In re: Groves
Facts: A tenant-in-common (TIC) co-owner owns commercial property with a limited liability company (LLC) wholly owned by the co-owner. The co-owner and the LLC take out a mortgage secured by a trust deed on the property. Later, the co-owner files for Chapter 13 bankruptcy. A bankruptcy court determines the trust deed does not encumber the bankrupt co-owner’s interest in the property. The mortgage holder takes no further action to protect their trust deed lien on the property. The bankrupt co-owner then seeks to sell the jointly owned property free and clear of the mortgage holder’s lien encumbering the LLC’s interest in the property.
Claim: The bankrupt co-owner claims they may contest the distribution of the sales proceeds entitled to the LLC since they are TICs with the LLC and the mortgage holder forfeited their secured claim against the LLC’s interest in the property by not seeking to fully enforce their security interest in the property in the bankruptcy proceedings.
Counterclaim: The mortgage holder claims they are entitled to the LLC’s share of the net sales proceeds for amounts remaining unpaid on the trust deed note since the bankrupt co-owner has no standing to contest the distribution of another co-owner’s share of the net sales proceeds as only a co-owner may contest the distribution of their net sales proceeds.
Holding: A United States Bankruptcy Appellate court holds the bankrupt co-owner has no standing to contest the distribution of the LLC’s share of the net sales proceeds since only the LLC as an encumbered co-owner may contest the distribution of their own share of net sales proceeds. [In re: Groves (2023) 652 BR 104]
Editor’s Note: An appeal was filed by the mortgage holder in this case challenging whether their trust deed encumbered only the LLC’s interest in the property. Stay tuned to the firsttuesday Journal for future updates on this case.
Related Article:
Bankruptcy’s tie to homeownership
Related Reading:
Legal Aspect of Real Estate, Chapter 26: Tenants in common as a vesting
