Unusual Facts Permit Selling Property Free and Clear of Judicial Liens

Given the unusual facts of the case, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., decided that he had power to sell real property free and clear under Section 363(f)(5), even though holders of judicial liens objected and would not be paid.

An individual owned real property subject to two mortgages totaling slightly less than $1.9 million.

There were judgments against the debtor totaling another $1.7 million. The judgment creditors had obtained judicial liens against the property to secure the judgments.

In addition, there were tax liens of about $400,000 against the property. Just like the judgments, the tax liens were also personal obligations of the individual who owned the real property.

The individual owner transferred the real property’s title to a corporation that he owned the day before the corporation filed a chapter 7 petition. The owner didn’t file bankruptcy himself.

Despite the transfer, the property remained subject to the mortgages, the judicial liens and the tax liens.

The corporation’s chapter 7 trustee obtained an offer to sell the property for $1,920,000, or enough to satisfy the two mortgages in full. The mortgage holders consented to a sale of the property in bankruptcy court, thus satisfying the requirements of Section 363(f)(2) as to them.

The holders of the judicial liens objected to a sale free and clear of their judgment liens. In his April 26 opinion, Judge Grossman assumed that the tax lienholders also objected to the sale free and clear.

Section 363(f)(3)

The question was whether Judge Grossman could sell the property free and clear under Section 363(f) despite the objections. He first addressed Section 363(f)(3), which permits a sale “free and clear of any interest in such property . . . only if— (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.”

What does the statute mean when it says “aggregate value of all liens on such property?” Does “value” of the liens refer to the face amount of the liens or only the extent to which the liens would have value under Section 506(a)?

Judge Grossman disagreed with In re Beker Indus. Corp., 63 B.R. 474 (Bankr. S.D.N.Y. 1986), where the late Bankruptcy Judge Howard C. Bushman, III held that “value” as used in Section 363(f)(3) is the same as “value” in Section 506(a). That section says that a claim is secured only “to the extent of the value of such creditor’s interest in the estate’s interest in such property.” In other words, Section 506(a) bifurcates a secured claim into a secured claim for the value of the collateral and an unsecured claim for the deficiency resulting from insufficient value of the collateral.

Judge Grossman followed the line of cases concluding that “value” in Section 363(f)(3) means the face amount of the liens. “Under this approach,” he said, “the proposed sale price of the property must be ‘greater than’ the aggregate actual amount of all liens encumbering the property.”

Invoking the “plain language of the statute,” Judge Grossman decided that the property could not be sold free and clear under Section 363(f)(3) because the sale price was not greater than the total face amounts of the liens against the property.

Section 363(f)(5)

Judge Grossman then turned to Section 363(f)(5) and found grounds for selling property out from under the judicial and tax lienholders.

Section 363(f)(5) permits a sale if the lienholder “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” Judge Grossman first dealt with the judicial liens and found the power to sell given the “unique” facts of the case.

Judge Grossman first decided that the judicial liens represented the judicial lienholders’ “interests,” but the question remained whether they could be compelled “to accept a money satisfaction.”

In an ordinary foreclosure, the judicial lienholders’ interests would be wiped out and they would receive nothing. Because the judicial lienholders would be receiving no “money satisfaction,” Judge Grossman concluded that Section 363(f)(5) would not permit a sale free and clear in a situation where the debtor had personal liability for the debts giving rise to the liens.

The facts of the case, however, were out of the ordinary. The corporate debtor had no personal liability for the debts underlying the liens. In addition to the liens, the judicial lienholders also held judgments against the owner and could satisfy their claims by attaching other property belonging to the owner.

Were the judicial lienholders to collect in full by attaching the owner’s property, their liens on the property would terminate. In that respect, Judge Grossman said that Section 363(f)(5) “merely requires the possibility of a proceeding under which the Judgment Lienors can be compelled to accept money in satisfaction of their interest.”

If the owner were to offer to pay the judicial lienholders in full, Judge Grossman said they “would be compelled to accept a monetary payment in lieu of their liens on the Property.” He therefore concluded that he could order a sale free and clear because the judicial lienholders could be compelled to accept money in satisfaction of their liens.

The result was the same for the holders of the tax liens, but for a somewhat different reason.

Judge Grossman said that the tax liens could be subordinated under Section 724(b), thus forcing the holders of the tax liens to accept a money satisfaction and giving the court power to sell free and clear.