Trustee Blog

Over Bidders at Bankruptcy Auctions

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The other day I was speaking with Riverside Chapter 7 Trustee Todd Frealy. He said that he has been involved in several auctions for chapter 7 trustees where there have been “over-bidders” on the property. This means that the property the trustee collects that is not-exempt is then sold to bidders at an auction at a price that is more than expected. The Trustee will usually make a deal with the debtor to have the debtor “buy back” from the estate unkempt property. The item, whether it is a house, commercial property, an interest in note or some other property is given a value in the notice of sale. The bidders then bid up the price due to the demand for the item or real property.

The auction is done under court approval and the monies received are used by the bankruptcy trustee to pay off debts of the bankruptcy estate. In the case of a house or real estate or car, the bankruptcy trustee usually hires a broker. Trustee holds broad authority to select her professionals. The qualification for employing a broker, though are rather low. Under 11 U.S.C. 327, the Trustee has the burden of providing evidence to show that (1) the Broker does not have an interest adverse to the estate; and (2) the Broker is a disinterested person.

The trustee must show to the Bankruptcy Judge that the liquidation of the property is in the best interest of the creditors. If the property is not exempt and enough money will come into the estate, then this burden is lifted. The money that comes into the bankruptcy estate is used to pay the creditors and the expenses of the trustee. This is the typical case.

In what Mr. Frealy was talking about of “over-bidders”. The real estate market has driven up prices in what a trustee can think he or she can sell property for. For example a trustee finds an asset that he can sell and it is not exempt. The Debtor wants to keep the property and agrees to buy it from the trustee. If the House is worth $200,000 when the notice of the sale goes out and then a few months later the house is now worth $220,000. The trustee can accept the “over-bid” on the property. Though the property has been noticed to the public at $200,000, the property sells for $220,000 and the extra money goes in the the estate to pay the creditors.  The Trustee has to accept “over-bids” from outsiders and the debtor must now bid against these outside people.

This is common in a rising real estate market. Mr. Frealy said in the last he week, he has seem the overbid in the commercial real estate market. He obtained an interest in commercial property in two separate cases and both drew over-bidders. This is indication that investors think the commercial real estate market will continue to rise. The investors buy low and hope to sell high.

Mr. Frealy thought this was because there is much investor money out in the market and investor think they can make more more buying these properties. Trustee Frealy also said he had an “over-bidder” in a promissory note and the right to receive payment on this note.

 Practice Pointer: In this rising real estate market, if the debtor has property that he cannot exempt, he may not be able to buy the property back from the trustee. The debtor may have to bid against outside investors that drive up the price of the property. This property can be homes. commercial property, autos or any other type of property: even promissory notes.


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