15.49 3. Contractual And Other Prohibitions On Transfers

• Jurisdiction: New York

3. Contractual and Other Prohibitions on Transfers

Contractual clauses and applicable nonbankruptcy law that are intended to limit the transfer of property if the debtor is in bankruptcy are ineffective. The trustee or debtor-in-possession may sell property of the estate notwithstanding restrictions based on the insolvency or financial condition of the debtor, the commencement of a bankruptcy case or the appointment of or taking possession of the property by a bankruptcy trustee or a custodian, which restrictions purport or give an option to effect a forfeiture, modification or termination of the debtor’s interest in the property.²⁷⁰²

A related issue is whether section 363 authorizes a trustee or debtor-in-possession to transfer property despite restrictions imposed by state law. This issue is relevant to the financially distressed health care provider that desires to transfer its certificate of need. The few courts that have addressed the issue have concluded that section 363 does not broaden a debtor-in-possession’s rights beyond the debtor’s pre-bankruptcy rights, and, therefore, section 363 does not override state law restrictions on the transfer of property.²⁷⁰³

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Notes:

^[2702] . 11 U.S.C. § 363(l).

^[2703] . See Calvert v. Bongards Creameries (In re Schauer), 835 F.2d 1222, 1225 (8th Cir. 1987) (Chapter 7 trustee could not transfer debtor’s patronage certificates in a cooperative in violation of state law restrictions); California v. Farmers Mkts., Inc. (In re Farmers Mkts...