Bankruptcy sale of trust interest triggers right of first refusal.

Byline: Eric T. Berkman

A Chapter 7 trustee's bankruptcy sale of a 50 percent beneficial interest in a nominee trust holding commercial property triggered a lessee's right of first refusal over any property sale, the Appeals Court has ruled.

Plaintiff Goodwill Enterprises operated a car dealership on property owned by nominee trust 218 Andover Street Peabody Realty Trust. When trust beneficiary Daniel Corbett filed for bankruptcy, the bankruptcy trustee auctioned off his 50 percent interest to defendant April Realty Trust, which was controlled by a neighboring car dealer that had sought to purchase the property in the past.

A Land Court judge ruled that Goodwill Enterprises, which did not learn of the sale until three years afterward, was entitled to specific performance of a lease provision granting it the right to match any offer to purchase the property that Peabody Realty might receive.

April Realty argued on appeal that because trust beneficiary Corbett's 50-percent interest was not enough to direct the actions of the trustee, he merely had a personal property interest in the trust and not a real property interest that would trigger the right of first refusal.

But the Appeals Court disagreed.

"We conclude that Corbett's beneficial interest in Peabody Realty was an interest in real property," Judge Mary T. Sullivan wrote for the court. "Moreover, where the parties did not exempt bankruptcy sales from Goodwill's right of first refusal, the bankruptcy sale of Corbett's fifty percent interest in the real property triggered Goodwill's right of first refusal."

The 16-page decision is Goodwill Enterprises, Inc. v. Kavanagh, et al., Lawyers Weekly No. 11-111-19. The full text of the ruling can be found here.

'Different animal'

Sara Decatur Judge, one of the plaintiff's attorneys, said the decision recognizes important protections for commercial tenants. She explained that a right of first refusal or ROFR is typically negotiated at arm's length when a lease commences and is part of the consideration.

"It follows that the beneficiaries of a nominee trust, who reap the rewards of ownership, should be bound by the contractual obligations to the lease," the Boston lawyer said. "To hold otherwise would allow landlords to side-step around ROFR obligations while still reaping the benefits of the lease."

Judge's co-counsel, Paul M. Harris, called the ruling a reminder that nominee trusts are a "different animal" than other trusts, and when the...