Short Sales of Real Estate

At Shenwick & Associates, with the continuing fall in the value of real estate, we have received many inquiries regarding short sales of real estate (where the balance on the loan exceeds the value of the real estate in residential or commercial properties). Section 363 of the Bankruptcy Code concerns the use, sale or lease of property, and has been in the news of late with the GM and Chrysler bankruptcies. There are two ways to sell real estate or other assets in bankruptcy. One is pursuant to Section 363 of the Bankruptcy Code, and the other is pursuant to a confirmed bankruptcy plan.

While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.

Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.

Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.