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Margaret Kinney v. HSBC Bank USA

Summarizing by Lars Fuller

Trilogy Development Co., LLC v. J.E. Dunn Construction Co. (In re Trilogy Development Co., LLC)

Case No. 12-6008 (8th Cir. Apr. 5, 2012)
Affirmed bankruptcy court's order holding that mechanic liens attach to an earnest money deposit of the highest bidder at an auction sale of the property, who failed to purchase the property. Such a deposit is not an unencumbered asset of the Chapter 11 bankruptcy estate. The deposit is considered part of the "sale proceeds" of the property and, pursuant to the sale order; the deposit is subject to such mechanic lien claims.
Procedural context:
Appeal of bankruptcy court's order holding that certain funds held by the Appellant constitute sale proceeds which are subject to the liens of the Appellee.
Debtor, owner and operator of a real estate development project, filed a voluntary petition under Chapter 11. By the date of the filing, numerous contractors, suppliers, and vendors asserted mechanic lien claims against the project for unpaid balances due. The liens against the project far exceeded its value. Debtor filed a motion under §§ 105(a) and 363 of the Bankruptcy Code to conduct an auction sale of the project free and clear of liens. The motion was granted and an auction was conducted. The bankruptcy court entered its sale order authorizing close of the sale to the highest bidder, for the sum of $10,000,000, the prevailing bid. The sale also approved a backup bid for $9,500,000 to a second bidder, in the event the original sale was not consummated. The highest bidder entered into a purchase agreement under which it posted an earnest money deposit in the amount of $1,000,000 and agreed to close by a certain date. The highest bidder failed to close by that date, the purchase agreement was terminated, and the deposit was retained. Subsequently, the second highest bidder closed under the sale order.

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