Bankruptcy Sales Free And Clear

Bankruptcy sales

Now that the real estate market in my area is improving, we are dusting off another of our little used skills to effect sales of property during a Chapter 13:  the sale free and clear of liens.

The ability to sell property subject to disputes and continue the fight over a bank account, rather than a piece of property, is one of the real treasures in the Bankruptcy Code.

A sale free and clear transfers the disputed lien or interest from the property to the proceeds of the sale.  The order typically provides that the lien on the proceeds has the same validity and extent as the lien had when it attached to the real estate.

The seller can deliver clear title to a buyer, and the parties can work out or litigate the rights to the proceeds thereafter.

Let’s look at how it works, and flag some of the potholes you can fall in along the way.

Meet §363(f)

The governing subsection is found in Chapter 3 of the Code, thus it applies to sales in bankruptcy cases under any chapter.  So, while it speaks of the power of the “trustee” to sell property, a Chapter 13 debtor may invoke it as well.

Five alternative bases for a sale free and clear appear:

  1. Applicable non bankruptcy law permits sale free and clear
  2. The entity affected consents
  3. The interest is a lien and the value of the property is greater than the total of all liens
  4. The interest is disputed
  5. The holder of the interest could be compelled to accept a money judgment in satisfaction.

We’ll assume for ease of discussion that the interest we are selling free and clear of is a disputed lien, which is the most common scenario in my experience.  And, like anything associated with bankruptcy procedure, I’ll tell you how it works where I practice. Your mileage may vary.

Sale versus Sale Free and Clear

Be clear that getting an order to sell property free and clear of a particular lien doesn’t excuse you from complying with the usual procedures to sell property of the estate.

The creditors are entitled to notice of the sale, with the particulars of the price and the proposed disposition of the proceeds.  General creditors get 21 days notice of the proposed sale.  The real estate professionals may need to have their engagement approved by the court.

Motion to Sell Free and Clear

The motion directed at the disputed lien is a contested matter, directed at a particular entity.  Check out the bankruptcy rules for contested matters for the notice required to be given and the manner of service. FRBP 9014.

Note that moving papers in contested matters must be served in the same manner as adversary proceedings.  FRBP 9014(b). Serve the right folks just as though the motion was a complaint (FRBP 7004) , or you’ll find yourself redfaced or worse at the hearing.

Absent an order shortening time, our local rules provide 28 days notice to the target creditor of your intent to convey the property without full payment of the lien.

The motion papers have to establish that the lien or interest in question is one to which the statute applies. Be clear about which of the statutory bases for the sale apply.

Typically, the order granting the motion will specify

  • how much money will be held back, subject to the disputed lien; 100% or some larger increment
  • who will hold the money
  • whether a separate interest bearing account is required
  • any time limits within which an adversary proceeding for a determination on the merits must be filed

Be mindful of FRBP 6004 which provides that any order authorizing the sale of property is automatically stayed for 14 days.

Close the deal

Most real estate transactions come with timelines.  Trouble results when the client and/or the real estate agents craft the deal without involving bankruptcy counsel.

Your role, in a perfect world, will be to identify up front the need for a motion to sell free and clear, and to educate all concerned about the requirements of a bankruptcy sale.  Particularly, make sure that closing is scheduled for after the sale order becomes final, not just after that order is issued.

The player in a sale transaction too often forgotten, to the parties’ later chagrin, is the title insurer.  The joke in our office and in our bankruptcy courtrooms is that the world is really run by title companies.  No matter how right and tight your legal procedures are, if the title company won’t issue title insurance, your transaction is not going to close.

Get the title company involved early with the issues and the timelines.  Draft the proposed order authorizing sale free and clear early and solicit comments and approval, in advance, from the title insurer, to the form of the order.

Then, while everyone else is patting themselves on the back for having closed the sale, you can retreat to your office to file the adversary to determine who, in the end, gets the money now impressed with the disputed lien.

Image courtesy of Flickr and Dan Moyle.