1. New York Law School
Real Estate Bankruptcy
Prof. David Kuney
Spring 2013

2. Part I: the basics.
Statutory power to sell: section 363
– 363(c) A debtor which is authorized to operate the business may enter into
transactions, including the sale or lease of property in the ordinary course.
• No court hearing or approval is required.
– 363(b) says a debtor may sell or use “other than in the ordinary course of
business” after notice and hearing.
• Parties in interest may object; court must review.
– Vertical and horizontal tests to determine “ordinary.”
– Business judgment test.

3. Adequate protection
• The power to sell by the debtor is tempered by
the countervailing power of the party holding an
interest to request adequate protection.
• Section 363(e) states that notwithstanding any
other provision, on request of a party that has an
interest in property, to be sold or leased the
court shall prohibit or condition such sale as
necessary to provide adequate protection of such
interest.

4. Credit bid
Section 363(k)
• “At a sale under subsection (b). . .unless the court for cause orders
otherwise, the holder of such a claim may bid at such sale, and, if
the holder of such claim purchases such property, such holder may
offset such claim against the purchase price of such property.”
• A mortgage lender is also entitled to credit bid, although this is
subject to “unless otherwise ordered.”
• Lenders are permitted to credit bid the face amount of their claim
and not just the secured amount. Cohen v. KB Mezzanine Fund II,
(In re SubMicron Systems Corp.), 432 F.3d 448, 459 (3rd Cir. 2006).
• Secured creditors do not have absolute right to credit bid; court
may decline right to bid for “cause.” In re Theroux, 169 B.R. 489,
499 (Bankr. D. R.I. 1994)(noting that, “there is no absolute
entitlement to credit bid”).

5. Not subject to appeal
• Ordinarily a sale cannot be set aside on appeal.
• Section 363(m) states that the “reversal or modification on appeal of an
authorization under subsection (b) or (c) . . . 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. . .unless such sale or lease were stayed pending appeal.”
• But see , In re PW, LLC held that while the “change of title” is not subject to
reversal, the terms of the sale, including the “free and clear” term are not
protected by 363(m).”
– Unclear/doubtful whether that other courts will follow this ruling, but
conservative advice mandates awareness.

6. Evolution of the use of non-ordinary course sales:
Judicial tolerance of accelerated sales process-no
need for “melting ice cube”
• Pre 1978 Code: Perishable standard. Authorization for a
sale was granted only when the asset was physically
perishable or liable to deteriorate in price and value.
• Traditional view: a sale too early in the case was in effect a
“sub rosa” (i.e., secret) plan of reorganization and hence
could only be permitted in an “emergency” such as the need
to sell perishable commodities (the melting ice cube; fruit
rotting on the dock).
– Sales prior to plan confirmation were viewed as
“exceptional” and not permitted absent imminent
danger.
• 1983: Second Circuit in In re Lionel, 722 F.2d 1063:
“articulated business purpose is enough.” [But not mere
appeasement of creditors?]
• Doctrine gradually evolved to slightly more liberal view and
permitted sales early. Many retailer bankruptcy cases in
2008 and 2009 experienced very prompt liquidation of
inventory and leases under section 363.
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7. General Motors and Chrysler
Were you thinking GM and
Chrysler were auto cases?
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Think again!

8. In re Chrysler LLC, 405 B.R. 84 (May 31, 2009)
• Facts
– $10 billion term loan to loan syndicate. Loan balance = $6.9 billion.
– Indiana State Teachers Retirement Fund holds $42 million, or less than 1%.
– Chrysler seeks court approval to sell substantially all of its assets free and clear of all liens to Fiat. Liens will be transferred to
proceeds.
– Bankruptcy Code 363(f) permits sale free and clear of liens if lenders “consent” (other provisions not pertinent).
– Indiana Funds does not consent.
• Issues:
– Can an agent for a syndicate “consent” to a sale under 363 and bind the minority member?
– Is the consent to a sale free and clear a loan modification or a release of collateral which requires unanimous consent of
lenders?
– [Geo political issue] Can the holder of a $42 million claim assert an argument that blocks the sale of a major industry, favored
by the U.S. government, and critical to the economic fate of the Union?
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9. The Chrysler subordination provisions
• Rights and remedies clause:
• Collateral Trustee then has the power to take any Collateral Enforcement
Actions permitted under the security documents or any action to “realize
upon the Collateral” including selling it. CTA sec. 2.2 and 2.3. Id. at 101.
• Collateral Enforcement Action was defined as exercising. . . any rights or
remedies with respect to the Collateral including any remedy under the
Uniform Commercial Code. . . or applicable law. CTA sec. 1.1. Id.
• No contest clause:
• “[N]o. . .[secured party] shall . . . (i) take any Collateral Enforcement
Action or (ii) object to, contest or take any other action that is reasonably
likely to hinder (1) any Collateral Enforcement Action initiated by the
Collateral Trustee, (2) any release of Collateral permitted under Section
6.12. . . CTA, sec. 2.5, Id at 102.
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10. The Chrysler rulings
• Agent’s consent to a sale free and clear of liens under 363(f) is exercise of “right or remedy.
– Section 2.5 gives the Collateral Trustee the exclusive right to pursue all of the lender’s rights and remedies and gives the Administrative Agent
as Controlling Party the exclusive authority to direct the Collateral Trustee’s action concerning the collateral. 405 B.R. at 102.
– “The right to consent to the sale of the Debtors’ assets that constitute Collateral is a Collateral Enforcement Action. It is an exercise of a right
pursuant to Bankruptcy Law concerning the Collateral.” 405 B.R. at 102.
• Not a loan amendment:
– Follows Beal Bank and GWLS and holds that the requirement for unanimous consent for an amendment, does not preclude application of specific provisions
to accomplish the parties’ agreed upon intent for collective action through an agent upon default.
• Not a release of collateral:
– The sale is not a “release of collateral” because the lien attaches to the proceeds of the sale, which remain as collateral to secure the loan made by the
Lenders.” 405 B.R. at 103.
• Policy argument: Avoids chaos:
– “Restricting enforcement to a single agent to engage in unified action for the interests of a group of lenders, based upon a majority vote,
avoids chaos and prevents a single lender from being preferred over others.” 405 B.R. at 103.
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11. Chrysler: implications
• Advances notion of “collective action” as strong policy basis for strict enforcement
of intercreditor agreement.
• “Freedom of contract” is now dominant theme.
• Provides enormous leverage to agent and majority to “drag along” dissidents.
• Substantial weakening of the rights of a “B” note holder.
• Strong policy argument in favor of enforcement and limited chaos and litigation.
• No ruling on whether agent’s decision to consent is a “breach” of some duty inter
the intercreditor agreement. [I]t is not clear that this Court would have
jurisdiction over this inter-creditor dispute.” Id. at 103.
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12. Sales free and clear
– Section 363(f) says that the estate can sell free and clear of any “interest” in property
if one of five conditions are met:
• applicable law permits
• The entity consents
• the interest is a lien and the price is greater than the value of
the lien
• the interest is in bona fide dispute
• such entity could be compelled in a legal or equitable
proceeding to accept a money satisfaction.

13. Successor liability?
• Free and clear of successor liability?
– Application in real estate case.
– Recent case where contractor’s crane collapsed on building, creating potential
tort claim against developer.
– Could bankruptcy court sell the asset free and clear of the tort claims?

14. What is an “interest”
• What is an “interest?”
• Congress intended “interest” to have an expansive scope.
• Courts agree that “interest” includes “in rem” interests such as liens.
• Lien encompasses junior mortgages, tax liens and mechanic’s liens.
• But what about other non-lien interest and claims?
• In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003) held that sale of airline
business was free of discrimination claims by flight attendants and rights under
travel vouchers.
• “[T]he term ‘any interest’ is intended to refer to obligations that are connected to,
or arise from, the property being sold.” Folger Adam, 209 F.3d at 259 ( citing 3
Collier on Bankruptcy ¶ 363.06[1] ).

15. 363(f)(3):
sales free and clear of liens
• 363(f) permits a sale free and clear of a junior lien if the price “is greater than the
aggregate value of all liens on such property.”
• Lien stripping: Can a court sell free and clear if the sales price is less than the
outstanding balance of all liens.
• Courts are split.
• One view- value means the secured value, and hence the value of the collateral.
– Under this view almost all assets can be sold free and clear.
• Second view: value means outstanding loan balance.

16. Free and clear– ultimate cleansing?
• Does free and clear clean up all claims
• 363 sale may permit assets to be sold of
more than a mere “interest”
• May be sold free of various contract
claims related to the secured property.
• Warranty claims?
• Tort claims?
• This “free and clear” when coupled with
the “no appeal” rule of 363(m) makes
sales almost impregnable.
•

17. 363 v deed in lieu v foreclosure
Issue 363 Deed in lieu Foreclosure
Extinguish junior liens Despite power to sell free and clear,
one court has denied right of credit bid
to extinguish junior liens. (In re Clear
Channel)
No extinction of junior liens until foreclosure;
but such right preserved.
Extinguishes all junior liens
Extinguish claims (warranty;
environmental)
In re TWA holds that sale may
extinguish claims related to the asset
being sold. Successor liability may be
possible(permitted in 3rd Circuit)
No power to cancel contract claims No power to cancel contracts.
Costs Likely to be higher than anticipated;
may require payment of bankruptcy
administrative costs; payment of liens
and debtor attorneys fees;
Less expensive, but note difference on
recordation tax.
Less expensive
Risks of cram down Some risk Does not preclude subsequent bankruptcy Avoids cram down risk
Fraudulent conveyance or
No risk. Minor risks; courts should auction as reasonable
preference
value and no preferential effect.
Protected from fraudulent conveyance
attack under BFP
Credit bid Code permits, but subject to court
order and objection; may include full
claim including deficiency.
n/a Credit bid permitted
Extinction of debt Credit bid will extinguish debt in
amount of bid; no right to preserve
claim
Statutory right to avoid merger and preserve
claim exists under various state laws; should
confirm each state.
Debt extinguished; deficiency created.
Recordation tax If done pursuant to a plan can avoid
tax.
Must pay recordation tax Recordation tax
Effect on guarantor Partial release in amount of credit bid None if claim preserved. Guarantor liable for deficiency
Time Process requires bidding procedures;
auction; notice; may take two months
or more.
Immediate; much shorter. Varies from state to state: 2 months to 2
years.