A district judge in New York wrote an opinion in 2014 espousing a narrow reading of Section 363(f)(5) that would allow the sale of property free and clear of liens only when the debtor or the trustee, not a creditor, “could compel the interest holder to accept a money satisfaction for its interest.” Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 710 (S.D.N.Y. 2014).

Because a trustee or an owner would seldom have the right to compel a lienholder “to accept a money satisfaction of such interest” in “a legal or equitable proceeding,” Dishi would typically bar selling liened property free and clear in bankruptcy cases.

Since district court opinions are not binding authority even in the same district, bankruptcy courts in New York typically do not follow Dishi. New York’s Bankruptcy Judge Philip Bentley wrote an opinion on March 4 politely explaining why Dishi is not the best or proper reading of Section 363(f)(5). Because the underlying order by Judge Bentley is already final, there will not be an appeal.

Selling a Hotel Free and Clear

The debtor operated a leased hotel in Manhattan that fell on hard times during the pandemic. With $114 million in first-lien debt and no financing to operate, Judge Bentley said that the debtor’s “only viable option” was to sell the assets.

After 13 months of mediation, the parties negotiated a global settlement calling for a sale to the holder of the first lien on a $78 million credit bid. To permit the hotel to reopen, the buyer was willing to pony up $20 million in cash to cure defaults on leases and contracts.

The only objection to the sale and confirmation of the plan came from the holder of a $189,000 mechanic’s lien, who wrapped itself in the Dishi flag. The mechanic’s lien was deeply underwater and would be treated as a general unsecured debt under the plan.

Sustaining the Dishi objection, Judge Bentley said, “would effectively elevate this lien holder’s rights from those of an unsecured to a secured creditor, enabling it to demand to be paid as the price of dropping its objection to the sale.”

The Best Reading of Section 363(f)(5)

The outcome turned on the interpretation of Section 363(f), which provides that a “trustee may sell property . . . free and clear of any interest in such property of an entity other than the estate, only if . . . (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”

Judge Bentley explained why Section 363(f)(5) “is often the only available basis for a free-and-clear sale.” Subsection (1), he said, is construed “narrowly, to apply only to a limited number of non-bankruptcy laws that permit non-judicial sales free and clear of liens.” If “the holder of a lien that is not in bona fide dispute refuses to consent,” he said that “subsections (2), (3) and (4) by their terms do not apply.”

“For decades” before Dishi, Judge Bentley said that “many courts and commentators considered it settled that section 363(f)(5) made free-and-clear sales widely available because foreclosure sales and UCC sales satisfied that subsection.” If Dishi were to govern, he said that “Section 363(f)(5) would rarely be satisfied.”

Judge Bentley said that Dishi “was right” in rejecting a “sweepingly broad construction” that would permit a sale free and clear if it were theoretically possible for a governmental condemnation to extinguish interests in property. Instead, he favored “a middle-ground construction” that would not “encompass . . . any conceivable hypothetical proceeding . . . but only proceedings that might realistically be brought in the case before the court if the automatic stay were lifted or did not apply.” In most cases, he said, “this would include either foreclosure proceedings or UCC sales.”

Employing a “realistic possibility” standard, Judge Bentley said, “does not render sections 363(f)(1) through (4) superfluous.” Unlike eminent domain takings, he said that foreclosure sales “do not extinguish all interests in the property,” such as “easements and covenants running with the land” and nondisturbance agreements.

“Most important,” Judge Bentley said, his interpretation “conforms more closely” with “the text, statutory context and purposes of this subsection.” He pointed out that “section 363(f)(5) is written in the passive voice.” By comparison, he said that “Dishi’s interpretation drastically narrows this language.”

Judge Bentley said that the propriety of his interpretation was “even clearer” when considering “the Bankruptcy Code’s other provisions concerning the treatment of secured debt.” Among other sections, he mentioned Section 506(a), where a secured creditor’s claim can be bifurcated into a secured and unsecured claim when the lien is partially underwater.

Pragmatically speaking, Judge Bentley said that Dishi “would depress the price any potential buyer would be willing to pay” or “enable holders of out-of-the-money liens to extract payment of hold-up value in exchange for waiving their liens.”

Judge Bentley overruled the objection and allowed the debtor to sell the lease “free and clear of all liens, claims and encumbrances.”