The Delaware bankruptcy court recently denied a debtors’ motion to sell real estate free and clear of a bank’s senior liens on the properties. The court rejected the debtors’ arguments that the bank could be compelled to take less than the full amount of the bank’s debt under section 363(f)(5) of the Bankruptcy Code. The decision is a useful reminder that, in some jurisdictions, a bank holding senior liens may be entitled to veto any sale that does not result in payment-in-full.
The debtors in In re Ferris Properties, Inc., decided to sell 11 parcels of real property for $240,000. A bank that held senior mortgages on the properties filed an objection to the sale motion because the sale proceeds were less than the total amount of debt owed to the bank. The court denied the debtors’ motion on July 30, 2015, in a 10-page opinion. Neither the debtors nor the bank submitted much briefing to the court, probably because the value of the properties was relatively low as compared to the cost of extensive briefing.
The debtors, for their part, argued that the sale ought to be approved under section 363(f)(5) of the Bankruptcy Code, for various reasons. The debtors argued that the bank could be compelled to accept a money satisfaction of its liens under either sections 724(b) or 1129(b)(2)(A) of the Bankruptcy Code. The court rejected the first argument because section 724(b) applies to tax liens and the bank here held consensual senior mortgages. And although the court acknowledged a split of authority interpreting section 1129(b)(2)(A), the court held that the debtors had not carried their burden even under case law favorable to their position. They hadn’t shown that the bank was retaining its liens after the sale, or was receiving deferred cash payments totaling the allowed amount of its claim, or was receiving the indubitable equivalent of its claim. To the contrary, the debtors admitted the bank would not be paid in full and would be deprived of its security.
The debtors also argued that they satisfied section 363(f)(5) because the bank could be compelled to accept a money satisfaction of its interests through a Delaware tax monition or Delaware partition sale. But the bank could not be “compelled” to surrender its liens in a monition sale because the bank always had the option of paying delinquent taxes or redeeming the property. Moreover, a partition sale was only for use by joint tenants or tenants-in-common, and could not be used to deprive a secured lender of its mortgage rights.
Although the sale didn’t work out for the debtors in Ferris, under other circumstances the result might have been different. There are other states with laws more favorable to the debtors’ efforts to sell property free and clear of liens. Although Delaware law did not give the debtors the relief they needed, some states have statutes authorizing sales free and clear of liens through various mechanisms, including receiverships and other procedures.
The debtors might also have sought relief under other provisions of section 363(f). They might, for example, have argued that the sale satisfied section 363(f)(3) because the bank was arguably receiving the full amount of the “aggregate value of all liens on such property.” Courts disagree about how that provision is to be interpreted. Some courts hold that relief under section 363(f)(3) is only available if a lienholder is being paid the full amount of its debt, while others hold that section 363(f)(3) only requires the senior lienholder to receive the full value of the property. Section 363(f)(3) was not, however, raised by the parties or addressed by the court in its opinion.
This case is a useful reminder that the holder of a senior lien holds leverage in any disposition of its security. Even if, in some jurisdictions and under some circumstances, a senior lienholder could be compelled to accept less than the full amount of its debt, that’s not a result that is likely to come easily or cheaply. Those fights often require expensive expert testimony, extensive briefing, and evidentiary hearings. And even spending those resources does not guarantee a successful sale.