Selling Chapter 11 Estate Property Free and Clear of Non-Debtor Interests

A Debtor in Possession ("DIP") may sell estate property free and clear of third party interests, such as liens, claims, and encumbrances.  Authority is found in 11 USC 363(f).  A sale free and clear of third party interests is authorized if one of the following conditions is found:

  1. A sale of the property free and clear of the interest is authorized by nonbankruptcy law;
  2. The third party affected consents;
  3. The affected interest is a lien and the sale price of the property is greater than the aggregate value of all liens on the property;
  4. The affected interest is in bona fide dispute; or
  5. The Third party whose interest will be affected could be be compelled in law or equity to accept a money satisfaction.

To qualify under item 3, above, several courts in the Ninth Circuit have held that the sales price must be greater than the aggregate amount of the debts encumbering the property so there will be some equity for the estate.  This may give leverage to junior lienholders to receive compensation from senior lienholders to let the sale go through.

Most importantly, property may be sold free and clear of nondebtor's interest that is in bona fide dispute.  The bankruptcy court need only determine that a dispute exists.  In re Gerwer (9th Cir. 1990), 898 F.2d 730, 733.  11 USC 363(f)(4).

The authority to sell free and clear is, of course, subject to adequate protection.  Courts typically order that the affects nondebtor interests attach to the sale proceeds. 

Don't forget that any secured creditor can "credit bid" at a sale.  This means that the secured creditor can offer a bid in the amount of the lien.

Sale orders involving Chapter 11 debtors in the Central District must include a provision requiring a certified copy of the escrow closing statement to be submitted to the U.S. Trustee within 10 days after the close of escrow or completion of the sale.

Mansfield Cheney, PC is here to help Chapter 11 debtors through the sale of assets.