• 363 Sale Denied because Secured Creditor not Paid in Full from Proceeds
  • August 20, 2015
  • Law Firm: Mintz Levin Cohn Ferris Glovsky Popeo P.C. - Boston Office
  • A Delaware bankruptcy court held in In re Ferris Properties, Inc. that the debtors could not sell their property free and clear of the secured lender’s mortgages because the lender would not be paid in full from the proceeds of the sale. Specifically, the Court held that the lender could not be compelled to accept a money satisfaction of its interests under section 363(f)(5), and that the lender did not consent to the sale under section 363(f)(2).

    The issue arose when the debtors sought approval of a 363 sale of eleven properties on which Wells Fargo had mortgages. Well Fargo objected to the sale because the sale proceeds would be less than the amounts owed on the properties. The debtors argued that the proposed sale was proper because (1) Wells Fargo could be compelled to accept a money satisfaction of its interests in the properties under section 363(f)(5); and (2) Wells Fargo consented to the sale under section 363(f)(2).

    Section 363(f)(5)
    allows a debtor to sell property of the estate free and clear of liens, claims and encumbrances of an entity’s interest if that entity “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” The debtors and a potential purchaser asserted four separate scenarios under which Wells Fargo could be compelled to accept a money satisfaction of its interest in the properties: (1) under section 1129(b)(2)(A); (2) under section 724(b); (3) through a state law monition sale; and (4) through a state law partition sale.

    Section 1129(b)(2)(A)
    can constitute a “legal proceeding” by which a sale proponent can satisfy section 363(f)(5). To be applicable in this case, the debtors were required to show that (1) Wells Fargo would retain its lien; (2) Wells Fargo was receiving deferred cash payments totaling at least the allowed amount of its claim; or (3) Wells Fargo was receiving the indubitable equivalent of its claim. The Court found that the debtors failed to satisfy any of these elements, thus section 1129(b)(2)(A) was not applicable.

    Section 724(b)(2)
    subordinates certain tax liens to administrative expenses and can support a sale under section 363(f)(5) if the sale fails to fully satisfy a tax lienor. However, Wells Fargo was a mortgagor, not a tax lien creditor. Therefore, the Court held that section 724(b) was not a proceeding under which Wells Fargo’s interest could be subordinated or under which it could be compelled to accept a money satisfaction which was less than its claim.

    In a monition sale, property with delinquent taxes is sold, free and clear of other liens and encumbrances, to pay the back taxes. Eight of the properties in this case were delinquent on water and sewage taxes, thus the debtor argued that the county could pursue a monition sale. However, monition sales permit parties in interest to cure the delinquent taxes, or redeem the property within one year of the monition sale by paying the monition sale purchase price plus fifteen percent. The Court held that because Well Fargo could avoid a monition sale by paying the delinquent taxes or could redeem the property if it were sold, Wells Fargo could not be compelled by a monition sale to accept a money satisfaction of its interests in the properties.

    In a partition sale, property held by two or more joint tenants or tenants in common is sold free and clear of all ownership interest in the property. However, because Wells Fargo was not a joint tenant or a tenant in common in the properties, the Court found that the debtors could not rely on a partition theory to support a sale of the properties free and clear of Wells Fargo’s liens under section 363(f)(5).

    Section 363(f)(2)
    provides that a debtor may sell property of the estate free and clear of liens, claims and encumbrances if that entity consents to the sale. The sale proponents argued that Wells Fargo never properly objected to the Sale Motion and therefore must be deemed to have consented. The foundation of this argument was that Wells Fargo had erroneously claimed to hold a mortgage on certain other properties of the debtors, unrelated to those at issue in the sale motion. The Court found that the error did not materially affect the sale proponents’ rights and that the error was not so significant as to void Wells Fargo’s objection to the sale. Therefore, the Court held that the sale could not be confirmed under section 363(f)(2).