## Facts

- Bridge Associates of Soho, Inc. (Bridge) owned an occupied loft building in New York City that was classified as an interim multiple dwelling (IMD) under New York’s Multiple Dwelling Law (the Loft Law).
- The building lacked a residential certificate of occupancy, and Bridge had not completed the Loft Law’s required legalization process to convert the premises into lawful multiple dwellings.
- Because Bridge was not in compliance with the Loft Law legalization requirements, New York law barred Bridge from collecting rent from the residential occupants (the “statutory tenants”).
- Bridge filed a voluntary Chapter 11 petition in 2018.
- Bridge moved under 11 U.S.C. § 363(b) and § 363(f) for authority to sell the building “free and clear” of liens, claims, encumbrances, and interests, including any interests held by the statutory tenants.
- The statutory tenants (and the New York City Loft Board) objected, arguing the Loft Law grants them continuing, state-law rights to possess and remain in their units that could not be terminated by a bankruptcy sale order.
- Bridge argued the sale could be approved free and clear under:
  - § 363(f)(1), because “applicable nonbankruptcy law” would allow the tenants’ interests to be terminated (Bridge contended the tenants had not paid rent for years and were subject to eviction under New York law);
  - § 363(f)(4), because there was a bona fide dispute over whether the tenants held enforceable possessory rights; and
  - § 363(f)(5), because the tenants could be compelled to accept money satisfaction for any interests they had.

## Issues

1. Do Loft Law statutory tenants hold “interests” in property—specifically possessory occupancy rights—within the meaning of 11 U.S.C. § 363(f)?
2. If the tenants hold such interests, did Bridge satisfy § 363(f)(1) by showing that applicable nonbankruptcy law permits a sale free and clear of those occupancy rights?
3. Did Bridge satisfy § 363(f)(4) by showing a bona fide dispute as to whether the statutory tenants had possessory rights under the Loft Law?
4. Did Bridge satisfy § 363(f)(5) by showing the statutory tenants could be compelled, in a legal or equitable proceeding, to accept money satisfaction of their occupancy rights?

## Decision

- The court held the Loft Law statutory tenants possessed enforceable, ongoing occupancy rights that qualify as “interests” in the property for purposes of § 363(f).
- The court denied Bridge’s request to sell the building free and clear of the statutory tenants’ possessory rights.
- Section 363(f)(1) did not authorize the requested relief because Bridge did not establish that New York nonbankruptcy law permits a transfer that cuts off Loft Law occupancy protections in the manner sought.
- Section 363(f)(4) did not apply because Bridge did not show a bona fide dispute over the existence of the tenants’ Loft Law occupancy rights; arguments about rent nonpayment and eviction theories did not create the kind of objective dispute § 363(f)(4) requires.
- Section 363(f)(5) did not apply because Bridge failed to identify a legal or equitable proceeding in which the statutory tenants could be compelled to accept money in exchange for surrendering Loft Law occupancy rights.

## Legal Principles

- State-law occupancy protections can constitute “interests” in property under 11 U.S.C. § 363(f), limiting a debtor’s ability to convey real property free and clear in bankruptcy.
- Section 363(f)(1) requires the movant to show that applicable nonbankruptcy law allows the specific interest at issue to be terminated through a sale; a general assertion that occupants might be evicted under some circumstances is not enough.
- Section 363(f)(4) requires an objective bona fide dispute about the validity or existence of the asserted interest; disagreement with the consequences of a state statutory scheme, or litigation positions about eviction, does not automatically satisfy the standard.
- Section 363(f)(5) requires an identified legal or equitable proceeding that would allow the interest holder to be forced to take money in place of the interest; the movant must do more than speculate that the interest can be monetized.
- Where the owner’s noncompliance with state law triggers statutory tenant protections (including limits on rent collection), bankruptcy sale authority does not operate as a substitute for the state-law framework governing continued occupancy.

## Conclusion

In re Bridge Associates of Soho, Inc. held that Loft Law statutory tenants’ continuing rights to occupy an IMD are property “interests” that could not be stripped through a § 363(f) sale on the record presented, because Bridge failed to show that nonbankruptcy law permitted such extinguishment, failed to establish a bona fide dispute over the existence of the tenants’ rights, and failed to identify any proceeding that could compel the tenants to accept money in exchange for giving up their possessory occupancy rights.


In re Bridge Associates of Soho, Inc., 589 B.R. 512 (2018)