One of the benefits of purchasing a debtor’s assets through the bankruptcy process is the opportunity to obtain an order from a bankruptcy court approving the sale free and clear of other parties’ interests in the purchased property, pursuant to § 363(f) of the Bankruptcy Code. Through such “free and clear” sale orders, purchasers can preclude parties that had an interest in a property prior to the sale from later asserting such interests against the purchaser, including, but not limited to, claims against the purchaser for unpaid fees associated with the pre-sale use of the purchased property.
Occasionally, municipalities that provide utility services will challenge the application of a free-and-clear sale order to unpaid utility charges, claiming that such unpaid charges run with the land and/or are taxes that cannot be barred by § 363(f). However, in a recent decision by the U.S. Bankruptcy Court for the Northern District of Illinois, In re Vista Mktg. Grp. Ltd.,[1] the court held that a sanitary district’s assessment of a post-sale “connection charge” associated with wastewater at a purchased parcel of real property was barred by a § 363(f) free-and-clear sale order. In so holding, the court determined that the connection charge neither ran with the land nor was a tax. Thus, the sanitary district’s attempt to collect the connection charge from the purchaser post-sale violated the court’s sale order.
Facts
The debtor owned and operated a gas station convenience store in Rockford, Ill. The Rock River Water Reclamation District is an Illinois Sanitary District that manages and reclaims wastewater for properties located in Rockford. In 2006, the District issued a connection permit for the debtor’s gas station property based on expected wastewater usage.
On Jan. 3, 2013, after filing for bankruptcy, the debtor filed a motion to approve the debtor’s sale of its gas station property “free and clear of all liens with all liens to attach to the proceeds” pursuant to § 363(f) of the Bankruptcy Code.[2] The District was one of the parties that received notice of the debtor’s motion to sell the gas station property, but it did not object to the proposed sale, so an order approving the sale was entered by the court. In fact, upon receiving notice of the motion, the District provided the title company with a final bill for amounts owing through closing, which was paid from the proceeds of the sale.
Less than a month after the sale, the District attempted to collect an additional connection charge from the purchaser because of larger-than-expected wastewater usage during the four prior quarters. Not surprisingly, the purchasers objected based on the free-and-clear sale order. In response, the District claimed that the connection charge ran with the land and/or was a tax that could not be barred by the sale order.
The Decision
The court held that the sale order barred the connection charge from being asserted against the purchaser by first holding that the connection charge assessed by the District was an “interest,” as that term has been broadly interpreted under § 363(f) of the Bankruptcy Code. Additionally, the court found that the District could be compelled to accept a money satisfaction for its interest, as payment was exactly what the District was attempting to collect from the purchaser. Accordingly, under § 363(f)(5) of the Code, the debtor’s property could be sold to the purchaser free of the District’s connection charge because the District “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”[3]
The court also explained “that the District failed to timely object to the motion to sell or to assert[] its interest upon receiving notice of the proposed sale of the propert[y] ‘free and clear.’”[4] Therefore, the District is deemed to have consented to the sale free and clear of its connection charge interest pursuant to § 363(f)(2) of the Code.[5] Furthermore, the District did not appeal the order approving the free-and-clear sale of the debtor’s property, nor did it seek a stay of the order. Accordingly, pursuant to § 363(m) of the Bankruptcy Code, the validity of the sale was no longer subject to challenge.[6]
The court then proceeded to address the District’s tax arguments by determining that the applicable increased connection charge could only be asserted by the District based on a review of an initial three-year post-permit issuance period under the applicable statute. Since the initial three-year post-permit period concluded two years before the debtor filed for bankruptcy, any interest of the District’s based on a potential increased assessed connection charge was assessable as of the petition date, thus it was dischargeable interest under the sale order.
Moreover, the court held that the District’s connection charge was not a tax that the court was prohibited from enjoining pursuant to the Tax Injunction Act.[7] As the court explained, the funds collected from the District’s connection charges are primarily used for reimbursing the District for waste-management usage, not a tax revenue that could be used to fund other benefits of the municipality. Even if the connection charge was a tax, as stated above, the District had notice of the sale and failed to object. Accordingly, the District would be “barred by res judicata from attempting to collaterally attack[] the original sale order by asserting the Tax Injunction Act.”[8]
Takeaway
The Vista decision should act as a warning for any party that holds an interest in property that may be sold by a debtor in bankruptcy, including entities, and even municipalities, that provide utility services. All interest-holders must be diligent in assessing potential interests in property of the debtor’s estate and vigilant in raising objections, if necessary, to the sale of a debtor’s property free and clear of potential interests. Otherwise, potential interest-holders risk having their interests barred by a “free and clear” sale order pursuant to § 363(f) of the Bankruptcy Code.
From a purchaser’s perspective, the Vista decision is a reminder of the power and potential benefit of a § 363(f) free-and-clear sale. Free-and-clear sales approved pursuant to § 363(f) of the Bankruptcy Code may bar interest-holders from asserting claims against a purchaser post-sale that are related to property purchased from a debtor, especially when such interest-holders are provided notice and fail to object to such sales.
[1] In re Vista Mktg. Grp. Ltd., --- B.R. ----, 2016 WL 4764904 (Bankr. N.D. Ill. Sept. 12, 2016).
[2] Id. at *1.
[3] 11 U.S.C. § 363(f)(5).
[4] Vista, 2016 WL 4764904, at *4.
[5] 11 U.S.C. § 363(f)(2) (stating debtor’s property may be sold free and clear of an interest when the interest-holder consents).
[6] Id. at § 363(m) (“[T]he reversal or modification on appeal ... does not affect the validity of a sale ... to an entity that purchased ... such property in good faith ... unless such authorization and such sale ... were stayed pending appeal.”).
[7] The Tax Injunction Act states that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a … speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341.
[8] Vista, 2016 WL 4764904, at *8 (citation omitted).