In a recent decision, the Ninth Circuit Bankruptcy Appellate Panel (BAP) changed the legal landscape of bankruptcy asset sales. Prior to Clear Channel Outdoor, Inc. v. Knupfer, 391 B.R. 25 (B.A.P. 9th Cir. 2008), courts routinely stripped liens from assets purchased in a bankruptcy sale. Moreover, appeals of these sales were generally considered non-reviewable. The BAP in Clear Channel overturned these two longstanding features of bankruptcy asset sales, and, if followed, this decision could result in enforcement of existing property liens against asset purchasers.
Clear Channel arose from the bankruptcy of PW, LLC. PW purchased real estate to develop a mixed-use complex of luxury condominiums and retail space. However, problems developed, and DB Burbank, LLC, which held a first-priority lien on substantially all of PW's assets, began foreclosure proceedings in July 2006. Before the foreclosure sale occurred, PW filed for bankruptcy, and the court appointed a trustee.
The trustee proposed selling PW's property and began negotiating with DB. The parties agreed to an auction sale where DB would purchase the property for $41,434,465 if there were no qualified overbidders. With the agreement in place, the trustee moved to sell the property free and clear of liens under 11 U.S.C. § 363(f). Clear Channel, the holder of a junior lien, opposed the sale, which would ordinarily have stripped its lien. Over Clear Channel's objection, the court allowed the sale under § 363(f).
At the end of the auction, the highest qualified bid was for $25.25 million. Pursuant to the agreement, DB purchased the property with a credit bid and stripped Clear Channel's junior lien. Clear Channel appealed the sale and argued that its lien should not have been stripped.
On appeal, the BAP first considered whether the claim was reviewable. Before Clear Channel, courts generally held that lien-stripping sales were non-reviewable under 11 U.S.C § 363(m). This provision helped buyers and sellers because it provided certainty that once a sale was made the property went to the buyer stripped of existing liens. The BAP, however, read this statute extremely narrowly and found that it had the authority to review the sale. The BAP next considered whether Clear Channel's lien should have been stripped.
The BAP's discussion focused on § 363(f)(5), which allows a lien to be stripped if a lien-holder "could be compelled, in a legal or equitable proceeding, to accept a money satisfaction" for its lien. The BAP rejected other courts' reasoning, which found that nonconsensual confirmations, i.e., "cramdowns," were such proceedings because they can compel a lien-holder to accept money satisfaction. Instead, the BAP concluded that no such proceeding within the meaning of the statute existed. Thus, the BAP held that the sale did not meet the requirements of § 363(f) and the lien could not be stripped. Ultimately, the BAP remanded the matter to the bankruptcy court for further consideration of whether any such proceedings existed.
Clear Channel makes it substantially harder for sellers and purchasers to strip liens in a bankruptcy sale. The BAP read the applicable statutes narrowly and determined that lien-stripping is allowed in more limited circumstances than prior decisions. It is currently unclear to what extent Clear Channel will be followed. It may be limited to its facts, when a senior lien-holder tenders a credit bid in an attempt to strip junior liens, or it could forecast a greater trend of limiting lien-stripping sales. In either case, Clear Channel creates new considerations to which purchasers and sellers should be sensitive and responsive. Until the full effect of Clear Channel is known, sellers and purchasers should ensure that sales meet the narrowest construction under § 363 to avoid having liens reattached by a court.