As reflected in the facts
in the Clear Channel
case, a 363 sale opens
up another avenue for
the secured lender to
realize on its collat-
eral using a “credit bid.”
Burbank started foreclosure proceedings. The borrower filed Chapter 11
and DB became the stalking horse bidder with a credit bid equal to its $40
million debt. DB won the bid and the
Bankruptcy Court approved the sale of
the assets free and clear of all liens—
including the junior lien of Clear
Channel. Even though Clear Channel
objected to the sale, the Bankruptcy
Court overruled the objection and denied Clear Channel’s request for a stay
so that the sale had gone forward or,
to use the common metaphor, “the egg
had been scrambled”. The sale order
by the Bankruptcy Court included the
finding that DB was a “good faith purchaser”. Note, however, that the credit
bid by DB did not result in any cash to
bankruptcy estate.
On appeal, the Bankruptcy Appellate
Panel tackled several issues. First, it went
through whether evidence had been presented to the Bankruptcy Court to show
that one of the five alternative conditions
under Section 363(f) for a sale of assets to
be free and clear of liens had been satisfied. Ultimately, it concluded that there
had been no evidence submitted that
satisfied any one of such conditions.
The BAP pointed out that the sale
order of the Bankruptcy Court authorized
two things: (i) the sale under Section
363(b) and (ii) the “lien stripping” under
Section 363(f). In examining the language
of Section 363(m), the court focused on
the language that protects “the validity
of a sale” from a reversal or modification
on appeal. The BAP said, “This limita-
tion leads us to conclude that Congress
intended that Section 363(m) address
only changes of title or other essential
attributes of a sale…The terms of those
sales, including the “free and clear” term
at issue here, are not protected”. 391 B.R.
30, 35-36. The BAP then remanded the
case back to the Bankruptcy Court to
determine whether one of the conditions
of Section 363(f) was satisfied.
Some Implications of Clear Channel
No case better illustrates the need for
an intercreditor agreement. If there had
been an intercreditor agreement between DB as the first lienholder and Clear
Channel as the second lienholder, there
likely would have been a provision for the
second lienholder’s consent to asset sales
approved by the first lienholder. Such
consent would likely have eliminated the
basis for the litigation.
The case certainly raises the specter
of junior lienholders making claims and
seeking to hold up sales in exchange for
payments or other concessions from the
senior lienholder or the debtor. The con-
cern, of course, is that if buyers cannot
rely on the free and clear relief of the sale
order, it may “chill” their interest in buy-
ing assets at a 363 sale, which may reduce
the number of potential buyers and what
they are willing to pay. Or, lenders, who
would otherwise provide DIP financing
on the assumption that they will be paid
from the proceeds of a 363 sale, may be
less willing to proceed to make the loans
on such basis, which may lead to more
liquidations.
