The Best Laid Plans: How a Proposed Sale of NYC Real Estate Under Section 363 of the Bankruptcy Code Went Awry
There are several ways in which property owners can advantageously use the Bankruptcy Code to effectuate strategic dispositions of assets. But the bankruptcy process can be fraught with uncertainty that can upend the best laid plans. The matter of In re Wansdown Properties Corp. N.V., No. 19-13223 (SMB), 2020 WL 5887542 (Bankr. S.D.N.Y. Oct. 5, 2020) provides an instructive and cautionary example.
In that case, 29 Beekman Corp. (“Beekman”) agreed to purchase a townhouse located at 29 Beekman Place in New York City (“Townhouse”) from the debtor Wansdown Properties Corporation N.V (“Wansdown”) for $10,300,000 (“Sales Price”). The Townhouse was Wansdown’s primary asset. Pursuant to the parties’ Residential Contract of Sale dated September 29, 2019 (“Agreement”), Beekman tendered a down payment of $1,030,000 (“Downpayment”) upon contract execution.
The Agreement provided that Wansdown would file for chapter 11 and that the sale of the Townhouse would be “subject to... receipt of requisite authority under the Bankruptcy Code pursuant to, among other things, the entry of an order confirming the Plan, or if not possible, then approving a 363 Sale.’” Id. at *1. But the Agreement remained binding even in the absence of a formal bankruptcy case.
A so-called “363 sale” is the sale of all or substantially all of a debtor’s assets under section 363 of the Bankruptcy Code. Here, Beekman desired a confirmed plan instead of a 363 sale because while the State of New York imposes a “Mansion Tax” on conveyances of certain real estate including the Townhouse, section 1146(a) of the Bankruptcy Code exempts imposition of the Mansion Tax when a transfer of assets occurs under a confirmed plan. Since the Agreement obligated Beekman to pay any applicable Mansion Tax, avoiding a 363 sale to obtain that exemption would have saved Beekman $334,750.
Importantly, Wansdown represented under the Agreement that:
‘the net proceeds of a sale under this Contract would be sufficient to satisfy all claims against Seller and, as reasonably projected, Seller's contemplated estate in bankruptcy...’ Beekman's obligation to purchase the Townhouse was subject to the fulfillment of several conditions precedent, including the ‘accuracy, as of the date of Closing, of the representation and warranties of Seller made in this contract.’ Id. at *2.
The closing under the Agreement was to occur no later than 45 days after the Bankruptcy Court’s Confirmation Order became final and non-appealable. Although the Agreement set a January 31, 2020 closing deadline, it also allowed for extensions “‘on one or more occasions, until the earlier of 30 days after the entry of the Confirmation Order or January 31, 2021 by notice to Seller...’” Id.
Wansdown filed for chapter 11 on October 8, 2019 and submitted a modified plan (“Plan”) and modified disclosure statement (“Disclosure Statement”) the following day. The Plan contemplated Wansdown’s sale of the Townhouse to Beekman in a net amount sufficient to pay all of Wansdown’s creditors as required by the Agreement. On December 12, 2019, the Court preliminarily approved the Disclosure Statement and scheduled a hearing on final approval of the Disclosure Statement and confirmation of the Plan for January 14, 2020 to permit Wansdown to obtain a final, non-appealable order confirming the Plan by the January 31, 2020 deadline imposed by the Agreement.
Wansdown’s plan went awry on December 31, 2019, when its sole shareholder, Pelmadulla Stiftung Vaduz (“Pelmadulla”), “filed a general unsecured proof of claim in the sum of $3,243,941.19 based on a purported loan to” Wansdown (“Pelmadulla Claim”). Id. at *3. As a result, Wansdown could not confirm the Plan because, despite contesting the Pelmadulla Claim, the sale to Beekman would not produce sufficient proceeds to reserve for it. Thus, Wansdown changed course and elected to proceed with a 363 sale.
Wansdown filed a motion to approve the sale of the Townhouse, which the Bankruptcy Court expedited to allow Wansdown to meet the contractual closing deadline. Beekman and Wansdown then engaged in settlement negotiations to extend that deadline. These negotiations proved unsuccessful. Consequently, Wansdown’s only alternative to meet the closing deadline was to move forward with a 363 sale, but Beekman was only willing to do so if Wansdown assumed the obligation to pay the Mansion Tax. Wansdown declined.
At this point, Beekman tried to change the terms of the Agreement by sending a letter (“January 15 Letter”) to Wansdown stating it would only consent to a 363 sale if Wansdown agreed to assume Beekman’s obligation to pay the Mansion Tax. Wansdown never agreed and the hearing on Wansdown’s motion to approve the sale of the Townhouse proceeded. Although Beekman had counsel present at this hearing, it never filed a formal objection to Wansdown’s motion. The Court signed the Sale Order approving the terms Agreement, authorizing Wansdown to assume the Agreement, and concluding the sale was negotiated at arm's length and in good faith pursuant to section 363(m) of the Bankruptcy Code. The Sale Order became final and non-appealable on January 30, 2020, thus allowing Wansdown to meet the Agreement’s closing deadline.
The parties agreed to adjourn the closing to February 10, but the transaction never closed. On February 10:
Beekman advised [Wansdown] that it was exercising its right pursuant to... [the] Agreement to extend the closing to March 10, 2020. This date, however, fell beyond the Final Date permitted under the express terms of the Purchase Agreement... On February 18, 2020, [Wansdown] notified Beekman it was terminating the... Agreement based on Beekman's failure to close by [February 10, 2020] and intended to retain the Downpayment as liquidated damages... [Wansdown] eventually sold the Townhouse for $11,500,000 to another buyer under a revised plan” (citations omitted). Id. at *5.
The parties each filed adversary proceedings to obtain clarity regarding the disposition of the Downpayment. After both parties filed motions for summary judgment, the Court held that the Agreement was unambiguous as to the deadline to close the sale of the Townhouse and that the deadline could not be extended beyond February 18, 2020. The Court also found that Beekman anticipatorily breached the Agreement on two occasions, first when it sent the January 15 Letter, and second when it failed to close the transaction on the agreed upon extended date of February 10, 2020. The latter breach resulted in large part because Wansdown provided Beekman with a “time of the essence” letter specifying the February 10, 2020 closing date, which under New York law requires each party to a real estate contract to tender timely performance with respect to the agreed closing date.
Accordingly, the Court held that the only outstanding disputed issue of material fact is whether Wansdown was ready, willing, and able to close on February 10, 2020. This issue is determinative regarding Wansdown’s ability to comply with it its representation under the Agreement that the sales proceeds are sufficient to pay all of Wansdown’s creditors. As such, this case provides a valuable lesson clarifying that asset sales subject to approval of a Bankruptcy Court carry inherent risk associated with Court’s and Code’s rules and timelines, as well as unanticipated factors such as surprise creditors who can present difficulties in executing the parties’ contemplated plan.