Bank of Nova Scotia v. St. Croix Hotel Corp. (In Re St. Croix Hotel Corp.)

Citations: 44 B.R. 277; 1984 U.S. Dist. LEXIS 22264Docket: Civ. No. 84/218, Bankruptcy No. B-81000003

Court: District Court, Virgin Islands; November 2, 1984; Federal District Court

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The case revolves around the Bank of Nova Scotia's requirement to post $1,000,000 in cash to purchase the St. Croix by the Sea Hotel, a significant asset of the St. Croix Hotel Corporation, which is in bankruptcy. The bank claims a valid security interest in the hotel and filed a proof of claim as a secured creditor for $3,414,158.39. However, the debtor contests this claim, arguing it is not an "allowed claim" under 11 U.S.C. § 363(k), thus necessitating a cash payment without offset.

During bankruptcy proceedings, the hotel was ordered to be sold at auction, and the bank bid the required minimum of $1,000,000, with no other bidders participating. The bankruptcy judge mandated that the bank provide the full amount in cash without allowing an offset against its secured claim. The bank appealed this decision.

The court addresses two primary issues: (1) the legitimacy of the hotel sale and (2) the bank's entitlement to an offset against its purchase price. The court finds no merit in the debtor's objections regarding the sale, noting that prior objections were not raised until after the auction had occurred, and thus upholds the bankruptcy judge's order for the sale. The discussion on whether the bank holds an "allowed claim" under § 363(k) is ongoing, as it is critical to determining if the bank can offset its claim against the purchase price of the hotel.

"Allowed claim" is defined in 11 U.S.C. 502(a) and (b), which states that a claim is considered allowed unless objected to, and if objected, the court will determine the claim amount after a hearing. In this case, the Debtor objected to the bank’s proof of claim, leading to a trial that resulted in a jury verdict, later vacated on appeal, requiring a new trial. Consequently, the status of the bank's allowed claim remains unresolved. Since the bank did not have an allowed claim at the time of sale, it seemingly would not be entitled to an offset; however, the bank is still asserting a secured claim, which complicates matters as this issue has yet to be resolved. The bank filed a notice of a secured claim exceeding the sale bid price of one million dollars, and its lien against the hotel property is a matter of public record. 

Section 363(k) aims to allow only holders of valid security interests to claim setoffs, and this determination was not made before the sale. If the bank were to pay one million dollars in cash, this amount could be used for other estate expenses, potentially leading to unfair depletion of funds if the claim is later validated. To address this, a temporary offset will be permitted, contingent on the outcome of the bank’s claim determination. Should the bank prevail in its claim, the matter becomes moot; if it does not prevail, the bank must pay back the million dollars with compounded interest, calculated based on the bank's rates for million dollar CDs in New York City. Interest will begin accruing from specific dates related to the payment amount, and it will be compounded to ensure fairness to both the bank and the debtor's creditors during the pending resolution of the claim. Under these conditions, the hotel sale to the bank will be confirmed, granting it immediate possession of the property.