United States Bankruptcy Court, E. D. NY, No: 8-10-70231-478, May 20, 2010: Held a Debtor in a c. 11 bankruptcy proceeding may not sell its real property free and clear of a Development Rights restriction for agricultural preservation held by a county and town. The Debtor’s debtor-in-possession lender sought to have the property sold free and clear of the development rights, extinguishing them. The Court found the Development Rights are an interest in the Property under bankruptcy law and that New York’s Real Property Actions and Proceedings Law (“RPAPL”) is the appropriate state law governing disposition of development rights, which in turn are authorized by Section 247 of the New York State General Municipal Law. The Court wrote, “Because the Development Rights in this case created a restriction on the Property for a public purpose and the conveyance was by a contractual agreement with a governmental unit … the Development Rights are not voidable under RPAPL §1955(5). Accordingly, the procedures for extinguishing restrictions … would not be applicable and any evidentiary hearing on whether, in a balancing of equities, the restrictive covenant is of no actual and substantial benefit would serve no purpose.” The lender further argued the Debtor could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of their Development Rights and thus would be “adequately protected” (a term of art under bankruptcy law). Writing about the concept of monetary compensation for the public interest protected by the agricultural preservation restriction, the Court said, “As discussed above, RPAPL §1955(5) specifically excludes the extinguishment of restrictions and negative covenants in land held for a public purpose where such restriction or covenant is created by an agreement with a governmental entity. In this instance, the County and the Town paid fair consideration for the Development Rights. Furthermore, 11 U.S.C. § 363(e) [Bankruptcy Code] provides for the court to prohibit or condition a sale or use of property where a party requests adequate protection of such interest. How would the County and Town be adequately protected if this court were to permit the sale of the land free and clear of their Development Rights? There is no procedure available under applicable nonbankruptcy law to compensate the County and Town for the removal of their right to limit development of this land for agricultural purposes. There is no monetary satisfaction available in this case because the underlying purpose is to prevent the land from being used or developed for any purpose other than agriculture nor can the County and Town be compelled to accept monetary satisfaction under section 363(f)(5). The extinguishment of the Development Rights would defeat the public’s purpose of purchasing these rights and preserving existing farmland and no measure of damages would make the County and Town whole or compensate them for the loss of farmland.”
PLD Comment: the Court’s reasoning would seem applicable to any conservation easement or preservation easement created under a state law that establishes the purpose of the easement as a public purpose.
Decision available at http://www.nyeb.uscourts.gov/opinions/dte/317953_77_opinion.pdf. This decision was brought to my attention by a summary attributed to attorney Rob Levin in the February 2011 Land Trust Alliance Conservation Defense Network Update.