HARRISBURG – A panel trio of judges on the U.S. Court of Appeals for the Third Circuit has affirmed a lower federal court’s ruling that a York County property’s sale transaction was in fact an auction with reserve, rather than an absolute auction.
The case was decided by Third Circuit judges Cheryl Ann Krause, Peter J. Phipps and Morton I. Greenberg on Sept. 23, with Phipps authoring the Court’s opinion.
The instant case concerns a dispute about the auction of real property as part of a bankruptcy proceeding. The property – a house and 28 wooded acres located on Trone Road, Glenville, York County, Pennsylvania – was residential property that the debtor, Megan Thomas, co-owned with her estranged husband, and it was subject to a lien of approximately $400,000 held by M&T Bank.
The highest bidders at the auction, appellants Christopher and Natalie Spagnola, bid $255,000 for the property, but the Bankruptcy Court did not approve the auction sale because, at that price, the proceeds from the sale would not cover M&T Bank’s lien.
That is the crux of the dispute: The Spagnolas assert that the auction was ‘absolute,’ meaning that the sale was free and clear of the lien, while M&T Bank contends that the auction was ‘with reserve,’ meaning that the sale price at the auction had to cover its lien.
Phipps explained the controversy in the case comes from two orders by the Bankruptcy Court.
“The first order, the plan confirmation order, provided that the Trone Road property had to be sold within a year to pay M&T Bank ‘up to the full amount of its allowed secured claim,” Phipps said.
“The Bankruptcy Court later issued the second relevant order, the amended auction sale order, in an adversarial proceeding (which was necessary to account for the co-ownership interests of Thomas’s estranged husband). That order conditioned the sale upon M&T Bank’s being paid in full for its lien: Nothing contained herein shall approve the sale of the Trone Road Property unless M&T Bank is paid in full on account of the loan secured by its first priority mortgage lien on Trone Road.”
After those orders, Thomas arranged for the auction. In contracting with the auctioneer to sell the property, she specified that the auction would be absolute. The auction was also advertised as an absolute auction. Nonetheless, Thomas’s counsel informed the auctioneer that the auction was subject to the full value of M&T Bank’s lien.
“To resolve the dispute about the type of auction that its orders required, the Bankruptcy Court held an evidentiary hearing. It determined that the plan confirmation order contained ambiguities, but the amended auction sale order did not, and therefore the amended auction sale order controlled. With that, the Bankruptcy Court concluded that the auction was not an absolute auction but rather it was an auction with reserve. And because the sale price did not exceed the amount of the lien, the Bankruptcy Court did not approve the sale,” Phipps said.
“The Spagnolas disagreed with that ruling, and they appealed to the District Court, which affirmed the Bankruptcy Court’s ruling. The Spagnolas now appeal that ruling and seek to recoup their attorneys’ fees and other costs associated with the auction as administrative expenses. For the reasons below, we will affirm the judgment of the District Court.”
Phipps explained the order did not specify the precise amount of M&T Bank’s recovery, but rather it provided a range for that recovery – somewhere between nothing and the value of its lien.
Phipps added that at a future point, the amount of that recovery would have to be determined with certainty, and stated that what the Amended Auction Sale Order did.
“It allowed a recovery amount within that range, albeit at the top of that range: The value of M&T Bank’s lien. The orders, therefore, were not in tension; the amended auction sale order provided a value within the range identified by the plan confirmation order. That later-in-time specificity meant that the auction was with reserve, and thus neither the District Court nor the Bankruptcy Court erred in rejecting the auction sale for the property for a value less than the amount of M&T Bank’s lien,” Phipps said.
“Finally, the Spagnolas request reimbursement from the estate for their attorneys’ fees and other expenses in connection with the auction as administrative expenses. The Bankruptcy Code permits payment of ‘the actual, necessary costs and expenses of preserving the estate’ expenses ‘after notice and a hearing.’ But the Spagnolas did not preserve that issue for purposes of this appeal.”
U.S. Court of Appeals for the Third Circuit case 19-1932
U.S. District Court for the Middle District of Pennsylvania case 1:18-cv-00011
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com