Debtor May Not Compel Sale of Property under Section 363(h)

A chapter 13 debtor does not have the authority under section 363(h) to sell estate property free and clear of a co-owner’s interest. Kao v. Kelly (In re Kao), No. 15-31193, Adv. Pro. 15-3114 (Bankr. S.D. Tex. July 7, 2015). The case involved two properties co-owned by Jane Kao: one in California and one in Texas. In her adversary complaint, the debtor challenged the legitimacy of the foreclosure sales of both properties on several bases including that the sales were in contravention of a previous settlement agreement between the parties, and that an order relating to the California property was void. She advanced several state and federal claims in connection with both properties, and sought an order permitting her to sell the California property free and clear of other interests. Defendant, J. Michael Kelly, co-owner of the properties, moved to dismiss, arguing that a chapter 13 debtor has no power under section 363(h) to compel a sale of estate property. He also argued that the bankruptcy court should abstain from hearing the remaining claims because of ongoing litigation in state court.

In its conclusions of law, the bankruptcy court began with section 363(h) which empowers the trustee to sell the estate’s interest and the interest of any non-debtor, co-owner in property owned by the debtor at the time of commencement of the case, if certain conditions are met. Section 1303 provides that the “the debtor shall have, exclusive of the trustee, the rights and powers of a trustee,” to sell estate property under specified sections of section 363 not including paragraph 363(h). In the legislative history of section 1303, the court noted that the House version, not including section 363(h), was adopted while the Senate version, which did include section 363(h), was not. It found, therefore, that Congress elected not to give debtors the power to sell property free and clear of the interests of co-owners. The court granted the motion to dismiss with respect to the California property.

With respect to the remaining claims, the court turned to 28 U.S.C. section 1334(c)(1) to determine whether, under the totality of circumstances, abstention was appropriate. The court listed factors to consider, including; efficient administration of the estate, extent to which state law predominates, presence of related proceedings in state court, likelihood of forum shopping, the right to a jury trial, and considerations of comity and prejudice. The court found that state law predominated in the remaining claims and that Ms. Kao had engaged in forum shopping by bringing this adversary proceeding after the court had abstained from consideration of claims brought in previous adversary proceedings. Also, Mr. Kelly asserted a right to a jury trial and did not consent to such trial in the bankruptcy court. Therefore, multiplicity of litigation might not be avoided even if the court did not abstain.

The court, therefore, dismissed the claim based on 363(h) and abstained from consideration of the remaining claims.

Kao Bankr SD Tex opinion