9.4 Sale or Other Use During Bankruptcy of Assets Subject to Liens

• Library: Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.)

9.4 SALE OR OTHER USE DURING BANKRUPTCY OF ASSETS SUBJECT TO LIENS

9.401 Sales Free and Clear of Liens. Section 363 of the Code provides the DIP or the trustee broad authority to use, sell, or lease property of the estate in the ordinary course of business. This provision is normally of consequence only in Chapter 11 cases, since Chapter 7 trustees are not normally permitted to operate the debtor's business. ²³⁸ The exact opposite rule exists in Chapter 11 cases, allowing the DIP or the trustee to operate the debtor's business. ²³⁹

Section 363 contains provisions governing the use, sale, or lease of property outside the ordinary course of business and, in some circumstances,

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allows the DIP or trustee to sell property free and clear of liens. In order to sell property outside of the ordinary course of business, the DIP or trustee must receive authorization from the bankruptcy court after notice and a hearing. ²⁴⁰ FRBP 6004(f) specifies that such sales may be either public or private. There is no similar requirement for use, sale, or lease of property in the ordinary course of business, though the DIP or trustee may not use, sell, or lease cash collateral unless each entity that has an interest in the cash collateral consents or the bankruptcy court so orders after notice and a hearing. ²⁴¹

Whether the proposed sale of property is or is not in the ordinary course of business, the DIP or trustee may attempt to sell the property "free and clear" of any interest in the property of an entity other than the estate. ²⁴² Section 363(f) provides that the debtor may sell property free and clear of liens only if: (i) nonbankruptcy law allows such a sale; (ii) the entity holding an interest in the property consents; (iii) the price at which the property is to be sold is greater than the aggregate value of all liens on the property; ²⁴³ (iv) the interest in the property is in bona fide dispute; or (v) the entity holding an interest in the property could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of the interest.

A sale free and clear of liens is subject to section 363(e), which requires adequate protection of the secured party's interest in the property. FRBP 6004(c) provides the procedure pursuant to which such sales must take place. Adequate protection is normally provided by the imposition of a lien of the same stature on the proceeds of the sale. This results in the property being sold free and clear of liens, with all liens being shifted to the proceeds of the sale subject to the bankruptcy court's determination of the rights of the various secured claimants. After this decision, the bankruptcy court will determine whether all or any portion of these proceeds are to be distributed to lien claimants or retained by the bankruptcy estate.

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9.402 Imposition of Junior or Senior Liens.

A. Unsecured Postpetition Financing. Section 364(a) of the Code allows the DIP to incur debt in the ordinary course of...