In Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC),1 the United States Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) addressed the issue of whether a secured creditor had purchased estate property free and clear of liens, claims and encumbrances outside of a plan of reorganization. The BAP held that section 363(f) of the Bankruptcy Code does not permit the sale of the property free and clear of nonconsenting junior liens unless there is a showing that the junior lien holder could be compelled in a legal or equitable proceeding to release its lien in exchange for payment of less than the full amount owed.
Summary of the Facts
In In re PW, the debtor (the “Debtor”), a real estate developer, owned real property in Burbank, California. The property was subject to a $40 million first lien held by DB Burbank, LLC (“DB”), and a $2.5 million second lien held by Clear Channel Outdoor, Inc. (“Clear Channel”). Facing financial problems relating to the development of the property, the Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code, and a chapter 11 trustee was appointed (the “Trustee”). The Trustee and DB then decided to organize a package of all the Debtor’s property and development rights and put the package up for sale. Working together, the Trustee and DB negotiated a term sheet that established detailed sale procedures for an auction sale of these assets. The term sheet also provided that, in the event there were no qualified bidders for the package, DB would acquire the assets by credit-bidding the entire amount of its debt. The term sheet further provided that DB would pay an amount (referred to as a “carve-out”) to the trustee for certain administrative fees and expenses relating to the case.
The United States Bankruptcy Court for the Eastern District of Washington approved the sale and auction procedures. Because no qualified bidders participated in the auction sale, the Bankruptcy Court authorized a credit-bid sale to DB free and clear of Clear Channel’s junior lien pursuant to section 363(f) of the Bankruptcy Code. The Bankruptcy Court also found that DB was a good faith purchaser under section 363(m) of the Bankruptcy Code. Clear Channel, which would not receive any recovery on account of its claim if the sale was approved, sought a stay of the order approving the sale pending appeal. The Bankruptcy Court denied the request, and Clear Channel appealed the order approving the sale to the BAP.
The first issue the BAP addressed was whether Clear Channel’s appeal was moot under constitutional, equitable, and statutory theories. If the appeal was held to be moot, the BAP would dismiss the case because no legal or practical relief could be granted. The BAP held that Clear Channel’s appeal was not constitutionally moot, as there was a live case or controversy in which Clear Channel could receive some relief. The BAP found that Clear Channel’s appeal was equitably moot as to the sale itself under section 363(b) of the Bankruptcy Code because third parties had relied on the finality of the sale. However, as to the Bankruptcy Court’s order that the sale was free and clear of Clear Channel’s lien under section 363(f) of the Bankruptcy Code, the BAP found equitable mootness inapplicable, as no third party would be affected if Clear Channel’s lien was reimposed on the assets. The BAP also held that Clear Channel’s appeal was not statutorily moot under section 363(m) of the Bankruptcy Code. The BAP noted that the terms of section 363(m) apply only to “an authorization under subsection (b) or (c) of this section. . . .”2 The BAP rejected DB’s argument that receiving title to the assets free of liens was an essential condition of the sale that could not be separated from the sale. The BAP reasoned that as section 363(m) specifically mentions sections 363(a) and (b), only the validity of the sale, and not the order authorizing the sale free and clear of liens under section 363(f), was shielded from reversal on appeal.
After determining that Clear Channel’s appeal was not moot, the BAP analyzed whether section 363(f)(3) or (5)3 permitted the sale of the assets free and clear of Clear Channel’s lien. Section 363(f) of the Bankruptcy Code permits a debtor to sell assets free and clear of liens, claims and encumbrances under certain circumstances. Section 363(f)(3) allows a sale to be free of a claim or interest 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.”4 Section 363(f)(5) permits such a sale if the entity holding the lien “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”5
Despite the fact that all liens on the Burbank property would not be satisfied from the sale proceeds, the Trustee argued that the test of section 363(f)(3) had been met. The Trustee contended that, pursuant to section 506(a) of the Bankruptcy Code, the amount of an allowed secured claim can never exceed the value of the property securing the claim. The Trustee thus argued that “an estate representative may use [section] 363(f)(3) to sell free and clear of the property rights of junior lienholders whose nonbankruptcy liens are not supported by the collateral’s value.”6
The BAP disagreed. The BAP found that according to the statute, in order to sell estate property free and clear of liens under section 363(f)(3), the sale price of the property must be greater than the aggregate value of all liens, including out-of-the-money liens. The BAP reasoned that to hold otherwise would be illogical. Because the statute requires that the proceeds be greater than the liens, if the Trustee’s argument were to be accepted, “then the paragraph could never be used to authorize a sale free and clear” in circumstances like those in In re PW. The BAP added:
In any case in which the value of the property being sold is less than the total amount of claims held by secured creditors, the total of all allowed secured claims will equal, not exceed, the sale price, and the statute requires the price to be “greater than” the “value of all liens.”7
The BAP then turned to the issue of whether section 363(f)(5) authorized the sale of the assets free and clear of Clear Channel’s junior lien. The BAP explained that, in order to fulfill the requirements of this section, a proceeding must exist or must be capable of being brought, in which the non-debtor could be compelled to accept a money satisfaction of its interest.8
After finding that Clear Channel’s junior lien was an “interest” as contemplated under the statute, the BAP considered the issue of whether Clear Channel could be compelled to accept a money satisfaction for such interest. The BAP reasoned that the statute could not be read automatically to apply whenever an interest can be satisfied by the payment of money. Rather, the provision only applies if the lien holder could be compelled pursuant to a legal or equitable proceeding to accept a “monetary satisfaction” of its interest that is less than the full amount owed.9 The BAP found that, in order to authorize a sale free and clear of a non-consenting creditor’s interest under section 363(f)(5), a court must conclude that some form of legal or equitable proceeding is available that could compel Clear Channel to release its lien for a payment of less than the full amount owed to it. The BAP explained: “[t]he question is thus whether there is an available type or form of legal or equitable proceeding in which a court could compel Clear Channel to release its lien for payment of an amount that was less than full value of Clear Channel’s claim.”10
Because the Bankruptcy Court had not considered evidence of such a proceeding, the BAP remanded the case for further findings. The BAP specifically rejected the argument that the possibility of confirmation of a plan of reorganization under the cramdown provisions of section 1129(b)(2) of the Bankruptcy Code could be the available legal or equitable proceeding, finding such an interpretation of section 363(f)(5) to be “circular reasoning.”11 The BAP explained that permitting a sale under these circumstances would sanction “the effect of cramdown without requiring any of [section] 1129(b)’s substantive and procedural protections.”12 The BAP thus remanded the matter to the Bankruptcy Court to determine whether there was a proceeding pursuant to which Clear Channel could be compelled to accept a payment of less than the full amount owed in satisfaction of its junior lien.
Most debtors and trustees seeking to sell assets free and clear of liens take it for granted that such a sale will be permitted by the Bankruptcy Court as long as the highest and best price available for the assets is obtained. In obtaining approval of asset sales under section 363(b), the requirements of section 363(f) are often glossed over, and debtors assume that the objections of junior lien holders will be overruled.
The holding of In re PW suggests parties should be more cautious regarding the requirements of section 363(f). Under this decision, a debtor or trustee must determine what kind of non-bankruptcy proceeding would enable it to extinguish junior liens for less than a full money satisfaction of these claims prior to being granted the right to sell estate assets free and clear of such interests. Although section 363(b) sales are faster and less expensive than a sale accomplished through a confirmed plan, and sometimes are necessitated by declining values, with this required showing, section 363(b) sales might prove to be less desirable. If the rules of section 363(f) become too cumbersome, and the rights of junior lien holders are elevated, debtors and trustees might find that a sale through a plan of reorganization (an avenue the BAP expressly left open) is an easier and less controversial method of disposing of estate assets.