In re Nance Properties, Inc., Case No. 11-06197- 8-JRL (Bankr. E.D.N.C. Nov. 8, 2011)
CASE SNAPSHOT
The chapter 11 debtor sought to sell its assets free and clear of all liens pursuant to section 363(f) of the Bankruptcy Code. The secured creditor objected because the proposed sales price was less than the total indebtedness secured by the property. Pursuant to section 363(f)(3) of the Code, a debtor cannot sell property free and clear if the sales price for the property is “not greater than the aggregate value of all liens on such property.” The court analyzed two lines of cases to determine the meaning of “value,” and held that “value” means the “face value,” rather than the “economic value” of the liens. Although the sales price was greater than the economic value (i.e., present value) of the liens, the court denied the debtor’s motion because the sales price was less than the face value (i.e., outstanding debt owed) of the liens.
FACTUAL BACKGROUND
The debtor, Nance Properties, Inc., was a North Carolina corporation that operated Valvoline stations. After filing a chapter 11 petition, it continued operating as a debtor-in-possession. First Citizens Bank & Trust Company held pre-petition liens against substantially all of the debtor’s real property, as well as inventory, equipment and fixtures. The total balance of debt owed to First Citizens on the petition date exceeded $1.5 million. The debtor’s schedules indicated the value of the subject properties was approximately $875,000. The debtor negotiated a sales price for the property of $1.2 million with an independent buyer.
Nance moved to sell the assets free and clear of all liens under section 363(f). First Citizens objected, arguing that the sales price did not exceed the aggregate value of all liens on the property in contravention of section 363(f)(3).
COURT ANALYSIS
Section 363(f) allows a debtor to sell assets free and clear of all liens in five distinct situations. At issue in this case was section 363(f)(3), which requires that “the price at which such property is to be sold is greater than the aggregate value of all liens on such property.” The issue before this court was whether section 363(f)(3) permitted the sale of assets at a price that exceeds the economic value of the liens, but that is less than the aggregate amount of the indebtedness secured by the property.
The court discussed two distinct lines of cases interpreting the phrase “the aggregate value of all liens” (emphasis in opinion). The first line of cases holds that the sales price must exceed the aggregate “face value” of the liens, i.e., the amount of the outstanding indebtedness the liens secure. The second line of cases holds that the sales price must exceed the “economic value” of the liens, i.e., the present value of the property. The debtor argued that the court should follow the second line of cases and grant its motion because the sales price of $1.2 million exceeded the economic value of the property. The secured creditor argued that the court should follow the first line of cases and deny the debtor’s motion because the sales price did not exceed the face value of the liens.
The court declined the debtor’s invitation to follow the “economic value” cases. The court acknowledged that both interpretations of 363(f)(3) had valid justifications, as well as criticisms. The court adhered to long-standing precedent in its district, holding that the sales price must exceed the face value of the liens. The court therefore denied the debtor’s motion to sell the assets free and clear of all liens.
PRACTICAL CONSIDERATIONS
Despite a recognition of the harsh realities of the current economy and the practical effect its decision would have on the increasing prevalence of underwater mortgages, the court felt bound by the precedent in its district. The case highlights the importance of existing case law in particular jurisdictions, especially with respect to unsettled questions of law.
