Bankruptcy Sale of Beneficiary's Interest in Nominee Trust Sufficient to Trigger Tenant's Right of First Refusal

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"A nominee trust is 'an entity created for the purpose of holding legal title to property.'" Goodwill Enterprises, Inc. v. Kavanagh. Record title for the property held in a nominee trust is in the name of the nominee trust's trustee (not its beneficiaries), but such trustees "are often viewed as agents for the convenience of the principals (i.e., the beneficiaries)." Id. But what is the nature of a beneficial interest in a nominee trust? Is it more like an ownership share of a corporation or does it constitute a real property interest in the property held by the nominee trust?

That's the question the Massachusetts Appeals Court considered in Goodwill Enterprises v. Kavanagh, where the holder of a fifty percent beneficial interest in a nominee trust filed for Chapter 7 bankruptcy and his interest was auctioned off as part of those proceedings. The nominee trust held title to a commercial property, and the tenant leasing that property held a right of first refusal (meaning, it had the contractual right to match any offer made to purchase the property) pursuant to the terms of its lease. Three years after the beneficiary's bankruptcy sale, the tenant filed suit to enforce the lease's right of first refusal provision. The entity that purchased the bankrupt beneficiary's interest in the nominee trust argued that the right of first refusal did not apply because the bankruptcy sale conveyed only a beneficial interest in the nominee trust (which it claimed to be personal property), not an interest in the real property, particularly since the bankrupt beneficiary did not hold a majority interest in the nominee trust.

Drawing from Massachusetts common law concerning the status of beneficiaries to a nominee trust, the Appeals Court disagreed, holding instead that the entity had purchased the bankrupt beneficiary's interest in the subject real property - which should have triggered the tenant's right of first refusal - because the subject real estate was held for his benefit and under his control under the terms of the nominee trust. "Here the two beneficiaries were the true owners who together held one hundred percent undivided interest in the trust," the Appeals Court reasoned. "As a matter of law, the trustee acted as their agent, and ultimate control and authority resided at all times with the beneficiaries." According to the Appeals Court, because the bankrupt beneficiary "owned and exercised control over the real estate to the extent of his fifty percent undivided share in the real estate," his status was "no different" than that of an individual holding title to property in a tenancy in common. As such, the sale of the beneficiary's interest constituted a sale of real property and thereby triggered the tenant's contractual right of first refusal. Therefore, the tenant was entitled to purchase the beneficiary's share of the subject property for the same amount that the purchasing entity did at the bankruptcy auction.

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