The Bottom Line

The Bankruptcy Court for the District of New Jersey denied the Debtors’ request for approval of a sale of property free and clear of liens encumbering the property. The court determined that the term “value” in section 363(f)(3) of the Bankruptcy Code referred to the face value of all liens on the property and not the “economic value”. Because the value of liens encumbering the property in this case exceeded the proposed sale price, the property could not be sold free and clear of all liens pursuant to section 363(f)(3).

What Happened

In re Lutz, Case No. 16-26969 (Bankr. D.N.J. May 3, 2017), involves individual Debtors who attempted to sell their property free and clear of all liens for a sale price that was below the aggregate face value of the liens against the property.

The Debtors’ property was on the market for five years, with an original asking price of $5.5 million. The Debtors continued to market the property post-petition and received an offer from a buyer for $1.3 million for the property and an additional $408,350 for the Debtors’ personal property. The Secured Creditor objected to the sale because the sale price fell well below its secured claim of $2,379,562.94.

The parties agreed 363(f)(3) was the only section 363(f) exception that could apply in this case. Section 363(f)(3) provides a trustee may sell a property free and clear of an interest in the property if “such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property.” The Debtors argued the definition of “value” in section 363(f)(3) should be interpreted to mean “economic value” (i.e., the proposed sale price), a value clearly lower than the face value of the liens (i.e., $2,379,562.94). The Debtors cited In re Collins, 180 B.R. 447 (Bankr. E.D. Va. 1995), where the court held “value” means the “actual value to be determined by the court.” The Debtors then argued the court should evaluate the sale of the property in conjunction with the buyer’s offer to also purchase the Debtors’ personal property.

The Court did not agree with the Debtors’ definition of value. Instead, they were persuaded by the Secured Creditor's definition of value: “value” is the face amount of the claim secured by the lien. In support of this interpretation, the Secured Creditor cited In re WDH Howell, LLC, 398 B.R. 527 (D.N.J. 2003). In this case, the court determined “value” could not possibly mean “economic value” because the “sale price for the overencumbered property can never be greater than the aggregate economic value of the liens on the property.” Id. at 532. (internal citation omitted).

Thus, because the face value of liens on the property (i.e., the Secured Creditor's claim of $2,379,562.94) was greater than the $1.3 million proposed sale price, the Court did not approve the sale.

Why This Case is Interesting

Absent a secured creditor's consent, debtors may be unable to sell a property free and clear of all liens. Although Collins remains good law in the Eastern District of Virginia, as Lutz shows, debtors in other jurisdictions may not be able to rely upon section 363(f)(3) in seeking approval of a free and clear sale where the face value of the liens exceeds the proposed sale price. Note that the Court did not address the secured creditor's right to credit bid under section 363(k) which also precludes a debtor from selling the collateral to a third party for less than the allowed secured claim by allowing the secured creditor to submit a protective bid up to the amount of its lien.