Debtors, whether a corporation or an individual, often need to divest of real estate holdings while under bankruptcy protection. Section 363 of the Bankruptcy Code provides an avenue (and often the only avenue) by which a trustee or debtor[1] in possession (DIP) may sell property of the estate.[2] Specifically, § 363(b)(1) provides that a trustee or DIP may sell property of the estate “other than in the ordinary course of business” after “notice and a hearing.”[3]
A sale is considered to be outside the ordinary course of business if the business is not authorized to operate (i.e., because it is being liquidated), if the business is authorized to operate but the sale is not in the ordinary course of the business (i.e., a clothing retailer seeks to sell off real property assets), or if an individual debtor is liquidating his/her assets.[4] While sales under § 363 apply to all estate property (tangible and intangible), this article focuses on navigating through a § 363 sale of real property. In most situations where real property of the estate is to be sold, the sale must occur under the auspices of the court pursuant to § 363(b)(1).
Section 363 requires that sales be conducted after notice and a hearing. This means that the movant must provide (1) adequate notice of the sale of the estate’s property; (2) an opportunity for objections; and (3) a hearing, if there are any objections.[5] While § 363(b)(1) does not necessarily require a court order sanctioning the sale of estate property, most buyers will require a court order as a “comfort order” to the buyer, providing them with added protections, such as the “good-faith purchaser” protection provided in § 363(m).[6] Pursuant to the Federal Rules of Bankruptcy Procedure (FRBP), at least 21 days’ notice of the proposed sale must be provided to all parties in interest, any committee and the U.S. Trustee.[7] The notice must include the following: (1) a general description of the property; (2) the time and place of any public sale, or the terms and conditions of a private sale; and (3) the time for filing objections.[8] While the FRBP provide the minimum requirements to provide adequate notice of a § 363 sale, many local rules have much stricter requirements in place. For example, in the U.S. Bankruptcy Court for the Central District of California, apart from the aforementioned requirements, a § 363 sale notice must include (1) the name and address of the proposed buyer; (2) consideration received by the estate, including all estimated costs of sale; (3) the brokers involved in the transaction and the commission to be received by each side; (4) tax consequences of such a sale for the estate; and (5) whether the proposed sale is free and clear of liens.[9]
From a practitioner’s standpoint, adequate notice of a § 363 sale often involves a considerable amount of disclosure and requires the attorney to become very familiar with all of the salient terms of the real estate transaction. Adequate notice is essential when moving for a § 363 sale; therefore, it is often best to err on the side of being overinclusive in the notice for a real property sale. In addition to listing the address of the property, the sales price, the purchaser(s), the broker(s) involved, and any lienholder(s) in the notice, it is advisable to include copies of the complete purchase agreement (with escrow instructions), title report, estimated closing statement and any other pertinent documents as exhibits to the sale motion. This will ensure that all parties-in-interest are provided with all the material facts surrounding the sale.
Section 363(f) allows a trustee or DIP, in certain situations, to sell the subject property free and clear of any liens.[10] With respect to real property, the most commonly used and longest recognized method by which a bankruptcy court authorizes the sale of property free and clear of liens is by allowing the liens to attach to the proceeds of the sale.[11] Under the Bankruptcy Code, property may also be sold free and clear of liens if (1) nonbankruptcy law permits a sale of the property free of the interest; (2) the lien or interestholder consents; (3) the sale price is greater than the aggregate value of all liens on the property; (4) the interest is in bona fide dispute; or (5) the interestholder could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest.[12] A motion for sale under § 363(f) is considered a contested matter governed by FRBP 9014, which requires that service of the motion for § 363 sale be in the same manner as provided under FRBP 7004 for service of a complaint and summons.[13] In situations involving the sale of real property pursuant to § 363(f), it is likely that the motion will have to be served on a bank (or other insured depository institution) that holds a deed of trust against the property. FRBP 7004(h) requires that service on an insured depository institution be made by certified mail that is addressed to an officer of the institution unless the institution has appeared through an attorney, the court orders otherwise or the institution has waived, in writing, its requirement to service pursuant to FRBP 7004(h).[14]
Service on a large insured depository institution (e.g., Bank of America NA), while not complicated, may be tricky. Bank of America’s officers are located at the bank’s headquarters in North Carolina, and sending certified mail copies of a motion for a sale of property in which Bank of America has an interest can be time-consuming. In addition, it is often unclear to the movant whether copies of the sale motion were actually directed to the appropriate person at the bank, which becomes particularly important if the bank’s liens are being negatively affected by a sale (such as a short sale).
Furthermore, some judges will also require orders granting § 363(f) sale motions and authorizing the sale of property be approved, in form and content, by the bank that holds a trust deed on the property. When dealing with large banks such as Bank of America, obtaining the appropriate signatures is often a time-consuming and difficult process. Thus, from a practical perspective, it is a good idea for the movant’s attorney to reach out to attorneys in the community whom he/she knows have previously represented the bank. These attorneys are likely to have a contact at the bank and can often represent the bank in the sale process, thus providing a good point of contact for the movant’s attorney and significantly streamlining the sales process.
From a buyer’s prospective, the most important elements of a § 363 sale — and often the reason why buyers will require a “comfort order” from the court authorizing such a sale — is the protection from appeal or modification of the sale pursuant to § 363(m). Section 363(m) provides buyers with the peace of mind of knowing that the reversal or modification on appeal of an order authorizing a § 363 sale does not affect the validity of such a sale, as long as the buyer purchased the property in good faith and the appellant failed to stay the sale.[15] This “good-faith purchaser” protection is very broad, and applies even in objections claiming that the bankruptcy court did not have jurisdiction over the case.[16] While the Bankruptcy Code does not define a “good-faith purchaser,” courts have held that a good-faith purchaser is a purchaser who buys property for value, without knowledge of adverse claims.[17] The party seeking the good-faith purchaser protection has the burden of proof of showing good faith.[18]
From a practical standpoint, different bankruptcy courts have different procedures for establishing good faith. In the U.S. Bankruptcy Court for the Northern District of California, in order for a buyer to obtain the good-faith purchaser protection of § 363(m), the buyer must file a written declaration demonstrating its good faith and the absence of fraud or collusion among the purchaser and the debtor’s or the estate’s agents or employees.[19] Such a declaration must also disclose facts material to the good-faith determination, such as the purchaser’s pre- and post-petition relationships with (1) any other bidder; (2) the debtor or the debtor’s current or former officers, directors, agents or employees; and (3) any of the debtor’s major creditors or equity securityholders.[20] Preparing such a declaration will require the movant’s attorney to get in touch with the purchasers (or their attorneys, if applicable), and the real estate professional representing the purchasers. As a practice pointer, it makes the most sense to submit the “good-faith purchaser” declaration as part of the sale motion so that any objections to the declaration can be heard at the time of the sale motion, and the entry of the sale order can include the protection of § 363(m).
Conclusion
Communication is key in navigating a successful § 363 sale of real property. The § 363 sale process will often involve the sharing of documents with a number of parties, including the buyer and his/her real estate sales professional, the seller and his/her sales professional, the escrow company, title company, bank(s) holding any lien(s) on the property and the court. Thus, it is very important that everyone involved in the § 363 sales process is kept up-to-date with all developments in order to ensure a smooth and effective sale.
[1] 11 U.S.C. § 363.
[2] See 4 Collier on Bankruptcy ¶ P 363.01 (16th ed. 2013).
[3] See 11 U.S.C. § 363(b)(1).
[4] See 4 Collier on Bankruptcy ¶ P 363.02 (16th ed. 2013).
[5] Id.
[6] Id.; see also 11 U.S.C. § 363(m).
[7] See Fed. R. Bankr. P. 6004(a) and 2002(a)(2).
[8] See Fed. R. Bankr. P. 2002(c)(1).
[9] See U.S. Bankruptcy Court for the Central District of California L. Bankr. R. 6004-1(c)(3)(A)-(J).
[10] See 11 U.S.C. § 363(f).
[11] See 4 Collier on Bankruptcy ¶ P 363.06 (16th ed. 2013).
[12] See 11 U.S.C. § 363(f)(1)-(5).
[13] See Fed. R. Bankr. P. 6004(c) and 7004(a) - (h); see also 4 Collier on Bankruptcy ¶ P 363.06 (16th ed. 2013).
[14] See Fed. R. Bank. P. 7004(h).
[15] See 11 U.S.C. § 363(m).
[16] See 4 Collier on Bankruptcy ¶ P 363.11 (16th ed. 2013); see also Ginther v. Ginther Trusts (In re Ginther Trusts), 238 F.3d 686 (5th Cir. 2001).
[17] See 4 Collier on Bankruptcy ¶ P 363.11 (16th ed. 2013); see also In re Mark Bell Furniture Warehouse Inc., 992 F.2d 7, 8 (1st Cir. 1993).
[18] See 4 Collier on Bankruptcy ¶ P 363.11 (16th ed. 2013); see also T.C. Investors v. Joseph (In re M Capital Corp.), 290 B.R. 743 (B.A.P. 9th Cir. 2003) (noting that proponent of good faith has burden of proof and that good faith may not be assumed).
[19] Guidelines of the U.S. Bankruptcy Court for the Northern District of California regarding sale orders, available at www.canb.uscourts.gov/procedures/dist/guidelines/order-re-sale-orders (last visited Aug. 15, 2014).
[20] Id.