Sale Free and Clear

SALE FREE AND CLEAR OF LIENS

If authorized by the court, property of the bankruptcy estate may be sold by the debtor in possession (Chapter 11 or 13) or by the trustee (Chapter 7) free and clear of liens. Code, Sec. 363(f). The motion for the order to sell free and clear of liens must be served on all lien holders, and notice of the sale must be given to all parties in interest. It must be verified that any creditor whose lien is divested received notice of the sale. The court may order the sale free and clear of all liens, or free of a certain class of liens but subject to others.

In order to insure a sale of scheduled property free and clear of liens, the following is required to be recorded in the Public Records:

1. Proof that all parties having an interest in the property and all creditors whose lien is divested were given proper notice of the motion and hearing.
2. The court docket showing no objections to the motion, and also that there was no appeal of the order authorizing the sale.
3. Certified copy of the Order of the bankruptcy court authorizing the sale free and clear of liens and over-ruling any objections that had been filed.
4. The deed conveying title should state that it is free and clear of liens pursuant to the bankruptcy court order.

However, because of decisions by the United States Supreme Court, WFG will not rely on a bankruptcy court order that property be sold free and clear of liens of the state, a county or a municipality. This includes ad valorem taxes. Fidelity will require that such liens be specifically released by the governmental entity.

Finality of Bankruptcy Sales and Appeals

Pursuant to Federal Rules of Bankruptcy Procedure 6004(h) and 6006(d), any order approving a sale of property of the bankruptcy estate is subject to an automatic stay of effectiveness of such order for a period of 14 days after entry of the sale order. This is designed to allow any objectors an opportunity to file an appeal or to make a motion for reconsideration.

However, the 14-day stay of sale orders may be shortened (or lengthened) if “the court orders otherwise.” Federal Rule of Bankruptcy Procedure 6004(h). In order to avoid the additional economic burden of paying 14 more days of “carry costs” for the assets, most debtors or trustees routinely request at the sale hearing that the 14-day stay under Federal Rule of Bankruptcy Procedure 6004(h) be waived so that the closing can occur immediately (and a finding supporting the waiver of the 14-day stay would be included in the proposed sale order).

Despite the opportunity for appeals, there is a strong federal policy of protecting the finality of sale orders in bankruptcy, which, in turn, creates certainty in the market and helps maximize the value of the assets. One reflection of this policy of “finality” is provided by the doctrines of equitable and statutory mootness that severely limit the ability of any party seeking to challenge a bankruptcy sale on appeal.

Under either doctrine, the appealing party will generally find its appeal to be rendered “moot” unless the party successfully obtains a stay of the sale during the pendency of the appeal. If not, the closing of the sale will usually provide a basis to dismiss the appeal without the appellate court even addressing the merits of the appeal.

Statutory mootness is based upon 11 U.S.C. § 363(m), which provides that the reversal on appeal of an order approving a sale does not affect the validity of the closing of the sale to the buyer if the purchaser acted in “good faith” and if no stay of the sale was in effect. 11 U.S.C. § 363(m).

As noted above, the seller and buyer will almost always make a “good-faith” presentation at the sale hearing, seek to obtain a “good-faith” finding in the sale order, and will attempt to have the 14-day stay of Federal Rule of Bankruptcy Procedure 6006(h) waived in an effort to thwart and moot any appeals (i.e., by closing the sale immediately following entry of the sale order and before the buyer can run to the district court or circuit court for a stay pending appeal).

Equitable mootness is similar to statutory mootness except that instead of being based on Section 363(m), it is based on equitable principals, and a showing of prejudice to the buyer and seller and the need for finality of sales. The procedure for obtaining a stay pending appeal of a sale order is governed by Federal Rule of Bankruptcy Procedure 8005 and local rules.

As a result of the mootness doctrines, a party seeking to challenge the sale must attend the sale hearing and, if unsuccessful, seek to challenge the Section 363(m) findings and/or seek to have a stay of the sale order in place — or else it is highly likely that the buyer and seller can close the transaction and moot the appeal.