Carve-out agreement will only be allowed if Chapter 7 trustee rebuts presumption of impropriety

The Ninth Circuit U.S. Bankruptcy Appellate Panel in In re KVN Corp., Inc., 13-1318, decided July 29, 2014, remanded a bankruptcy case from the Northern District of California to determine if a carve-out agreement reached between a Chapter 7 trustee and a bank resulted in a benefit to the bankruptcy estate. Upon the debtor’s bankruptcy filing, the bank approached the trustee seeking her aid in selling the lender’s collateral. The trustee agreed but in exchange, required the bank to pay storage costs and split the net proceeds from the sale with the estate. The trustee estimated the sale would earn up to $4,400 for the benefit of unsecured creditors. The Bankruptcy Court denied approval of the carve-out agreement and the trustee appealed. The BAP agreed with the Bankruptcy Court that generally, fully encumbered property should not be sold by a Chapter 7 trustee and that there is a presumption of impropriety in carve-out agreements but that carve-out agreements are not per se banned. In order to rebut the presumption of impropriety, however, a trustee must show that s/he has fulfilled his/her basic duties, that the agreement benefits the estate, and the terms of the agreement were fully disclosed. In this case, the BAP had a difficult time finding that the carve-out agreement was in the best interest of the estate and remanded the case. Click here to read the full opinion.