The guidelines establish the necessary components for an application to conduct asset sales. One important consideration for courts is whether the trustee “exercised sound business judgment” in seeking the property sale. 

In In re CLST Enters., LLC, No. 24-10596, 2025 WL 951298 (Bankr. S.D.N.Y. Mar. 27, 2025), the United States Bankruptcy Court for the Southern District of New York articulated the requirements (1) to find a sound business purpose for bankruptcy estate real property sale and (2) to remove principals from real property to effect a sale.

Background

On April 8, 2024, a voluntary Chapter 11 petition was filed on behalf of CLST Enterprises LLC in the United States Bankruptcy Court for the Southern District of New York (SDNY). On the petition date, the membership interests in CLST were held by two individuals, who were each 50 percent members (collectively, the “principals”), and the debtor had a 100 percent ownership interest in a multistory mixed-use building, comprised of residential and commercial retail/office space rentals. The principals resided on the upper three floors of that real estate property.

In January 2025, the court appointed a Chapter 11 trustee for the debtor and its estate pursuant to 11 U.S.C. §1104(a)(1). The trustee filed a motion seeking entry of an order authorizing the public auction of the real estate property and directing the principals to vacate the property.[1] The trustee argued that the sale of the real property would provide a significant benefit to the debtor’s estate and that removal of the principals was necessary to maximize value through the auction sale. Counsel for one of the principals filed an objection to the motion. The court considered whether to authorize the auction sale and grant removal of the principals.

Bankruptcy Court’s Ruling

The court first analyzed the motion for compliance with the SDNY’s amended guidelines for the conduct of asset sales under 11 U.S.C. § 363(b). The guidelines establish the necessary components for an application to conduct asset sales. One important consideration for courts is whether the trustee “exercised sound business judgment” in seeking the property sale. A determination that there are sufficient business reasons to justify a sale depends on the facts and circumstances of each case. Factors generally considered to determine if there are “sufficient business reasons” to justify a particular sale include, but are not limited to, (1) the proportionate value of the asset to the estate as a whole, (2) the amount of time elapsed since the filing, (3) the likelihood of proposing and confirming a plan in the near future, (4) the effect of the proposed sale on any reorganization, (5) the sale price to be obtained with reference to any appraisals of the property, (6) alternative uses of the property and (7) whether the asset is increasing or decreasing in value.

The court determined that the motion had satisfied all procedural requirements of the guidelines and the trustee had articulated a sound business purpose for the auction sale. The court held that the sale procedures proposed by the motion satisfied the guidelines because such sale procedures were designed to ensure that the maximum benefit would be obtained from the auction sale.

Lastly, the court determined that the trustee had adequately articulated that it was necessary to remove the principals from the real property prior to the auction sale. The motion was supported by a declaration from the trustee detailing the “substantial history” involving the principals. This history included the principals “engaging in belligerent and non-cooperative behavior regarding the [real estate property] for over a decade, including as to sale and marketing efforts during the pendency of [the case].” The court stated that the “circumstances [made it] clear” that the removal of the principals was necessary to maximize value of the debtor’s estate.

Conclusion

The In re CLST Enters. decision highlights the importance of articulating compliance with the guidelines for auctions of bankruptcy estate real property and the value of documenting interactions with relevant parties throughout the bankruptcy process.

For More Information

If you have any questions about this Alert, please contact Jessica Kenney Bonteque, Marie Bauer, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

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