real estate distressed real estate: market trends and...

Educ

atio

nal M

ater

ials

2010

Jo Ann J. Brighton - ModeratorK&L Gates LLP; Charlotte, N.C.

Harold J. BordwinKeen Consultants - The Real Estate Division of KPMG Corporate Finance LLC; New York

Alec P. OstrowStevens & Lee, PC; New York

Douglas PoutasseNational Council of Real Estate Investment Fiduciaries Chicago

Committee Educational Session

Real EstateDistressed Real Estate: Market

Trends and Disposition Strategies in a Difficult Market

Real Estate Distressed Real Estate: Market Trends and Disposition Strategies in a Difficult Market

-2-

applies to secured creditors who seek repayment of their attorney’s fees during the bankruptcy case. In re Canto, 410 B.R. 506, 533-35 (Bankr. S.D. Tex. 2009)(holding that Rule 2016 applies to post-petition claims for fees claimed by creditor during the life of a Chapter 13 plan); In re Tate, 253 B.R. 653, 665-66 (Bankr.W.D.N.C. 2000)(Rule 2016 applies to secured creditors claim for attorneys fees made pursuant to § 506(b)); but see In re Atwood, 293 B.R. 227, 231-32 (B.A.P. 9 Cir. 2003)(secured creditor properly included its prepetition fees in a proof of claim, and no application under Rule 2016(a) was required); In re Padilla, 389 B.R. 409, 440-43 (Bankr. E.D. Pa. 2008)(Rule 2016 does not apply to secured creditors attorneys fees sought in conjunction with a Chapter 13 cure and maintenance plan). Almost always, this question arises in the context of a Chapter 13 case, and may turn on whether the secured creditor is claiming prepetition or post-position fees and the language governing the specific Chapter 13 plan confirmation order.

This split of authority predates the current mortgage crises. In Tate, a 2000 case, the Court held that due process required that creditors seeking pre-petition attorney’s fees as part of their claim must comply with Rule 2016(a). Tate, 253 B.R. at 666. The Tate court found that the proof of claim process provided debtors insufficient notice of how the attorney’s fees were calculated and included in the claim. Further, the court was concerned that the bundling of fees in a proof of claim all but guaranteed their approval, because the process generally deprived an opportunity for any substantive review by the Court as to the reasonableness of the individual claimed fees. Id. Therefore, the Tate court concluded that adherence to the procedures of Rule 2016(a) was required. Id.

However, in 2003, the Ninth Circuit Bankruptcy Appellate Panel rejected the reasoning of Tate. Atwood, 293 B.R. at 232. The Atwood panel concluded that the proof of claim process provided sufficient due process protections, and therefore a separate application under Rule 2016(a) was not required. Specifically, the Atwood court relied on In re Powe, 281 B.R. 336 (Bankr. S.D. Ala. 2001), in which the Bankruptcy Court for the Southern District of Alabama found unreasonable certain attorney’s fees by a secured creditor included in the proof of claim, without resorting to requiring a separate Rule 2016(a) application. Atwood, 293 B.R. at 232. According to the Atwood court, the result in Powe was sufficient proof that adherence to the stricter procedural mandates of Rule 2016(a) was not required to provide meaningful review by the courts. Id.

Some courts require court approval, or the filing of a statement under Bankruptcy Rule 2016. Others say that the creditor must provide notice of post-confirmation charges. Still others reject those approaches. It is imperative that counsel know the prevailing law in their district.

1396

28th Annual Spring Meeting

American Bankruptcy Institute

1397

91

tHe oDD Free anD Clear sale, or Clear-CHannelIng tHe sPIrIt oF suBseCtIons (3) anD (5) oF seCtIon 363(f)

By Alec P. Ostrow

Alec P. Ostrow is a shareholder of Stevens & Lee, P.C. and co-chair of the firm’s bankruptcy and financial restructuring practice group, and can be reached at (212) 537-0402 and [email protected]. He is also an adjunct professor of law in the LL.M. in bankruptcy program at St. John’s University School of Law and a fellow of the American College of Bankruptcy.

IntroDuCtIon

Last year’s decision in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC)1 by the Ninth Circuit Bankruptcy Appellate Panel has rekindled a controversy that had been smoldering since the early days of the Bankruptcy Code: What is the meaning of two specific subdivisions of the codification of the bankruptcy court’s power to con-duct a sale of property free and clear of interests held by others? At first glance, the two provisions of section 363(f),2 preceded by their introduction, seem clear enough:

The trustee may sell property… free and clear of any interest in such property of an entity other than the estate, only if—

(3) 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; [or]

* * * *

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.3

This uncomplicated language suggests that a plain meaning enforcement4 ought to yield consistent and predictable results. That, however, has not been the case. Each of these subdivisions contains terms that have divided the courts: “value” in subsection 363(f)(3), and “satisfaction” in subsection 363(f)(5), to select two examples. More-over, the question persists whether a simple construction of either provision renders the other unacceptably superfluous. These problems with interpretation suggest that courts should either reach back to when statutes were read to embody overarching principles5 or eschew internal consistency in the statute to reach a pragmatic result consistent with prior practices.6 This article will discuss the Clear Channel decision and try to divine the meaning of these odd subsections of section 363(f).

This article first appeared in the 2009 edition of the Norton Annual Surveyof Bankruptcy Law, published by West, and is reproduced with the consentof the copyright holder, West Services, Inc.

1398


NortoN ANNuAl Survey of BANkruptcy lAw

92

1. Clear Channel

In Clear Channel, the Ninth Circuit BAP reversed and remanded a free and clear sale order in an appeal by the junior out-of-the-money lienor who had not obtained a stay of the closing.7 The result was that the buyer, who happened to be the credit-bidding senior lienor, was faced with a completed acquisition of real property that continued to be encumbered by the junior lien. Such a result is precisely contrary to the buyer’s intention. Although the appellate court framed the issue as restricted to credit bids,8 as will been seen below, nothing in the court’s analysis is so limited.

The facts of the case are easily summarized. The debtor, PW, LLC, was a real estate development company that owned 18 parcels of land in Burbank, California. The land was encumbered essentially by two liens of undisputed validity, a senior lien of more than $40 million to its lender, DB Burbank, LLC; and a junior lien of a $2.5 million to Clear Channel Outdoor, Inc.9 Prior to PW’s bankruptcy filing, DB had commenced foreclosure proceedings, which were automatically stayed. DB sought and obtained the appointment of a Chapter 11 trustee, who agreed to sell the real property to DB, free and clear of liens,10 subject to a bankruptcy auction, using the DB’s credit bid as the upset price.11 The auction did not yield any higher bids. Over Clear Channel’s objection, the bankruptcy court approved the sale of the property to DB, free and clear of the junior out-of-the-money lien.12 Although the trustee and DB sought approval of the free and clear sale under both subsections 363(f)(3) and (f)(5), the bankruptcy court relied solely on section 363(f)(5),13 holding that section applicable to any inter-est, including a lien, that “can be paid with money.”14 The bankruptcy court also found that DB was a good faith purchaser.15 Clear Channel appealed and sought a stay of the closing pending appeal. The stay was denied, and the closing held.16

On appeal, the BAP first considered a crucial threshold issue: whether the merits of the free and clear sale could be reached in light of the unstayed closing.17 Although the court considered and rejected constitutional and equitable mootness doctrines,18 its controversial decision was to hold inapplicable statutory mootness under section 363(m) of the Bankruptcy Code.19 The BAP read the statutory language restrictively. By its express terms, the statute applies solely the sale authorization under either sub-section 363(b)20 or subsection 363(c)21 but not to the free and clear authorization, which is contained in subsection 363(f). The court held that this failure to include a reference to subsection 363(f) meant that the free and clear aspect of the sale could be challenged on appeal, even after a closing. Significantly, the appellate court rejected the argument that the free and clear authorization was an integral part of the sale that could be not treated separately without destroying the buyer’s benefit of the bargain.22

Reaching the merits, the BAP considered both grounds that had been urged on the bankruptcy court for the authorization of the sale of the property free and clear of the out-of-the-money lien. Section 363(f)(3) permits a sale free and clear of a lien when the sale prices “is greater than the aggregate value of all liens on such property.” The meaning of the word “value” has divided the courts into two camps: Those that hold it means value in the sense of what the underlying collateral is worth irrespective of the aggregate dollar amount of all liens;23 and those that hold it means the aggregate dollar amount of all liens, irrespective of what the collateral is worth.24 The BAP sided with


1399

cleAr-chANNeliNg the Spirit of § 363(f)(3) AND (5)

93

the second group and held that subsection 363(f)(3) permits a free and clear sale only when the price exceeds the total amount of the lien claims.25 Under this interpretation, the provision’s requirement was not satisfied by DB’s credit bid.

Section 363(f)(5) permits a free and clear sale when the holder of the interest in the property “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” The BAP rejected the bankruptcy court’s view that this provision applies whenever the interest in question “could be satisfied with money.”26 The appellate court interpreted the statute in three critical ways. First, contrary to several other courts,27 the BAP held the provision applicable to liens.28 Second, it held that satisfaction mentioned in the statute must be for less than full payment.29 Finally, a specific legal or equitable proceeding applicable to the interest must be identified.30 Because neither the bankruptcy court nor the parties had identified such a proceed-ing—remarkably, the decision makes no mention in this regard of a foreclosure pro-ceeding, such as the one commenced by DB prior to bankruptcy—the free and clear sale aspect of the sale could not stand. The BAP sent the case back to the bankruptcy court to determine whether an applicable legal or equitable proceeding existed that would enable the free and clear sale under section 363(f)(5).31

It must be observed that, despite the BAP formulation of the issue, nothing in its statutory analysis limits its holding to credit-bidding situations, Chapter 11, or even to real estate. Substituting DB’s credit bid with a third-party’s cash bid in the same amount, converting the case to Chapter 7, or even changing the composition of the assets from real estate to an operating business would not affect the court’s reading of the relevant statutes. Consequently, the Clear Channel result has potential for wide application. In determining whether this result is consistent with Congress’s intent in drafting the free and clear sale provisions, it is useful to consider the state of the law prior to the enactment of the Bankruptcy Code.

2. Pre-Code law and Practice

Prior to the adoption of the Bankruptcy Code, the focus had not been on the power of the bankruptcy court to order free and clear sales, which was deemed inherent even in the absence of an express statutory provision.32 The issue was the propriety of the use of that power, which was generally restricted to when there was some possibility of distribution to unsecured creditors because of equity in the property or the invalid-ity of a lien.33 The Supreme Court declared the free and clear power inherent in Van Huffel v. Harkelrode34 and stated that it derived from the bankruptcy court’s general equity powers and its duty “to collect, reduce to money and distribute the estates of bankrupts and to determine controversies with relation thereto.”35 That duty is no lon-ger imposed on the court. Instead, the Bankruptcy Code makes it a duty of a Chapter 7 trustee to “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as possible as is compatible with the best interests of parties in interest.”36 Trustees under other chapters and debtors in possession have no such duty.37 It would be difficult to imply an inherent power today, in light of the specific regulation in section 363(f) and the Supreme Court’s admoni-tion that “whatever equitable powers remain in the bankruptcy courts must and can

1400



94

only be exercised within the confines of the Bankruptcy Code.”38 The power granted under section 105(a) of the Bankruptcy Code to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions” of the Code39 has generally been construed not to permit a contradiction of any specific provision of the Code.40

It is significant that the lien at issue in Van Huffel was itself treated as an out-of-the-money lien. The lien in question, a state tax lien, was concededly erroneously treated as junior to two mortgages as to which the bankruptcy court “applied all of the proceeds of the sale toward the satisfaction of one of them; and left the state taxes unpaid.”41 The state treasurer, who had been sent notice of the bankruptcy proceed-ing, did not challenge the bankruptcy court’s improper determination of lien priority, which was res judicata in the subsequent action to quit title brought by the purchaser from the bankruptcy estate. In that action, which was how the issue reached the Su-preme Court, the state court treasurer argued that the bankruptcy court’s order was a nullity because that court lacked to the power to sell property free and clear of liens and did not acquire jurisdiction over the state based on insufficiency of notice.42 The Court’s rejection of the first contention is its central holding. The Court rejected the second contention on two grounds: First, the record demonstrated the mailing of a no-tice to the treasurer prior to any bankruptcy court action. Second, the issue of requiring a plenary proceeding to determine the priority of liens had not been raised in the lower courts and could not be raised for the first time before the Supreme Court.43 The result, therefore, is that the bankruptcy courts were determined to have inherent power to order free and clear sales, even with respect to out-of-the-money liens.44

The exercise of this power in a particular case was governed by prudential prin-ciples.45 The point of a free and clear sale is to obtain unencumbered funds. This could be accomplished if there seemed to be equity in the property or if an encumbrance could be invalidated.46 The consent of the lienholders to a bankruptcy sale, as provid-ing a superior method for maximizing value or reducing costs and delays, also allowed the bankruptcy court discretion to order the sale.47 It was considered an abuse of the court’s discretion to order a free and clear sale over the objection of the holder of a valid lien whose economic interests were affected by the proposed sale.48

3. Codification

The shift away from the focus on the propriety of the exercise of the free and clear power in a particular sale and toward the rights of the holder of the interest being sub-jected to that power seems to have originated with the 1973 Report of Commission of the Bankruptcy Laws of the United States.49 In its proposed revision of the Bankruptcy Act, the 1973 Commission Report included the following express free and clear sale power:

(b) Sale Free of Interests of Third Persons. The trustee may sell nonexempt property of the estate although subject to an encumbrance if (1) there is appar-ent equity or (2) the validity of the lien or other interest encumbering the prop-erty is in dispute. The property may be sold subject to any lien or other interest for which the holder can be compelled to take a money satisfaction, if the holder


1401


95

of the lien or other interest consents or is fully protected, and the lien or interest shall attach to the proceeds.50

This provision contains the precursor to most of the subdivisions of section 363(f).51

The first sentence with its two numbered clauses essentially restates the existing case law about when a bankruptcy court should, within the proper exercise of its dis-cretion, allow a free and clear sale. The second sentence adds the reference to a lien “or other interest for which the holder can be compelled to take a money satisfaction.” The accompanying note for this provision states that it “codifies case law insofar as it recognizes the right of the trustee to sell property of the estate free and clear of liens and other interests that can be reduced to dollars.”52 The italicized portion of this quo-tation suggests an equation between liens and certain kinds of interests (those capable of being satisfied by the payment of money) that may be properly subjected to a free and clear sale as opposed to other kinds of interests, such as easements or restrictive covenants, which, at least in certain instances, may not be properly subjected a free and clear sale.53

The key inquiry is the meaning of the term “fully protected.” As discussed above, the stated intention of the provision was to codify existing case law, which specifi-cally included Van Huffel.54 In this context, “fully protected” cannot mean “fully paid.” “Protection” is a likely reference to “adequate protection,” which appeared in the Bankruptcy Act in the provisions governing confirmation of plans without the consent of secured creditors.55 This term was famously construed by Judge Learned Hand in Murel Holding Corp. as being “completely compensatory,”56 but the protec-tion at issue is nevertheless limited to “the realization… of the value of their claims.”57 Thus the term “fully protected” in the 1973 Commission proposal must be taken as a statement concerning the value of the interest subjected to the free and clear sale.58

The recasting of the free and clear sale power from an inherent one whose exercise is governed by prudential considerations to an express one based on the satisfaction of one of five enumerated criteria was completed in the Bankruptcy Code.59 The current version of the statute is the one that first appeared in House version of the bill,60 with one change in 1984. The 1984 change was in section 363(f)(3). It changed the provi-sion from “such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of such interest” to “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.”61 The significance of that change will be discussed below.

4. section 363(f)(3)

The central issue in section 363(f)(3) is the meaning of “value” in the phrase “aggre-gate value of all liens on such property.”62 Does it mean value of in the section 506(a) sense, which links the meaning to the value of the collateral?63 Or does it mean the “face value” or “face amount” of all the liens?64 Clear Channel chose the latter interpretation. To justify that interpretation, Clear Channel began with the observation that section 363(f)(3)’s language, which refers to the value of “liens,” varies from the Code’s usual

1402



96

formulation of value, which the court asserted refers to “claims,” and asked whether the deviation is “unfortunate” or “whether it has some other significance.”65

The court’s assertion that the Code generally refers to the value of claims is itself questionable. To be sure, section 506(a)(1)66 relates “secured claim” to “value.” Nev-ertheless, the “value” that is related is to the “secured claim” is the “value of such creditor’s interest.” It is the “interest,” specifically, the “interest… in such property” that is being valued, not the “claim.” The Code frequently uses “value” in juxtaposi-tion to “interest” or “property” to emphasize precisely what is being valued.67 In none of the instances noted is a claim being valued.68 Section 363(f)(3)’s reference to the “value” of a “lien” is therefore not far afield. A lien is defined as a “charge against or interest in property to secure payment of a debt or performance of an obligation.”69 Liens, like other interests in property mentioned in the Code, can be valued.

Because liens can be valued and claims, generally speaking, are not, it is difficult to ignore the Code’s concept of value when interpreting section 363(f)(3). Of course, when a regular section 506(a) valuation is applied to the phrase “aggregate value of all the liens on the property,” a frequent result is one that prohibits the use of section 363(f)(3) in authorizing the sale of overencumbered property. The standard argument is that the price at the sale determines the value of the property, which can equal, but never be greater than, the value of all the liens on overencumbered property.70 This interpretation makes sense when the lien at issue is partially “in the money” because it is in keeping with the pre-Code practice of generally not permitting bankruptcy sales when there is no equity in the property. Moreover, this interpretation is clearly consistent with Congressional intent in connection with the 1984 amendment to sec-tion 363(f)(3), which replaced “the price at which such property is to be sold is greater than the aggregate value of such interest” with “the price at which such property is to be sold is greater than the aggregate value of all liens on such property.”71 The change clearly affects junior, partially “in the money” interests because, unlike the prior ver-sion, it forces the liens of higher priority to be taken into account in measuring price against value.

Nevertheless, this interpretation loses its force when it confers sale-stopping rights upon holders of liens with no economic value. In other contexts, the Code treats such holders as unsecured creditors. In a Chapter 11 plan, section 506(a)(1) mandates that they be classified as unsecured creditors.72 On a motion for relief from the automatic stay, the holder of a valueless claim cannot seriously argue lack of adequate protec-tion73 since the value of its interest cannot decline from zero. Such a holder is thus treated as an unsecured creditor that has no right to relief from the automatic stay to pursue remedies against property of the estate.74 It seems that in this sole context, a free and clear sale, with this statutory interpretation, the holder of a valueless lien is being given a significant right.

The answer must be to not count liens that have no value. Section 506(d) can be appropriately employed in this context to void valueless liens75 without running afoul of the Supreme Court’s apparently contrary construction of the provision in differ-ent context in Dewsnup v. Timm.76 Indeed, the Supreme Court itself has expressly allowed for the possibility of different readings of this statute in different contexts.77


1403


97

Interpreting section 363(f)(3) of the Code to not include valueless liens presents the appropriate occasion. This interpretation of the free and clear power recognizes both the use of the word “value” consistently with its other uses throughout the Code and the provisions’ use of “all the liens on such property” to invoke the historical pruden-tial restriction not to authorize a sale of encumbered property when no unencumbered proceeds would likely result, unless all relevant lienholders consent. The reference to “all the liens on such property” takes into account not only the value of the secured claims having priority over the lien in question, which the pre-1984 version of the statute failed to do, but the possibility that an increase in the price due to competitive bidding might place a junior lien “in the money.” It places the determination of the fate of the bankruptcy sale with the holder of the fulcrum lien since it is that holder who is not satisfied and faces a choice whether to accept the offered bankruptcy price or risk a worse loss by trying to better the price with an alternative disposition. Under no circumstances should that determination be handed to the holder of a lien that is hopelessly out of the money. Such an interpretation grants the valueless lienor a “holdup” value.78

5. section 363(f)(5)

The central problem with this provision79 is that, depending on what “satisfaction” means, a plain construction renders it either applicable to everything (if “satisfac-tion” means “in a complete, rather than partial, exchange”80) or essentially useless (if “satisfaction” means “payment in full”81). If satisfaction means “payment in full,” there is little utility in the provision because if the seller is required to pay the interest in full, the seller could ordinarily obtain a voluntary release of the interest, or obtain reputable insurance against the of risk of loss to the holder of the interest, and consum-mate the sale without a free and clear power.82 The addition of a free and clear power would merely allow the seller to hold, rather than pay over, the portion of the proceeds allocated to the interest, with the interest attaching to the proceeds as adequate protec-tion.83 This might be advantageous if the estate needed to use these proceeds as cash collateral and could provide another form of adequate protection to the interest holder, such as a different replacement lien, to permit such use.84 Nevertheless, it is difficult to imagine that such a creative estate funding device is what was envisioned by the drafters of this provision.

At the other extreme, if satisfaction means “in a complete, rather than partial, ex-change,” every interest in property is susceptible to a free and clear sale because there exists a legal or equitable proceeding in which every interest is reducible to money. It is called condemnation or eminent domain. The eminent domain power is inherent in a sovereign,85 and in the U.S., it pertains to the state governments as well as the federal government.86 The power is limited by takings clause of the Fifth Amend-ment to the Constitution, which states “nor shall private property be taken for public use, without just compensation.”87 A proceeding to determine “just compensation” in an condemnation case88 obviously qualifies as a “legal or equitable proceeding” in which the holder of an interest “can be compelled to accept a money satisfaction of such interest.”89 What is crucial for present purposes is that any interest in property is

1404



98

susceptible to condemnation.90 Admitting the theoretical possibility of a federal con-demnation proceeding would be tantamount to construing the statute to mean that “the trustee may sell property… free and clear of any interest in such property of an entity other than the estate.” Such a construction of the statute, however, cannot be correct because then there would be no need for any of the other four subsections of section 363(f). Interpretations of statutes that render other statutory language mere surplusage are heavily disfavored.91

Some middle ground between these extremes is therefore desirable. Pre-Code practice is an aid. Because the language of subsection (f)(5) is derived from the 1973 Commission Report’s proposed statute and commentary, the probable meaning is sim-ply an interest, like a lien, that in some ordinarily available fashion92 “can be reduced to dollars.”93 Such a reading would ordinarily exclude many restrictive covenants and easements from the operation of this provision.94 The requirement of full payment should be rejected because not every proceeding in which the interest is cashed out, such as foreclosure proceedings, results in full payment. Notably, in Van Huffel, the Supreme Court approved a free and clear sale in which the state tax lien, by virtue of an erroneous priority determination, received nothing.95 The Court did not then require full payment to support the free and clear sale. The Code should not be read to require it now. Finally, as discussed above, the proposed codification of this free and clear power, as contained in the 1973 Commission Report, used the term “fully protected,”96 which in current Code terminology means “adequately protected.”97 That concept refers, of course, to the value of the interest.98 Full protection of a junior in-terest whose hierarchical distributive rights in the proceeds of a sale are well below replacement cost does not require the payment of the much higher replacement cost.

Satisfaction of the requirement of the existence of a legal or equitable proceed-ing that results in the reduction of the interest to money should be tested against known proceedings that can accomplish such a result. A mortgage or lien foreclo-sure proceeding will ordinarily reduce any interest that is legally junior to the one foreclosed upon to a claim against surplus moneys.99 Such junior interest need not include only liens but leases100 and certain easements.101 This is important because the rule against construction of a statute that renders another portion of it superfluous102 counsels against the applicability of section 363(f)(5) to liens.103 As has been noted by many courts,104 if section 363(f)(5) applies to liens—even though liens are clearly “interests” within the meaning of the statute105—section 363(f)(3) is rendered super-fluous.106 Since foreclosure proceedings can reduce junior interests that are not liens to money, such other interests can be subjected a free and clear sale under section 363(f)(3), so long as there is a senior lien that is subject to a free and clear sale under section 363(f)(2) or 363(f)(3).107

ConClusIon

Despite the relative simplicity of their language, subsections (3) and (5) of section 363(f) of the Bankruptcy Code have raised profound controversies as to their applica-tion. The Clear Channel decision, if widely followed, will severely hobble the ability to use the bankruptcy free and clear sale power to dispose of over-leveraged assets. It


1405


99

is submitted that such decision should not be followed because the out-of-the money lienor, who should be treated as a unsecured creditor, should not be empowered with the right to stop a sale. Although the pre-Code practice, which the Code attempted to codify, discouraged sales over the objections of lien creditors whose liens were par-tially in the money, such practice did not require a court to honor the complaints of those whose liens had no economic value. Section 363(f)(3) should be construed not to count valueless liens in the determination whether the price exceeds “the aggregate value of all the liens” on the property. Section 363(f)(5) should not be construed to apply to liens because it would render section 363(f)(3) superfluous but should be construed not to require full payment of those interests to which it does apply. Such interests include those that are junior to liens on the property that could initiate suc-cessful foreclosure proceedings and thereby be converted into claim against surplus moneys, if the senior lien is itself susceptible to a free and clear sale.

notes

1. In re PW, LLC, 391 B.R. 25, 50 Bankr. Ct. Dec. (CRR) 70 (B.A.P. 9th Cir. 2008) (Clear Channel).

2. 11 U.S.C.A. § 363(f).3. 11 U.S.C.A. § 363(f)(3), (5).4. See U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 103 L. Ed.

2d 290, 18 Bankr. Ct. Dec. (CRR) 1150, Bankr. L. Rep. (CCH) P 72575, 89-1 U.S. Tax Cas. (CCH) P 9179, 63 A.F.T.R.2d 89-652 (1989):

The task of resolving the dispute over the meaning of §506(b) begins where all such inquiries must begin: with the language of the statute itself. In this case, it is also where the inquiry should end, for where, as here, the statute’s language is plain, the sole function of the courts is to enforce it according to its terms (citations and internal quotation omitted).

5. Cf. Bank of Marin v. England, 385 U.S. 99, 103, 87 S. Ct. 274, 17 L. Ed. 2d 197 (1966) (“Yet we do not read these statutory words with the ease of a computer. There is an overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction”).

6. Cf. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S. Ct. 773, 116 L. Ed. 2d 903, 22 Bankr. Ct. Dec. (CRR) 750, 25 Collier Bankr. Cas. 2d (MB) 1297, Bankr. L. Rep. (CCH) P 74361A (1992) (“Were we writing on a clean slate, we might be inclined to agree with petitioner that the words ‘allowed secured claim’ must take the same meaning in § 506(d) as in § 506(a). But, given the ambiguity in the text, we are not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected” (footnote omitted)).

7. Clear Channel, 391 B.R. at 29, 46-47.8. Clear Channel, 391 B.R. at 29 (“This appeal presents a simple issue: out a plan of

reorganization, does § 363(f) of the Bankruptcy Code permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, nonconsenting junior liens? We hold that it does not”).

9. Clear Channel, 391 B.R. at 29-30. There was a lien that was senior to that of DB in the amount of $250,000. Clear Channel, 391 B.R. at 32. This lien was paid at the closing of the sale to DB.

10. Clear Channel, 391 B.R. at 31. The court made specific mention that the debtor was a “single asset real estate” entity under 11 U.S.C.A. § 101(51B) and predicted that DB would likely have been granted real from the automatic stay under the special “single asset real estate” provision, 11 U.S.C.A. § 362(d)(3). That provision requires the debtor, within 90 days of the

1406



100

order for relief and subject to an extension of cause, to file a Chapter 11 plan with a reasonable chance of being confirmed within a reasonable time or to begin making monthly payments at the applicable nondefault contract rate of interest on the value of the real property.

11. Clear Channel, 391 B.R. at 31. DB also agreed to pay the trustee a carve-out, ultimately determined to be $550,000, for the trustee’s administrative expenses. Clear Channel, 391 B.R. at 32. Clear Channel claimed this carve-out fund was part of the proceeds of sale to which its junior lien could attach, but the court rejected this contention, holding that the carve-out was an independent obligation of DB. Clear Channel, 391 B.R. at 46-47. Although not explained this way in the decision, this obligation stemmed from DB’s role as secured creditor, rather than as buyer. The obligation has as its theoretical origin the ability of a trustee to recover from the secured party’s collateral the costs of preserving and disposing of the collateral. 11 U.S.C.A. § 506(c).

12. Clear Channel, 391 B.R. at 32.13. Clear Channel, 391 B.R. at 32.14. Clear Channel, 391 B.R. at 42.15. Clear Channel, 391 B.R. at 32. The finding is a prerequisite to the invocation of the

statute rendering moot appeals from unstayed, consummated bankruptcy sales. 11 U.S.C.A. § 363(m).

16. Clear Channel, 391 B.R. at 32.17. Clear Channel, 391 B.R. at 33.18. Clear Channel, 391 B.R. at 33-34. The appeal was not moot in the constitutional sense

of the requirement of a “case or controversy,” U.S. Const. art. III; because it was possible to grant relief to Clear Channel, namely, rendering the subject to, instead of free and clear of, its lien.. The appeal was not moot in the equitable sense because all the relevant parties on the issue of whether the sale was free and clear, or subject to, Clear Channel’s lien, were before the court.

19. 11 U.S.C.A. § 363(m) provides:

The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization was stayed pending appeal.

This provision has been described as imposing a necessary finality on bankruptcy sales. Knowing that a sale to a good faith purchaser cannot be undone on appeal, unless the closing is stayed, encourages the participation of bidders, and thereby aids in maximizing the value of assets sold at bankruptcy sales. In re Trism, Inc., 328 F.3d 1003, 1007, 41 Bankr. Ct. Dec. (CRR) 78, Bankr. L. Rep. (CCH) P 78848 (8th Cir. 2003); In re Stadium Management Corp., 895 F.2d 845, 847, 20 Bankr. Ct. Dec. (CRR) 341, Bankr. L. Rep. (CCH) P 73229 (1st Cir. 1990). It also allows for the prompt distribution of the sales proceeds and thereby aids in getting the creditors paid.

20. 11 U.S.C.A. § 363(b) authorizes the use, sale, or lease of property of the estate outside the ordinary course of business, after notice and a hearing.

21. 11 U.S.C.A. § 363(c) authorizes the use, sale, or lease of property of the estate, other than cash collateral, in the ordinary course of business without notice or a hearing.

22. Clear Channel, 391 B.R. at 36. The court commented that the parties cannot by agreement restrict the appellate court’s jurisdiction. Although beyond the scope of this article, two criticisms of this holding are worth noting. First, most purchasers of property outside of bankruptcy seek to acquire that property free of liens. See ABA Model Asset Purchase Agreement with Commentary § 2.1 (2001):

Upon the terms and subject to the conditions set forth in this Agreement… Seller shall sell… to Buyer, and Buyer shall purchase and acquire from Seller, free and clear of any


1407


101

Encumbrances other than Permitted Encumbrances, all of Seller’s right, title and interest in and to all of Seller’s property and assets, real and personal.

Second, many appellate courts have recognized that statutory mootness indeed applies to all fundamental aspects of a sale. See Trism, 328 F.3d at 1007-08 (§ 363(m) also moots an appeal from a release of liability for avoidance actions given to buyer as a critical part of sale); Stadium Management, 895 F.2d at 849 (§ 363(m) also moots an appeal from the assumption and assignment of executory contracts as a critical part of a sale). Ironically, even the Ninth Circuit, in a case involving an appeal from a sale to the mortgagee at a mortgage foreclosure held by public auction in the bankruptcy, held the appeal moot, based on mootness principles embodied in 11 U.S.C.A. § 363(m). In re Onouli-Kona Land Co., 846 F.2d 1170, 1171-73, 17 Bankr. Ct. Dec. (CRR) 1371, 18 Collier Bankr. Cas. 2d (MB) 1436, Bankr. L. Rep. (CCH) P 72247 (9th Cir. 1988).

23. E.g., In re Collins, 180 B.R. 447, 451 (Bankr. E.D. Va. 1995); In re Terrace Gardens Park Partnership, 96 B.R. 707, 713, 19 Bankr. Ct. Dec. (CRR) 727, 20 Collier Bankr. Cas. 2d (MB) 1183 (Bankr. W.D. Tex. 1989); In re Beker Industries Corp., 63 B.R. 474, 476, 15 Collier Bankr. Cas. 2d (MB) 52, Bankr. L. Rep. (CCH) P 71408 (Bankr. S.D. N.Y. 1986). To these courts, “value” in 11 U.S.C.A. § 363(f)(3) is used in the same sense as in 11 U.S.C.A. § 506(a), which determines the allowed amount of a secured claim as the value of the collateral, subject to valid secured claims of higher priority in the collateral. With such meaning, an out-of-the money lien can be said to have no “value.”

24. E.g., Matter of Stroud Wholesale, Inc., 47 B.R. 999, 1001-02 (E.D. N.C. 1985), aff’d, 983 F.2d 1057 (4th Cir. 1986); In re Terrace Chalet Apartments, Ltd., 159 B.R. 821, 826-27 (N.D. Ill. 1993); In re Canonigo, 276 B.R. 257, 262-63, 39 Bankr. Ct. Dec. (CRR) 116, 47 Collier Bankr. Cas. 2d (MB) 1252 (Bankr. N.D. Cal. 2002).

25. Clear Channel, 391 B.R. at 40.26. Clear Channel, 391 B.R. at 42. The BAP found further justification for rejecting the

bankruptcy court’s construction in the text of 11 U.S.C.A. § 1206, which is applicable only in Chapter 12 cases, and provides:

After notice and a hearing, in addition to the authorization contained in section 363(f), the trustee in a case under this chapter may sell property under section 363(b) and (c), free and clear of any interest in such property of an entity other than the estate if the property is farmland, farm equipment, or property used to carry out a commercial fishing operation (including a commercial fishing vessel), except that the proceeds of such sale shall be subject to such interest.

The simplicity of this section’s allowance of a free and clear sale, if the property is of a specified type, demonstrated to the BAP that Congress knew how to draft a provision with an absolute right to conduct a free and clear sales. In contrast, the language of 11 U.S.C.A. § 363(f)(5) yielded no absolute right to conduct a free and clear sale with respect to an interest that could be paid with money, such as a lien. Clear Channel, 391 B.R. at 44-45.

27. E.g., Canonigo, 276 B.R. at 265; see Beker Indus., 63 B.R. at 478.28. Clear Channel, 391 B.R. at 41-42. The court specifically held that Congress intended

“interests” to have an expansive scope, including “liens,” and quoted 11 U.S.C.A. § 363(f)(3), which begins, “such interest is a lien.”

29. Clear Channel, 391 B.R. at 42-43. This holding is in part based on its prior holdings that 11 U.S.C.A. § 363(f)(3) requires a price greater than the amount of all liens and that 11 U.S.C.A. § 363(f)(5) applies to liens. The court reasoned that if 11 U.S.C.A. § 363(f)(5) also requires full payment, it would be superfluous because it would mirror 11 U.S.C.A. §363(f)(3).

30. Clear Channel, 391 B.R. at 45-46. In this regard, the court rejected the use of a cram down proceeding under 11 U.S.C.A. § 1129(b)(2)(A) as a proceeding that would qualify.

31. Clear Channel, 391 B.R. at 42-47.

1408



102

32. Van Huffel v. Harkelrode, 284 U.S. 225, 228, 52 S. Ct. 115, 76 L. Ed. 256, 78 A.L.R. 453 (1931). The Court observed that the Bankruptcy Act of 1898, unlike one of its predecessors, contained no explicit authorization for a free and clear sale.

33. In re Miller, 95 F.2d 441, 442 (C.C.A. 7th Cir. 1938); In re National Grain Corp., 9 F.2d 802, 803-04 (C.C.A. 2d Cir. 1926). See generally, 4B Collier on Bankruptcy ¶ 70.97 at 1139, ¶ 70.99 at 1214-1216 (14th ed. 1975).

34. Van Huffel, 284 U.S. 225.35. Van Huffel, 284 U.S. at 228; see Bankruptcy Act § 2a(7), former 11 U.S.C.A. § 11(a)

(7) (repealed 1978)).36. 11 U.S.C.A. § 704(a)(1).37. The duties of a Chapter 11 trustee, and by extension of a debtor in possession, do not

incorporate the liquidation obligation of a Chapter 7 trustee. See 11 U.S.C.A. §§ 1106(a)(1) (incorporating most of the duties of a Chapter 7 trustee into the duties of a Chapter 11 trustee, except for the liquidation duty) and 1107(a) (imposing on a debtor in possession most of the duties of a chapter 11 trustee). Similar provisions prescribing the duties of chapter 12 and chapter 13 trustees. 11 U.S.C.A. §§ 1202(b)(1), 1302(b)(1).

38. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 99 L. Ed. 2d 169, 17 Bankr. Ct. Dec. (CRR) 201, 18 Collier Bankr. Cas. 2d (MB) 262, Bankr. L. Rep. (CCH) P 72186 (1988).

39. 11 U.S.C.A. § 105(a).40. In re Kmart Corp., 359 F.3d 866, 871, 42 Bankr. Ct. Dec. (CRR) 166, 51 Collier

Bankr. Cas. 2d (MB) 1076, Bankr. L. Rep. (CCH) P 80054 (7th Cir. 2004); In re Barbieri, 199 F.3d 616, 621, 35 Bankr. Ct. Dec. (CRR) 106, 43 Collier Bankr. Cas. 2d (MB) 410, Bankr. L. Rep. (CCH) P 78076 (2d Cir. 1999). It should be noted, however, that the Supreme Court has recently invoked the bankruptcy court’s section 105(a) power to limit (or contradict) a supposed absolute right [of a debtor under 11 U.S.C.A. § 706(a) to convert a Chapter 7 case to a Chapter 13 case, if eligible for relief under Chapter 13] but specifically addressed that section’s conferral of the power to prevent an abuse of process. The Court also referred to any court’s inherent power to sanction abusive litigation practices. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 375-76, 127 S. Ct. 1105, 166 L. Ed. 2d 956, 47 Bankr. Ct. Dec. (CRR) 221, 57 Collier Bankr. Cas. 2d (MB) 1, Bankr. L. Rep. (CCH) P 80850 (2007). Nevertheless, this limited abuse-prevention exception is not applicable to a free and clear sale under 11 U.S.C.A. § 363(f).

41. Van Huffel, 284 U.S. at 227.42. Van Huffel, 284 U.S. at 227.43. Van Huffel, 284 U.S. at 229.44. The Court noted instances in which a free and clear sale of a tax lien had been ordered

and the liens were “treated as discharged.” Van Huffel, 284 U.S. at 228-29 & n.6.45. Miller, 95 F.2d at 442; National Grain, 9 F.2d at 803-04.46. Miller, 95 F.2d at 442; National Grain, 9 F.2d at 803-04.47. Miller, 95 F.2d at 442-43.48. Miller, 95 F.2d at 442; National Grain, 9 F.2d at 803-04. See generally, 4B Collier on

Bankruptcy ¶ 70.97 at 1139, ¶ 70.99 at 1214-1216 (14th ed. 1975).49. H.R. Doc. 137, 93d Cong., 1st Sess. (1973).50. H.R. Doc. 137, 93d Cong., 1st Sess., proposed Act § 5-203(b) (1973) (subsequent

sentences governing amount of notice and procedures to contest the sale omitted).51. The subdivision of section 363(f) that contains elements that cannot be located in

this language is 11 U.S.C.A. § 363(f)(1), which permits a free and clear sale when “applicable nonbankruptcy law” does.

52. H.R. Doc. 137, 93d Cong., 1st Sess., n.2 following proposed Act § 5-203(b) (1973) (emphasis added).


1409


103

53. Gouveia v. Tazbir, 37 F.3d 295, 299-300, 26 Bankr. Ct. Dec. (CRR) 123, 31 Collier Bankr. Cas. 2d (MB) 1698, Bankr. L. Rep. (CCH) P 76143 (7th Cir. 1994) (restrictive covenant enforceable by injunction); In re 523 East Fifth Street Housing Preservation Development Fund Corp., 79 B.R. 568, 576 (Bankr. S.D. N.Y. 1987) (same); see In re Oyster Bay Cove, Ltd., 196 B.R. 251, 255 (E.D. N.Y. 1996) (easement). But see In re Signature Developments, Inc., 348 B.R. 758, 764, 767, 46 Bankr. Ct. Dec. (CRR) 284 (Bankr. E.D. Mich. 2006) (distinguishing Gouveia and holding that for the restrictive covenant in that case, requiring future homes in the development to use the same contractor, a money satisfaction could be compelled).

54. H.R. Doc. 137, 93d Cong., 1st Sess., n.2 following proposed Act § 5-203(b) (1973). The note specifically refers to the Advisory Committee’s Notes to then-proposed Rule 606 of the 1973 Rules of Bankruptcy Procedure, which, in turn, cites both Van Huffel and ¶ 70.99 of the 14th edition of Collier on Bankruptcy.

55. Bankruptcy Act § 216(7), former 11 U.S.C.A. § 616(7) (repealed 1978), contained the alternatives for confirmation of a Chapter X plan without the consent of a class of creditors, which required “adequate protection for the realization by them of the value of their claims against the property dealt with by the plan and affected by such claims.” The alternatives are (a) leaving the property subject to the claims; (b) selling the property free and clear of such claims, “at not less than a fair upset price” and having the claims attach to the proceeds of sale; (c) appraising the property and paying in cash of “the value of such claims”; or (d) proving something that will “equitably and fairly provide such protection.” In addition, Bankruptcy Act § 216(8), former 11 U.S.C.A. § 616(8) (repealed 1978), contained a provision for the “adequate protection” of the value of stockholders’ equity, unless the debtor was determined to be insolvent.

56. In re Murel Holding Corp., 75 F.2d 941, 942 (C.C.A. 2d Cir. 1935) (construing the predecessor section, Bankruptcy Act § 77B(b)(5), former 11 U.S.C.A. § 207(b)(5) (repealed 1938)).

57. Bankruptcy Act § 216(7), former 11 U.S.C.A. § 616(7) (repealed 1978).58. There may be other considerations for a lien or other interest to be “fully protected,”

such as making sure that there is an appropriate apportionment of value when collateral is sold in bulk, see In re Wesley Corp., 18 F. Supp. 347, 350-51 (E.D. Ky. 1937); and an appropriate allocation of the costs of the sale, see Oppenheimer v. Oldham, 178 F.2d 386, 389-90 (5th Cir. 1949). See generally 4B Collier on Bankruptcy, ¶ 70.99[5]-[6] at 1222-25 (14th ed. 1975).

59. The reports of the House and Senate Judiciary Committees contain the same paraphrase of the five criteria:

The trustee may sell free and clear if applicable nonbankruptcy law permits it, if the other entity consents, if the interest is a lien and the sale price of the property is greater than the amount secured by the lien, if the interest is in bona fide dispute, or if the other entity could be compelled to accept a money satisfaction of the interest in a legal or equitable proceeding.

S. Rep. 989, 95th Cong., 2d Sess. 56 (1978); H.R. Rep. 595, 95th Cong. 1st Sess. 345 (1977).60. H.R. 8200, 95th Cong., 1st Sess. sec. 101, § 363(f) (1977). The Senate version, S. 2266,

95th Cong., 2d Sess. sec. 101, § 363(f) (1978) differs from the House version in one aspect. It included, prior to the enumeration of the five alternative criteria, the requirements of “a fair upset price” and 30 days’ notice. There is no explanation in the joint statement of the floor managers in lieu of a conference committee report why the House version of the provision was selected. 124 Cong. Rec. S 17409 (daily ed. Oct. 6, 1978); 124 Cong. Rec. H 11093 (daily ed. Sept. 28, 1978).

61. Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA) § 442(d), Pub. L. 98-353, 98 Stat. 33 (1984) (emphasis added). BAFJA was principally concerned with reconstituting the bankruptcy courts in the aftermath of the Supreme Court’s decision in Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598, 6 Collier Bankr. Cas. 2d (MB) 785, Bankr. L. Rep. (CCH) P 68698 (1982); and providing new regulation for the rejection of collective bargaining agreements in the aftermath

1410



104

of the Supreme Court’s decision in N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 104 S. Ct. 1188, 79 L. Ed. 2d 482, 11 Bankr. Ct. Dec. (CRR) 564, 9 Collier Bankr. Cas. 2d (MB) 1219, 5 Employee Benefits Cas. (BNA) 1015, 115 L.R.R.M. (BNA) 2805, Bankr. L. Rep. (CCH) P 69580, 100 Lab. Cas. (CCH) P 10771 (1984). The amendment to section 363(f) was placed in subtitle H of title III of the Act, which is entitled “Miscellaneous Amendments to Title 11.” There is nothing in the legislative history of BAFJA that deals with the change to 11 U.S.C.A. § 363(f)(3).

62. 11 U.S.C.A. § 363(f)(3).63. 11 U.S.C.A. § 506(a)(1) provides, in relevant part: “An allowed claim of a creditor

secured by a lien on property in which the estate has an interest… is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.” Courts holding that “value” in § 363(f)(3) means “value” in § 506(a) sense include Collins, 180 B.R. at 451; Terrance Gardens, 96 B.R. at 713; and Beker Indus., 63 B.R. at 476.

64. Courts holding that “value” in § 363(f)(3) means “face amount” or “face value” include Stroud Wholesale, 47 B.R. at 1001-02; Terrace Chalet Apartments, 159 B.R. at 826-27; and Canonigo, 276 B.R. at 262-63.

65. Clear Channel, 391 B.R. at 39.66. 11 U.S.C.A. § 506(a)(1) provides, in relevant part: “An allowed claim of a creditor

secured by a lien on property in which the estate has an interest… is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.”

67. See 11 U.S.C.A. § 361(1)-(2) (adequate protection against “decrease in the value of such entity’s interest in such property”); § 554(a) (abandonment of “property… that is of inconsequential value”); § 1111(b)(1)(B)(i) (election to be treated as fully secured under plan not available if “the interest in property on account of such claims is of inconsequential value”); § 1129(a)(7) (“best interest” requirement of confirmation is satisfied if each class receives or retains “property of a value, as of the effective date” that is not less than liquidation value); and § 1129(b)(2)(B) (cram down test for unsecured claims is satisfied if each member of the class receives “property of a value, as of the effective date” that is equal to the allowed amount of its claim).

68. But see Fed. R. Bankr. P. 3012 (“the court may determine the value of a claim secured by a lien on property in which the estate has an interest”). Here, the rule’s language may be an “unfortunate deviation” from the statutory scheme. The current Federal Rules of Bankruptcy Procedure were derived from the former Bankruptcy Rules under the Bankruptcy Act. The Act did refer to the value of “claims.” See Bankruptcy Act § 216(7), former 11 U.S.C.A. § 616(7) (repealed 1978) (Chapter X confirmation alternatives required “adequate protection for the realization by them of the value of their claims against the property dealt with by the plan and affected by such claims”).

69. 11 U.S.C.A. § 101(37).70. See Clear Channel, 391 B.R. at 40; In re General Bearing Corp., 136 B.R. 361, 366

(Bankr. S.D. N.Y. 1992). An alternative interpretation has been suggested—perhaps merely as an illustration of the problems with the standard argument—in which the costs of the sale of overencumbered property are subtracted from the initial valuation of the collateral, cf. 11 U.S.C.A. § 506(c); thus rendering the price automatically greater than the ultimate value. See Dennis J. Connolly & Sage M. Sigler, Section 363 Revisited: The Limitations on “Free and Clear” Sales, 11 Norton Bankr. L. Adviser 2 at n.20 & accompanying text (2008). The problems with this interpretation include producing results that are at odds both with the statute’s intended purpose, which the authors acknowledge, and the pre-Code practice.

71. See BAFJA § 442(d) (emphasis added).72. 11 U.S.C.A. § 506(a)(1) provides that the claim of a lien creditors “is an unsecured

claim to the extent that the value of such creditor’s interest… is less than the amount of such allowed claim.” Even holders whose liens have a non-zero value cannot elect to be treated as secured creditors, if the value of the liens is “inconsequential.” 11 U.S.C.A. § 1111(b)(1)(B)(i).


1411


105

73. 11 U.S.C.A. § 362(d)(1) makes lack of adequate protection a ground for relief from the automatic stay.

74. See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 90, 51 Collier Bankr. Cas. 2d (MB) 223 (2d Cir. 2003) (“the concepts of adequate protection of an interest in property and the existence of an equity interest in property do not apply to unsecured claims” (quoting In re Pioneer Commercial Funding Corp., 114 B.R. 45, 48 (Bankr. S.D. N.Y. 1990))).

75. 11 U.S.C.A. § 506(d) provides, in relevant part: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

76. Dewsnup v. Timm, 502 U.S. 410, 416, 112 S. Ct. 773, 116 L. Ed. 2d 903, 22 Bankr. Ct. Dec. (CRR) 750, 25 Collier Bankr. Cas. 2d (MB) 1297, Bankr. L. Rep. (CCH) P 74361A (1992). In that case, individual Chapter 7 debtors sought to employ 11 U.S.C.A. § 506(d) to void a mortgage lien on overencumbered property to the extent the lien exceeded the value of the property, so that they could redeem the property by paying the lower “stripped down” value of the lien. Dewsnup, 502 U.S. at 412-13. To prevent this result, which was certainly inconsistent with pre-Code practice, the Court declined to construe “allowed secured claim” in 11 U.S.C.A. § 506(d) consistently with the 11 U.S.C.A. § 506(a) and instead construed it “term-by-term to refer to a claim that is first, allowed, and second, secured.” Dewsnup 502 U.S. at 415, 417.

77. “Hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations. We therefore focus upon the case before us and allow other facts to await their legal resolution on another day.” Dewsnup, 502 U.S. at 416-17.

78. Cf. Lynn M. LoPucki & William C. Whitford, Preemptive Cram Down, 65 Am. Bankr. L.J. 625, 633 (1991) (suggesting the use of an early valuation to remove holders of valueless claims or interests from the case and thereby foreclosure attempts by these holders to extract value).

79. Accord Clear Channel, 391 B.R. at 38.80. As in “accord and satisfaction,” which can be described as an agreement to accept

a substitute performance in exchange for an original obligation. See Strickland Tower Maintenance, Inc. v. AT & T Communications, Inc., 128 F.3d 1422, 1428 (10th Cir. 1997) (Oklahoma law); Restatement (Second) of Contracts § 281 (1981); Black’s Law Dictionary 17 (6th ed. 1979).

81. Cf. 11 U.S.C.A. § 550(d) (“the trustee is entitled to only a single satisfaction” from any of the parties from whom recovery may be had on an avoided transfer).

82. The legal or equitable proceeding to compel the interest holder to accept full payment could then take place. If commenced prior to the consummation of the sale, while the property remained in the estate, the bankruptcy court presumably could entertain it, 28 U.S.C.A. §§ 157(a), 1334(b), 1334(e)(1); and treat it as a core proceeding. 28 U.S.C.A. § 157(b)(2)(K)-(O).

83. 11 U.S.C.A. § 363(e) requires the trustee to furnish adequate protection to the holder of an interest whose property is sold, if timely demanded. The typical form of adequate protection is free and clear sales is a replacement lien on the proceeds. 11 U.S.C.A. § 361(2).

84. A trustee or debtor in possession may use, that is to say, spend “cash collateral,” defined in 11 U.S.C.A. § 363(a) as cash or equivalents in which the estate and another entity each have an interest, if the holder of the interest consents, or the court permits, based on the estate’s furnishing adequate protection to the holder of the interest. 11 U.S.C.A. § 363(c), (e).

85. Kohl v. U.S., 91 U.S. 367, 371-72, 23 L. Ed. 449, 1875 WL 17549 (1875).86. Mississippi & Rum River Boom Co. v. Patterson, 98 U.S. 403, 406, 25 L. Ed. 206, 1878

WL 18388 (1878).87. U.S. Const. amend V. The principle is applicable to the states through the due process and

equal protection clauses of the Fourteenth Amendment, U.S. Const. amend. XIV; see Chicago, B. & Q.R. Co. v. City of Chicago, 166 U.S. 226, 239, 17 S. Ct. 581, 41 L. Ed. 979 (1897).

88. In federal district court, such a proceeding is governed by Fed. R. Civ. P. 71A.89. 11 U.S.C.A. § 363(f)(5).

1412



106

90. U.S. v. General Motors Corporation, 323 U.S. 373, 377, 65 S. Ct. 357, 89 L. Ed. 311, 156 A.L.R. 390 (1945) (“the constitutional provision is addressed to every sort of interest the citizen may possess”).

91. Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 562, 110 S. Ct. 2126, 109 L. Ed. 2d 588, 20 Bankr. Ct. Dec. (CRR) 833, 22 Collier Bankr. Cas. 2d (MB) 1067, Bankr. L. Rep. (CCH) P 73382 (1990) (“[o]ur cases express a deep reluctance to interpret a statutory provision so as to render superfluous other provisions in the same enactment”); see Rake v. Wade, 508 U.S. 464, 471, 113 S. Ct. 2187, 124 L. Ed. 2d 424, 24 Bankr. Ct. Dec. (CRR) 533, 28 Collier Bankr. Cas. 2d (MB) 983, Bankr. L. Rep. (CCH) P 75275 (1993) (“to avoid deny[ing] effect to a part of a statute we accord significance and effect… to every word”).

92. Such as a foreclosure proceeding. Cf. Miller, 95 F.2d at 442 (equating a free and clear sale to, “in effect, foreclos[ing] the mortgages”). This is not to suggest that a condemnation proceeding could never be considered. This author has posited that a condemnation proceeding of the type approved by the Supreme Court in Kelo v. City of New London, Conn., 545 U.S. 469, 472, 125 S. Ct. 2655, 162 L. Ed. 2d 439, 60 Env’t. Rep. Cas. (BNA) 1769, 35 Envtl. L. Rep. 20134, 10 A.L.R. Fed. 2d 733 (2005)—in which private property was taken for the purpose of conveying it to another private party as part of a development plan that would create jobs, increase the tax base, and revitalize an economically distressed city—is not an action that is protected by the “police power” exception to the automatic stay, 11 U.S.C.A. § 362(b)(4); and could be impeded by a bankruptcy filing. Alec P. Ostrow, Kelo Condemnation and the Automatic Stay: Can a Debtor Fight City Hall?, Amer. Bankr. Inst. Real Estate Committee Newsletter, vol. 5, no. 1 (Feb. 2008) (available online at http://www.abiworld.org/committees/newsletters/realestate/vol5num1/index.html). In such a situation, the condemnation would be actual, not hypothetical, and could be considered in a motion to approve a free and clear sale.

93. H.R. Doc. 137, 93d Cong., 1st Sess., n.2 following proposed Act § 5-203(b) (1973).94. Gouveia v. Tazhir, 37 F.3d at 299-300 (restrictive covenant enforceable by injunction);

Oyster Bay Cove, 196 B.R. at 255 (easement). But see Anderman v. 1395 E. 52nd St. Realty Corp., 60 Misc. 2d 437, 476, 303 N.Y.S.2d 474 (Sup 1969) (easement granted after a mortgage is junior to the mortgage and can be extinguished in a foreclosure with the interest holder remitted to a claim against surplus proceeds).

95. Van Huffel, 284 U.S. at 227.96. H.R. Doc. 137, 93d Cong., 1st Sess., proposed Act § 5-203(b) (1973).97. See 11 U.S.C.A. § 361.98. See United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S.

365, 371-72, 108 S. Ct. 626, 98 L. Ed. 2d 740, 16 Bankr. Ct. Dec. (CRR) 1369, 17 Collier Bankr. Cas. 2d (MB) 1368, Bankr. L. Rep. (CCH) P 72113 (1988).

99. U.S. v. Sage, 566 F.2d 1114, 1114-15, 78-1 U.S. Tax Cas. (CCH) P 9208, 41 A.F.T.R.2d 78-595 (9th Cir. 1977); Pioneer Credit Corp. v. Bloomberg, 323 F.2d 992, 993-94 (1st Cir. 1963); see Markey v. Langley, 92 U.S. 142, 155, 23 L. Ed. 701, 1875 WL 17799 (1875).

100. Title Guarantee & Trust Co. v. Twenty-First Street & Fifth Avenue Corporation, 110 Misc. 126, 359, 180 N.Y.S. 358 (Sup 1920) (citing Clarkson v. Skidmore, 46 N.Y. 297, 1871 WL 9802 (1871); Mack v. Patchin, 42 N.Y. 167, 1870 WL 7697 (1870)); see N.Y. Real Prop. Acts. Law § 1361.

101. Anderman, 303 N.Y.S.2d at 476.102. Pennsylvania Welfare Dep’t v. Davenport, 495 U.S. at 562; see Rake, 508 U.S. at 471.103. There is also a principle of statutory construction that says the specific controls over

the general. See National Cable & Telecommunications Ass’n, Inc. v. Gulf Power Co., 534 U.S. 327, 335, 122 S. Ct. 782, 151 L. Ed. 2d 794 (2002) (“[i]t is true that specific statutory language should control more general language when there is a conflict between the two”). The application of that principle results in the specific regulation of “liens” in 11 U.S.C.A. § 363(f)(3) controlling the more general provision governing “interests” in 11 U.S.C.A. § 363(f)(5).


1413


107

104. Canonigo, 276 B.R. at 265; Becker Indus., 68 B.R. at 478.105. Indeed, 11 U.S.C.A. § 363(f)(3) contains the phrase, “if such interest is a lien.” Accord

Clear Channel, 391 B.R. at 41.106. Rendering 11 U.S.C.A. § 363(f)(5) inapplicable to liens also removes the controversy

whether a cram down under 11 U.S.C.A. § 1129(b)(2)(A) is an eligible legal or equitable proceeding. Compare In re Hunt Energy Co., Inc., 48 B.R. 472, 485, 12 Bankr. Ct. Dec. (CRR) 1237 (Bankr. N.D. Ohio 1985) (permitting use of cram down) with Clear Channel, 391 B.R. at 46 (not permitting use of cram down). Because such cram downs apply only to secured claims, which, of course, are equivalent to liens—see 11 U.S.C.A. § 101(37) (definition of “lien” as including “interest in property to secure payment of a debt”); § 1129(b)(2)(A)(i) (cram down on secured claims includes an alternative involving the retention of the “lien”)—if liens are excluded from the reach of § 363(f)(5), the controversy becomes academic. See generally John Collen, Buying & Selling Real Estate in Bankruptcy, ¶ 5.02[5] (West 1997) (discussing the controversy).

107. 11 U.S.C.A. § 363(f)(1), (4) are presumably excluded. Subsection (f)(1) generally does not involve foreclosure proceedings. It implicates U.C.C. § 9-320(a), which permits a sale free and clear of a security interest granted by a seller when the sale is to a buyer in the ordinary course of business. Moreover, a senior lien that is the subject of a bona fide dispute under § 363(f)(4) would not be able to complete a foreclosure proceeding successfully.

1414


Rea

l Est

ate

2010

Am

eric

a’s

Lost

Dec

ade

ofG

row

th:

Am

eric

as

Lost

Dec

ade

ofG

row

th:

Wha

t Hap

pene

d an

d W

here

Do

We

Go

From

Her

e

Dl

MP

tD

ougl

asM

.Pou

tass

eEx

ecut

ive

Dire

ctor

NC

REI

Fdp

outa

sse@

ncre

ifor

gdp

outa

sse@

ncre

if.or

g


1415

Rea

l Est

ate

2010

Am

eric

a’s

Lost

Dec

ade

ofG

row

th:

Am

eric

as

Lost

Dec

ade

ofG

row

th:

Wha

t Hap

pene

d an

d W

here

Do

We

Go

From

Her

e

Dl

MP

tD

ougl

asM

.Pou

tass

eEx

ecut

ive

Dire

ctor

NC

REI

Fdp

outa

sse@

ncre

ifor

gdp

outa

sse@

ncre

if.or

g

The

Lost

Dec

ade

of G

row

th

Dec

ade

Job

Gro

wth

(m

illio

ns)

%C

hang

e

1940

s11

.927

38%

1950

s10

.744

25%

1960

s16

.902

31%

1970

s19

624

28%

1970

s19

.624

28%

1980

s18

.351

20%

1990

s21

.630

20%

2000

s -0

.985

-1%

Sour

ce: B

LS

1416


The

Lost

Dec

ade

of G

row

th b

y St

ate

Stat

e To

tal E

mpl

oym

ent

10 Y

ear G

row

th R

ates

(Jan

uary

to J

anua

ry)

90%

100%

110%

120%

Mas

sach

uset

tsC

alifo

rnia

Flor

ida

60%

70%

80%

90%

Ariz

ona

30%

40%

50%

-10%0%10%

20%

Sour

ce: B

LS,N

CR

EIF

Pro

ject

ion

10% 19

4919

5119

5319

5519

5719

5919

6119

6319

6519

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

09


1417

The

Lost

Dec

ade

of G

row

th b

y St

ate

Stat

e To

tal E

mpl

oym

ent

10 Y

ear G

row

th R

ates

(Jan

uary

to J

anua

ry)

90%

100%

110%

120%

Mas

sach

uset

tsC

alifo

rnia

Flor

ida

60%

70%

80%

90%

Ariz

ona

30%

40%

50%

- 10%0%10%

20%

Sour

ce: B

LS,N

CR

EIF

Pro

ject

ion

10% 19

4919

5119

5319

5519

5719

5919

6119

6319

6519

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

09

VAC

AN

CIE

S A

RE

NEA

RIN

G A

PEA

KP

PR

54 V

ACA

NC

Y R

ATE

S

20%

25%

Fore

cast

15%

10% 0%5%

Sou

rce

: PP

R

8284

8688

9092

9496

9800

0204

0608

1012

14

Apa

rtmen

tO

ffice

Ret

ail

War

ehou

se

page

4

1418


Wha

tto

Exp

ectf

orN

OIG

row

thW

hatt

oE

xpec

tfor

NO

IGro

wth

The

econ

omy

isec

onom

yis

wor

se in

th

is c

ycle

an

d th

e pr

oper

typr

oper

tym

arke

ts w

ill

be w

eake

r

Mus

tM

ust

assu

me

that

NO

I de

clin

es w

ill be

grea

ter

PEA

K-T

O-T

RO

UG

H D

ECLI

NE

IN P

RO

PER

TY N

OI

EAR

LY 1

990s

EAR

LY 2

000s

To 2

009Q

3

APA

RTM

ENTS

(10%

)(1

3%)

(3%

)be

grea

ter

APA

RTM

ENTS

(10%

)(1

3%)

(3%

)

IND

UST

RIA

L(1

1%)

(14%

)(1

0%)

OFF

ICE

(20%

)(1

6%)

(4%

)

RET

AIL

(5%

)(3

%)

(9%

)

5AE

W R

eal E

stat

e M

arke

t Out

look

RET

AIL

(5%

)(3

%)

(9%

)

TOTA

L(1

2%)

(12%

)(4

%)


1419

Wha

tto

Exp

ectf

orN

OIG

row

thW

hatt

oE

xpec

tfor

NO

IGro

wth

The

econ

omy

isec

onom

yis

wor

se in

th

is c

ycle

an

d th

e pr

oper

typr

oper

tym

arke

ts w

ill

be w

eake

r

Mus

tM

ust

assu

me

that

NO

I de

clin

es w

ill be

grea

ter

PEA

K-T

O-T

RO

UG

H D

ECLI

NE

IN P

RO

PER

TY N

OI

EAR

LY 1

990s

EAR

LY 2

000s

To 2

009Q

3

APA

RTM

ENTS

(10%

)(1

3%)

(3%

)be

grea

ter

APA

RTM

ENTS

(10%

)(1

3%)

(3%

)

IND

UST

RIA

L(1

1%)

(14%

)(1

0%)

OFF

ICE

(20%

)(1

6%)

(4%

)

RET

AIL

(5%

)(3

%)

(9%

)

5AE

W R

eal E

stat

e M

arke

t Out

look

RET

AIL

(5%

)(3

%)

(9%

)

TOTA

L(1

2%)

(12%

)(4

%)

NC

REI

F Pr

oper

ty In

dex

Tota

l Ret

urn

(4 Q

uart

er R

ollin

g)p

y(

g)

1420


NC

REI

F Pr

oper

ty In

dex

Cap

Rat

es (Q

uart

erly

)p

yp

(y)


1421

NC

REI

F Pr

oper

ty In

dex

Cap

Rat

es (Q

uart

erly

)p

yp

(y)

Deb

tDriv

esR

ealE

stat

eP

ricin

gD

ebtD

rives

Rea

lEst

ate

Pric

ing

Cap

ital

flow

sdr

ive

FOU

R Q

UA

RTE

R M

OVI

NG

AVE

RA

GE

OF

DEB

T FL

OW

S A

ND

CA

P R

ATE

Sflo

ws

driv

epr

icin

g

Ava

ilabi

lity

mor

e9.

0%

9.5%

10.0

%

$300

$350

$400

mor

eim

porta

ntth

an c

ost

Mor

e de

bt

7.5%

8.0%

8.5%

$150

$200

$250

= lo

wer

yi

elds

6.0%

6.5%

7.0%

$0$50

$100

5.0%

5.5%

-$10

0

-$50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

8AE

W R

eal E

stat

e M

arke

t Out

look

As o

f 200

8Q4

Sour

ce: F

eder

al R

eser

ve, N

CRE

IF

1422


Exc

essi

ve L

ever

age

in th

e C

omm

erci

al M

ortg

age

Mar

ket

Com

mer

cial

& M

ultif

amily

Mor

tgag

es O

utst

andi

ng a

s %

of G

DP

35%

% o

f GD

P

25%

30%

15%

20%

10%

15% 0%5%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

PPRS

ourc

es:

Fede

ral R

eser

ve; M

oody

's E

cono

my.

com


1423

Exc

essi

ve L

ever

age

in th

e C

omm

erci

al M

ortg

age

Mar

ket

Com

mer

cial

& M

ultif

amily

Mor

tgag

es O

utst

andi

ng a

s %

of G

DP

35%

% o

f GD

P

25%

30%

15%

20%

10%

15% 0%5%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

PPRS

ourc

es:

Fede

ral R

eser

ve; M

oody

's E

cono

my.

com

The

Effe

ct o

f Lev

erag

e on

Rea

l Est

ate

Inve

stm

ent P

erfo

rman

ceg

$678

.2$1

87.1

U.S

Rea

l Est

ate

Cap

ital (

$BN

)Eq

uity

:$8

65.3

Sou

rce:

Em

ergi

ng T

rend

s 20

10

Priv

ate

Deb

tP

ublic

Deb

t

qy

$ 21.7

%

Deb

t:$3

,120

.678

3%

NC

REI

F/T

owns

end

Fund

Indi

ces

$2,2

51.6

$869

.0P

rivat

e E

quity

Pub

lic E

quity

78.3

%

NC

REI

F/T

owns

end

Fund

Indi

ces

1424


NC

REI

F/To

wns

end

Fund

Indi

ces:

Rol

ling

4 Q

uart

er P

erfo

rman

ceg

real estate distressed real estate: market trends and...

Documents