In re Corbett
| Decision Date | 03 May 2016 |
| Docket Number | Case No. 11–13667–JNF |
| Citation | 550 B.R. 170 |
| Parties | In re Daniel P. Corbett, Debtor |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Jordan L. Shapiro, Shapiro & Hender, Malden, MA, Tal Unrad, Burns & Levinson LLP, Boston, MA, for Debtor.
Joan N. Feeney
On January 5, 2016, Cathleen E. Kavanagh, Trustee of the April Realty Trust (“Kavanagh”), filed a Request for Payment of Administrative Expense. Through the Request for Payment, Kavanagh seeks payment of “an administrative expense priority claim pursuant to 11 U.S.C. § 503(b)
and § 507(a)(1)(C) and (a)(2) in an amount to be determined by the Court.” Specifically, Kavanagh seeks an administrative expense in this case for attorneys' fees incurred in both opposing the Motion to Modify Sale Order filed by Goodwill Enterprises, Inc. d/b/a Auto Mall Collections (“Goodwill”) and defending an action commenced by Goodwill in the Land Court, Department of the Massachusetts Trial Court, because those fees were incurred as a result of the Trustee's breach of warranty to her as a purchaser of estate assets. The Chapter 7 Trustee filed an Opposition to Kavanagh's Request for Payment because “the sale of the beneficial interest was in fact free and clear of liens,”1 and because “in any event the claim asserted by the Buyer [Kavanagh] is not a claim for actual, necessary costs or expenses in preserving the estate.”
On February 3, 2016, the Court held a hearing on the Request for Payment and the Trustee's Opposition. On February 9, 2016, the Court issued an order requiring the parties to file post-hearing memoranda of law on certain legal issues including, but not limited to, the following: 1) whether Kavanagh has a breach of warranty claim under the Order Authorizing and Approving Private Sale of Interest in 218 Andover Street Peabody LLC and Interest in 218 Andover Street Peabody Realty Trust, the “Membership/Beneficial Interest Purchase Agreement,” the “Assignment of Membership Interest,” or the “Assignment of Beneficial Interest;” 2) whether the principles set forth in Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968)
, apply in this Chapter 7 case; 3) whether the present contingent nature of any administrative expense Kavanagh may have, which is dependent on a judgment against Kavanagh in pending Land Court litigation commenced by Goodwill affects its allowance as “actual, necessary costs and expenses of preserving the estate” under 11 U.S.C. § 503(b) (emphasis supplied); 4) whether Kavanagh is entitled to an administrative expense, either directly or through principles of indemnification, against the estate for either damages or attorneys' fees in the event the Land Court determines that the purchase of the estate's beneficial interest in the Realty Trust triggered Goodwill's right of first refusal; 5) whether the principles set forth in Brandt v. Lazard Freres & Co., LLC. (In re Healthco Int'l, Inc.), 310 F.3d 9 (1st Cir.2002), apply to attorneys' fees incurred by Kavanagh in defending Goodwill's claims; and 6) whether the potential loss by Kavanagh is sufficient to confer administrative expense status.
The parties complied with the Court's order and filed briefs on April 6, 2016. As the facts are not in dispute and neither party requested an evidentiary hearing, the Court makes the following findings of fact and conclusions of law.
The Debtor filed a Chapter 7 petition on April 22, 2011. On July 20, 2012, the Chapter 7 Trustee filed a Motion for Order Authorizing and Approving Private Sale of Interest in 218 Andover Street Peabody LLC (the “LLC”) and Interest in 218 Andover Street Peabody Realty Trust (the “Realty Trust”) to Miriam Garland. Pursuant to his Motion, the Trustee sought authority to sell, “pursuant to 11 U.S.C. § 363
, Fed. R. Bankr.P.2002(a)(2) and 6004, and MLBR Rule 2002–5 and 6004–1, all of the Trustee's right, title and interest in (a) 218 Andover Street Peabody LLC ... and (b) 218 Andover Street Peabody Realty Trust ... (collectively, the “Property”), free and clear of all liens, claims, encumbrances and other interests, with all liens, claims, encumbrances and other interests to the extent valid attaching to the sale proceeds.”2 In his Sale Motion, the Chapter 7 Trustee stated that he did not believe there were any such perfected, enforceable, valid liens, claims, interests, or encumbrances on the Property (defined as the bankruptcy estate's interests in the LLC and the Realty Trust), other than a mortgage in favor of North Shore Bank. The original offeror, Miriam Garland, William F. Garland's spouse, offered $185,000 in cash for the Debtor's membership interest in the LLC and beneficial interest in the Trust.
Following a sealed bid auction, the Court determined that the April Realty Trust was the successful bidder for the estate's beneficial interest in the Realty Trust (the “Beneficial Interest”), which holds title to real estate located at 218 Andover Street, Peabody, Massachusetts, as well as the estate's membership interest in LLC, for a total purchase price of $250,250.3 On August 31, 2012, this Court entered an Order Authorizing and Approving the Private Sale of the Property to Kavanagh “in accordance with the terms contained in the Motion and the Membership /Beneficial Interest Purchase Agreement.”
In conjunction with the purchase, the Chapter 7 Trustee of the estate of Daniel P. Corbett (the “Debtor”) and Kavanagh executed a “Membership/Beneficial Interest Purchase Agreement,” an “Assignment of Membership Interest,” and an “Assignment of Beneficial Interest.” The Membership/Beneficial Interest Purchase Agreement contained the following representations and warranties by the Trustee as Seller:
The Assignment of Membership Interest provides: “The Assignor [the Trustee] warrants and represents to the Assignee that the Estate owns the Assigned Interest free and clear of any liens, claims or other encumbrances and that Assignor has full right and authority to transfer the Assigned Interest to the Assignee.” The Assignment of Beneficial Interest provides:
Except as set forth in the next sentence, the Assignor [the Trustee] warrants and represents to Assignee [Kavanagh] that the Estate owns the Assigned Interest free and clear of any liens, claims or other encumbrances and that the [Trustee] has the full right and authority to transfer the Assigned Interest to the Assignee [Kavanagh]. The foregoing warranties and representations shall apply to attachments and other liens placed against the interest of Corbett in the Realty Trust or the Property but shall not apply to other encumbrances or matters affecting the title of the Property.
(Emphasis supplied).
Approximately three years after the entry of the Sale Order, on August 31, 2015, Goodwill, an entity that did not hold a claim against the Debtor and did not receive notice of the Trustee's Motion for Order Authorizing and Approving Private Sale, filed a Motion to Modify Sale Order. On October 26, 2015, this Court issued a Memorandum and Order with respect to the Motion to Modify addressing Goodwill's assertion that the sale to Kavanagh is subject to its right of first refusal which is set forth in its unrecorded Lease with the Realty Trust. The Court issued the following order:
[T]he Court allows in part and denies in part the Motion to Modify Sale Order filed by Goodwill Enterprises, Inc., d/b/a Auto Mall Collections. The Court clarifies that it made no determination that the Chapter 7 Trustee's sale of the bankruptcy estate's interests in the 218 Andover Street Peabody Realty Trust and the 218 Andover Street Peabody LLC triggered the right of first refusal contained [in] a lease between the 218 Andover Street Peabody Realty Trust and Goodwill Enterprises, Inc., as the successor in interest to the original lessee. The Court abstains from all other issues raised by Goodwill in its Motion to Modify Sale Order.
The effect of the Court's order was that Goodwill, as the holder of a right of first refusal, could pursue its rights and remedies in the Land Court in its action against William F. Garland, individually and as Trustee of the 218 Andover Street Peabody Realty Trust, and Cathleen Kavanagh, Trustee of the April Realty Trust. Approximately two months after the entry of the abstention order, on January 5, 2016, Kavanagh, as noted above, filed the Request for Payment of Administrative Expense Claim, seeking an administrative expense priority claim against the Debtor's estate pursuant to 11 U.S.C. § 503(b)
and § 507(a)(1)(C) and (a)(2) in an amount to be determined after resolution of the Land Court action.
Kavanagh argues that the April Realty Trust is entitled to an administrative expense for fees incurred in defending its title to the Beneficial Interest in the Realty Trust, including opposing Goodwill's Motion to Modify and responding to Goodwill's complaint in the Land Court. With respect to the specific issues identified by the Court the parties argue as follows.
Kavanagh contends that because the Assignment of Beneficial Interest was attached to the Trustee's Motion for Order Authorizing and Approving Private Sale, this Court approved the form of assignment, including the Chapter 7 Trustee's representations and warranties which provided that the estate owned the Beneficial...
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