The Ninth Circuit's Bankruptcy Appellate Panel Holds That a Non-Debtor Spouse May Purchase a Debtor's Claims Under Section 363(i) When a Third Party's Prior Purchase of the Same Claims Was Not Consummated (e.g. Payment Was Not Tendered)

The Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently issued the opinion, Kallman & Co. LLP Gottlieb (In re Lewis), BAP No. CC-13-1367-TaDKi (9th Cir. BAP Aug. 20, 2014), which held that a non-debtor spouse may purchase a debtor's claims under Section 363(i) of the Bankruptcy Code when a third party's prior purchase of the same claims was not consummated. Prior to filing bankruptcy, the Debtor commenced an action against Kallman & Co. LLP (K&C), his former employer, in California state court ("Claims"). The Debtor then filed a Chapter 7 bankruptcy filing, but the Debtor's spouse ("Non-Filing Spouse") was not included in the bankruptcy filing and was thus not a debtor. K&C and the Chapter 7 Trustee reached an agreement where K&C would purchase the Claims for $40,000, subject to a minimum overbid of $10,000. The bankruptcy court overruled opposition by the Debtor and since there were no overbids, approved the sale under Section 363(b) of the Bankruptcy Code to K&C ("K&C Sale Order"). However, one week after the K&C sale hearing, the Non-Filing Spouse notified the Trustee that she intended to exercise her right under Section 363(i) to purchase the Claims for $40,000.

The Debtor timely moved for reconsideration of the K&C Sale Order and the Chapter 7 Trustee concurrently moved to approve a stipulation to sell the Claims to the Non-Filing Spouse under Section 363(i). The parties were unable to find any case law establishing the date of consummation for purposes of Section 363(i). The bankruptcy court approved the Section 363(i) motion. The BAP affirmed the findings of the bankruptcy court. Specifically, the BAP found that for purposes of Section 363(i), "consummation" means when the sale is complete, accomplished, finished, or at the ultimate end. In general, "consummation" involves more than mere approval of a sale and requires finalization of the sale (e.g. typically payment has been made). Since K&C had not provided payment to the Chapter 7 Trustee immediately, its purchase was not consummated and the Non-Filing Spouse's right to purchase the Claims superseded K&C's purchase right.

The BAP opinion was critical of K&C's decisions not to pay the purchase price immediately, not to obtain a waiver of the Rule 6004(h) stay and not to seek a Section 363(m) finding that provided protection on appeal. Rather, K&C provided the Non-Filing Spouse with sufficient time to assert her Section 363(i) right. To see the full opinion, please click here.

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