The trustee, however, cannot as a matter of right sell property co-owned with a non-debtor co-owner as tenants in common, join tenants, or TBE. Instead, the trustee can seek to sell such co-owned property by satisfying the balancing test created by 11 U.S.C. 363(h). The trustee must show 1) a partition of the property among the co-owners is impracticable; 2) sale of the estate’s undivided interest would realize significantly less for the estate than sale of such property free of the co-owner’s interest; 3) the benefit to the estate outweighs the detriment to the co-owners; and 4) such property “is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.” To pursue a 363(h) sale, the trustee must commence an adversary proceeding (a lawsuit contained within the bankruptcy case) against the co-owner.
Even if the trustee satisfies the balancing test, a co-owner is still given an opportunity to purchase and retain the property. The Bankruptcy Code provides that the co-owner be given an opportunity to purchase the property at the price at which the sale is to be consummated. Lastly, if a sale of the property does occur, the co-owner is, obviously, entitled to his share of the proceeds minus costs and expenses, except for the Trustee’s compensation, which is paid entirely from the estate’s share of the proceeds.
As indicated above, although the bankruptcy code lessens the protection offered to owners as TBE, it does not completely eliminate the protection. The Trustee must commence an adversary proceeding against the co-owner and engage in the balancing test outlined above. Thus, a co-owner is given notice and the opportunity and ability to protect his co-owned property. Regardless, one thing is for certain: if a co-owner files for bankruptcy, the non-debtor co-owner is at risk of potentially losing property, irrespective of ownership type.
Understanding how real property interests will be impacted by a bankruptcy filing is critical to matrimonial counsel. The prospect of one spouse filing bankruptcy brings a trustee, creditors, and other parties into the equation, which are looking to protect the interests of the creditors; the creditor’s agenda is almost always adverse to the feuding spouses. Accordingly, in appropriate circumstances, bankruptcy and its impact is used in negotiating matrimonial settlement agreements between spouses.