Trustee May Not Sell Estate Property Free and Clear of Liens

Posted by NCBRC - April 17, 2013

When the sale price exceeds the value of the property but is less than the aggregate of all liens secured by that property, section 363(f)(3) does not authorize sale of the property. In re Jaussi, No. 12-34062 (Bankr. D. Colo. March 18, 2013). In Jaussi, the chapter 7 trustee moved to sell debtor’s land valued at $39,000.00 to the senior mortgagee for $1,500.00 .  Between the mortgage holder and two judgment lienholders, the property was encumbered to the tune of $44,040.56 with $40,181.00 of that amount owed on the mortgage. The motion sought to make the sale free and clear of the two junior judgment liens.

The court found that the sale was not permitted by the Code. Specifically, the sale did not fall under either of the two relevant conditions set forth in section 363(f), under which a trustee may sell estate property free and clear of liens when: “(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest,” or “(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.”

The court dispensed in short order with the trustee’s argument that Colorado foreclosure law permits the sale, finding that section 363(f)(1) should be read narrowly to exclude a state’s foreclosure law as one of the non-bankruptcy laws that would justify the sale. Rather, the court found that “[t]his section applies only to situations where the owner of the asset may, under nonbankruptcy law, sell an asset free and clear of an interest in such asset,” such as in jurisdictions with “pure race” recording statutes which permit sale of real estate free of an unrecorded mortgage.

The issue surrounding section 363(f)(3) required more in-depth analysis as courts are divided with respect to the meaning of “value of all liens.”  Terrace Chalet Apartments v. Federal Nat’l Mtge. Ass’n, 159 B.R. 821 (N.D. Ill. 1993) (finding that text and legislative history indicates congressional intent to protect the total secured debt rather than the secured “interest.”).

Some courts find that the phrase refers to the value as determined under section 506(a) and, therefore, is limited to the secured portion of such liens. See, e.g., In re Beker Industries Corp., 63 B.R. 474, 476 (Bankr. S.D. N.Y. 1986) (“It is thus plainly indicated that the term ‘value’, as used in § 506(a) with respect to the interest of a secured creditor, means its actual value as determined by the Court, as distinguished from the amount of the lien. That indication and the last sentence of § 506(a) requiring determination of value upon disposition of an asset standing as collateral strongly support the conclusion that the term ‘value’, as employed in § 363(f)(3) is to be similarly interpreted.”).  Under this reasoning, a trustee may sell estate property free and clear of liens that are unsecured within the meaning of section 506(a).

The other view is that the “value of all liens” refers to their face value without regard to actual value. Under this view a trustee may only sell when the sale price exceeds the aggregate secured debt. See, e.g., Clear Channel Outdoor v. Knupfer (In re PW), 391 B.R. 25 (B.A.P. 9th Cir. 2008).

The Jaussi court adopted the latter view: that proper interpretation of “value of all liens” means their face value. The court reasoned that “[s]ection 363(f)(3) does not refer to the aggregate value of the ‘secured claims,’ as one would expect if the statute’s intent was to incorporate the valuation process of § 506(a).” This reasoning is supported by legislative history as extracted by the court in Terrace Chalet. “In discussing Section 363(f), the House and Senate Reports stress that ‘the trustee may sell free and clear if . . . the sale price of the property is greater than the amount secured by the lien.’ H.R.REP. No. 95-595, 95th Cong., 1st Sess. 345 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6301-02 (emphasis added); S.REP.No. 95-989, 95th Cong., 2d Sess. 56 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5842 (emphasis added). These reports expressly provide that Congress intended Section 363(f) to protect the amount of secured debt, not the actual economic value of the lien.” Terrace Chalet, 159 B.R. at 826.

Jaussi opinion


Post a Comment

You must be logged in to post a comment.