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May 16, 2005.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge


This bankruptcy appeal arises from the inability of the appellant, 129 Front Street Associates, LLC ("Front Street"), to close on the purchase of a real property located at 129 Front Street, New York, New York (the "Property"), which was the sole asset of the debtor-appellee, Target Two Associates, L.P. ("Target Two"). The escrow agent moved for permission to transfer the appellant's entire deposit to the debtor-appellee. In an order dated July 27, 2004, the bankruptcy judge, the Honorable Cornelius Blackshear, granted the escrow agent's motion, over the appellant's objections. Contending that this order effectuates an inequitable forfeiture, Front Street now appeals the July 27th order. This Court has jurisdiction over Front Street's appeal pursuant to section 158(a)(1) of Title 28 of the United States Code.


  On February 24, 2004, Target Two filed for bankruptcy under Chapter 11 of the Bankruptcy Code. In an order dated March 29, 2004, Judge Blackshear authorized the sale of the Property in an auction to be held in his courtroom.*fn1 That order required bidders to deposit $1,000,000 in order to participate in the auction.*fn2 The order further provided that if the successful bidder failed to tender the amount of its bid, less the deposit, by a certain date, the successful bidder would forfeit its deposit:
Upon failure by the Successful Bidder to complete the Closing on or before June 1, 2004 at 2:00 p.m. (or on or before June 30, 2004 at 2:00 p.m. if the closing date is extended in accordance with the terms of this Order), the bid deposit of the Successful Bidder, plus any Extension Fee, plus any accrued interest, shall be forfeited and shall become the property of the Debtor's Estate subject to further order of this Court.*fn3
In addition, if the highest bidder defaulted, the second highest bidder was obligated to tender the amount of its own bid, less its deposit, within thirty days of receiving notice of the highest bidder's default.*fn4

  On April 22, 2004, the court conducted the auction, in which nine bidders participated. With a bid of $11,800,000, appellant Front Street was the highest bidder. Hang Seng Realty was the second highest bidder with a bid of $11,750,000. Front Street's and Hang Seng Realty's deposits were placed in separate interest-bearing escrow accounts. Unable to close the purchase by June 1, 2004, Front Street applied for a thirty-day extension and paid an $88,500 extension fee, which was also placed in the escrow account, as provided for in Judge Blackshear's March 29th order.*fn5 In a sworn affidavit, Jeffrey Levitt, a principal of Front Street, states that Front Street made every effort to close the transaction, but was unable to secure the necessary financing.*fn6 On June 30, 2004, Front Street informed the escrow agent that it was unable to close. Thereupon, over Front Street's objection, Judge Blackshear directed the escrow agent to transfer the funds held in the escrow account, which by that time amounted to $1,091,382.91, to a new account for the benefit of Target Two's estate.*fn7 Shortly thereafter, the second highest bidder, Hang Seng Realty, purchased the Property for $11,750,000.


  A district court hearing an appeal from a bankruptcy court reviews that court's findings of fact under a "clearly erroneous" standard and its conclusions of law de novo.*fn8


  Front Street contends that it should only be liable for actual damages stemming from its default. Given the fact that the second highest bidder, Hang Seng Realty, purchased the Property for only $50,000 less than Front Street's bid, it is likely that Target Two's loss is considerably smaller than Front Street's deposit — even taking into account extra costs and legal fees incurred by the bankruptcy estate as a result of the delay in closing the sale of the Property.*fn9 Furthermore, according to Front Street, the actual damages are readily ascertainable. Consequently, Front Street argues that the bankruptcy court erred in ordering the entire deposit transferred to the bankruptcy estate. Whether the bankruptcy court could require Front Street to forfeit its entire deposit is a question of law, and accordingly this Court will review Judge Blackshear's determination de novo.

  Congress has authorized the federal judiciary to exercise discretion in setting the terms and conditions for judicial sales of real property. Section 2001(a) of Title 28 of the United States Code provides in part: "[a]ny realty or interest therein sold under any order or decree of any court of the United States shall be sold . . . upon such terms and conditions as the court directs." By virtue of its authority to set the rules of a judicial sale, a bankruptcy court may provide for the forfeiture of a purchaser's deposit upon default, provided that the court explicitly indicates the conditions of forfeiture so as to provide adequate notice to potential bidders.*fn10 In this case, the bankruptcy court set the terms and conditions for the sale of the Property in the March 29th order, which unambiguously provided that the successful bidder would forfeit its entire deposit if it failed to close prior to a date specified in the order. In addition, it is undisputed that Front Street, which was represented by counsel, had notice of the terms, including the forfeiture provision, governing the sale of the Property.

  Front Street fails to identify any precedent for its contention that a bankruptcy court does not have the power to require a delinquent purchaser to forfeit its deposit. According to Front Street, a bankruptcy court may only require the bidder to pay the stipulated price — i.e., specific performance — or the deficiency resulting from a resale — i.e., actual damages. The cases cited by Front Street do not support this proposition, however. For instance, in In re Rival Knitting Co.,*fn11 the Second Circuit held that a defaulting purchaser in a bankruptcy sale was liable for the difference between its bid and the resale price, which in that case exceeded the purchaser's deposit. However, that court was not presented with, and did not address, the question of whether a defaulting purchaser could be required to forfeit its deposit when such a forfeiture is not required to make the debtor whole. Similarly, in In re Dallek Bros., Inc.,*fn12 also cited by Front Street, a defaulting purchaser was ordered to pay $429.97, the difference between its bid and the resale price, which again exceeded the deposit. Both of the cases relied upon by Front Street merely stand for the proposition that a purchaser may be held liable for the deficiency resulting from its default; neither case suggests that a bankruptcy court cannot set the terms of a judicial sale to provide for the forfeiture of a deposit.

  In the alternative, Front Street argues that the bankruptcy judge should have applied New York law regarding the forfeiture of deposits. Even assuming that state law is applicable, however, it is well established in New York that "a vendee who defaults on a real estate contract without lawful excuse, cannot recover the down payment."*fn13 Because Front Street's inability to obtain the necessary financing does not constitute a lawful excuse, it follows that Front Street has no right under New York law to recover its deposit.

  Front Street maintains that under the law governing foreclosure sales in New York — which it believes to be analogous to judicial sales conducted by bankruptcy courts — a defaulting purchaser's liability cannot exceed the difference between its bid and the amount obtained at resale. Once again, the cases cited by Front Street do not support this proposition. For instance, in Federal Nat'l Mortgage Assoc. v. Walsh,*fn14 the defaulting purchaser's liability was limited to the deficiency plus the expenses occurring on resale for the simple reason that the terms of the public auction so provided.*fn15 In other mortgage foreclosure cases, however, New York courts have ordered the forfeiture of a defaulting purchaser's deposit where the terms of sale executed by the court expressly provided that the deposit constitutes liquidated damages in the event of default.*fn16 Thus, while under New York law a court overseeing a foreclosure sale may limit damages to the deficiency resulting from resale plus any expenses connected thereto, there is no principle of New York state law that requires a court to limit a defaulting purchaser's liability in this manner.

  Finally, Front Street contends that the forfeiture is a penalty that is disfavored under principles of equity. Front Street relies on Lange v. Farmers Fed'n Coop., Inc.,*fn17 in which the District Court for the Western District of North Carolina drew on equitable principles articulated by the courts of North Carolina in holding that a bankruptcy referee erred in allowing the bankruptcy estate to retain the entire deposit of a defaulting purchaser. Front Street's reliance on Lange is somewhat misplaced given that decision's dependence on principles of equity as articulated by the courts of North Carolina, whereas the highest state court in this jurisdiction, the New York Court of Appeals, has insisted repeatedly that, notwithstanding equitable principles, a defaulting purchaser generally has no right to recoup its deposit.*fn18 At any rate, local law does not control a bankruptcy court's application of equitable principles. The Second Circuit has held that, in non-diversity cases, "if a form of relief exists within the ambit of the federal court's historic equity jurisdiction, it should be available without reference to the peculiar requirements of local law. . . . `Whether equitable relief should be granted and to what extent in federal matters is a matter properly within the domain of federal equity jurisprudence.'"*fn19 Consequently, Front Street's argument sounding in equity should not be lightly dismissed. It is axiomatic that equity abhors a forfeiture and will, likewise, avoid an unjust windfall.*fn20 It appears that enforcing the forfeiture provision — given the fact that Hang Seng Realty closed on the Property for a mere $50,000 less than Front Street's bid — will result in a substantial windfall to Target Two's bankruptcy estate. Indeed, Front Street estimates that, taking into account costs associated with the delay in closing caused by its ...

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