5.2 Use, Sale or Lease of Assets or Property—section 363

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

5.2 USE, SALE OR LEASE OF ASSETS OR PROPERTY—SECTION 363

5.201 Statutory Authority and Trustee's Powers. Section 363 of the Bankruptcy Code governs the rights and powers of a trustee ⁴⁷ regarding the use, sale, or lease of estate property. Specifically, section 363 sets forth the circumstances under which the trustee may use, sell, or lease property of the estate and distinguishes between sales that are within or outside of the ordinary course of the debtor's business. ⁴⁸ The trustee's powers under section 363 fall into the category known as "administrative powers." The administrative powers are a robust group of tools for the trustee's use in administering the debtor's estate or to operate the debtor's business if so authorized. But these tools, arguably, find their highest and best use in the hands of the reorganizing debtor, most especially in Chapter 11.

5.202 Use, Sale, or Lease in Ordinary Course of Business. If the business of a debtor is authorized to operate under sections 721, 1108, 1203, 1204, or 1304 of the Bankruptcy Code, it may use, sell, or lease property of the estate in the ordinary course of business without notice or a hearing. ⁴⁹ For example, where the debtor's business is leasing farm equipment, it may continue to lease farm equipment to third parties without approval of the bankruptcy court because that activity is within the ordinary course of the debtor's business. However, under section 363(c), the same trustee would not be permitted to sell, rather than lease, farm equipment because it is not the debtor's business to sell farm equipment. To sell farm equipment, the trustee must look to section 363(b) of the Code.

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5.203 Use, Sale, or Lease Outside Ordinary Course of Business. Section 363(b) authorizes the trustee to use, sell, or lease estate property outside the ordinary course of business (often referred to as a "363 sale") if the trustee provides creditors with notice and an opportunity for a hearing pursuant to Bankruptcy Rule 6004(a). Because Bankruptcy Rule 6004 does not require a hearing to sell property outside the ordinary course of business, if no party in interest files an objection to the motion, the court may grant the motion without a hearing. ⁵⁰

The trustee must file a motion seeking the court's approval of the terms and conditions of the proposed sale. Opponents of the proposed sale have the opportunity to file written objections. If any party in interest objects, the court will schedule and hold a hearing on the motion to sell or lease property outside the ordinary course of business. ⁵¹ A 363 sale may take anywhere from a few days to several months to complete, depending upon the nature of the asset being sold and the number, level, and merits of any opposition.

The contents of a motion seeking approval of a 363 sale must provide detailed information about the essential terms and conditions of the sale, such as the identity of the prospective purchaser, purchase price, and assets to be sold. Generally, the motion will also contain specific detailed provisions regarding the timing and manner of submitting any competing offers for the assets, or if applicable, a request seeking approval of an auction or other sales procedure to determine the successful purchaser.

The court will determine the sufficiency of a motion to sell by reviewing whether:

1.	The terms of the sale constitute the highest and best offer for the assets to be sold;
2.	Negotiations for the proposed sale were conducted at arm's length;

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3.	The sale is in the best interest of the bankruptcy estate and creditors; and
4.	The proposed purchaser has acted in good faith.

A sale will not be approved unless these general considerations are met.

If the transfer will also involve the disclosure of personally identifiable information about individuals to persons who are not affiliated with the debtor, and if such disclosure violates a privacy policy that the debtor had in effect on the date of the bankruptcy filing, the use, sale, or lease should conform to the privacy policy or a hearing must be held for the court to decide if the transfer should occur. ⁵²

5.204 Sales Free and Clear of Interests.

A. Requirements.

Section 363(f) of the Bankruptcy Code authorizes the sale of property of the estate free and clear of any pre-existing interests or liens in the property. A trustee may sell property of the estate pursuant to subsections (b) and (c) of section 363 free and clear of interests or liens of another entity only if:

1.	Applicable nonbankruptcy law permits sale of the property free and clear of the interest;
2.	The other entity consents;
3.	The interest is a lien and the sale price is greater than the aggregate value of all liens on the property;
4.	The interest is in bona fide dispute; or

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5. The other entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. ⁵³

Subsection (d) of section 363 makes it clear that any use, sale, or lease of the assets of a nonprofit entity must be in accordance with any applicable nonbankruptcy law governing that entity.

B. Attachment of Liens to Proceeds. The debtor must provide adequate protection to the owner of the interest or lien pursuant to subsection (e) of section 363. ⁵⁴ The most common form of protection is to attach the lien or interest to the proceeds of the sale. ⁵⁵ While adequate protection can come in different forms, at all times it must be adequate under the cir-cumstances. ⁵⁶

5.205 Sale of Interests of Co-owners. Section 363(h) of the Bankruptcy Code governs the sale of estate property held jointly by a debtor and a nondebtor entity. The Code authorizes the trustee...