Chesapeake be treated like a
prepetition purchaser whose contract necessarily includes the
prospect that if bankruptcy intervenes, the purchaser will be
powerless to prevent a trustee’s rejecting the executory contract
if assumption of the executory contract would be disadvantageous
to the estate.
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14	O:\TEEL\Judge Temp Docs\Linton Properties - Mem Decsn re Abandonment Issuev2.wpd
IV
An order follows sustaining Chesapeake’s objection to the
trustee’s proposed abandonment of the Property.
[Signed and dated above.]
Copies to: Debtor; Debtor’s attorney; Chapter 7 Trustee; Office
of United States Trustee; Katherine M. Sutcliffe Becker, Esq.;
Troy C. Swanson, Esq.; Craig M. Palik, Esq.
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