Law Review: Joseph Peter Gomez, Note, A Bona Fide Dispute: Can Bankrupt Debtors Sell Assets Free and Clear of Federal Civil Forfeiture Claims?, 29 Fordham J. Corp. & Fin. L. 587 (2024).

Available at:  https://ir.lawnet.fordham.edu/jcfl/vol29/iss2/4/

Abstract:
Auctions are wheeling-dealing extravaganzas in which frenzies of bidders fight over shiny objects. What would happen if the government busted down the doors of the auction house, took the shiny objects, and sold them online? An asset sale through section 363(b) of the Bankruptcy Code provides a court-supervised opportunity to maximize economic value for the bankruptcy estate. To sell estate assets, the debtor must either (1) pay off each creditor holding an interest in the assets or (2) strip the creditor’s interest and attach it to the proceeds of the sale. When the government asserts a civil forfeiture claim against the asset being sold, it argues that its claim has superpriority over every other interest. If the debtor chooses option one, the government might demand the debtor pay up, or else it will seize the assets, leaving the debtor and its creditors with nothing. A debtor, naturally, might wish to choose option two: strip the government’s forfeiture interest from the asset and attach it to the sale proceeds.

This Note examines the unique aspects of civil forfeiture claims and how those aspects conflict with asset sales through section 363(b). It identifies case law across jurisdictions to assist courts asked to determine whether to strip a civil forfeiture claim from assets sold through section 363(b). It proposes a three-step framework for courts to apply in analyzing this issue. Finally, this Note argues that bankruptcy courts should allow sales of assets free and clear of a federal civil-forfeiture interest if the interest is in bona fide dispute and the government’s interest can be adequately protected by attaching it to the sale proceeds.

Commentary:

363 sales are certainly much more rare in consumer cases,  particularly  for Chapter 13  debtors- largely because unlike with commercial loans might  have an interest in helping the corporate debtor retain assets against other creditors,  where consumer lenders basically will cut off their own nose to spite the consumer debtor's  face-

This article could,  however,  offer a possible solution for debtors  facing the loss of assets resulting  from  drug asset forfeiture from co-owners (or even just adult children that reside in a home).

With proper attribution,  please share this post.