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Senior Lienholder's Leverage in Disposition of Its Collateral

Can a debtor always compel its non-consenting secured lender to accept a money satisfaction of its interest in the debtor's property? Not according to the United States Bankruptcy Court for the District of Delaware.

Recently, the court in In re Ferris Properties, No. 14-10491 (Del. Bankr. Ct. July 30, 2015), wrestled with two issues involving the debtors' proposed Section 363 sale of 11 parcels of real property. First, could the secured lender be compelled to accept a money satisfaction of its interest in the properties, and, second, could the secured lender's failure to properly object to the sale motion be deemed consent to the sale.

Debtors Ferris Properties and Lexell sought to sell 11 parcels of real property through a proposed bulk sale, free and clear of all liens, claims, encumbrances and interests pursuant to Section 363 of the Bankruptcy Code. All 11 properties were encumbered by mortgages either held by or serviced by Wells Fargo Bank, which objected to the sale because, inter alia, the proposed purchase price of $240,000 fell far short of Wells Fargo's indebtedness of $1,337,545. Believing there was a pool of investors willing to bid higher, Wells Fargo was in the process of foreclosing on the majority of the properties at the time of the bankruptcy filing and had filed a motion for relief from the automatic stay in order to proceed with the foreclosure and take the properties to sheriff's sale.

Section 363(b)(1) of the Bankruptcy Code provides that a debtor, "after notice and hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. §363(b)(1). Although Section 363 of the Bankruptcy Code does not specify a standard for determining when it is appropriate for a court to authorize the use, sale or lease of property of the estate, courts generally require a debtor to show that each of the following elements has been met before a Section 363(b) sale may be approved: (i) that a sound business reason exists for the proposed transaction; (ii) that the sale has been proposed in good faith; (iii) that the sale price is fair and reasonable; (iv) that accurate and reasonable notice of the transaction has been provided. See In re WDH Howell, 298 B.R. 527, 534 (D.N.J. 2003); In re Stroud Ford, 163 B.R. 730 (Bankr. M.D. Pa. 1993). Courts have made it clear that a debtor's showing of a sound business justification need not be exhaustive, but rather a debtor or trustee is "simply required to justify the proposed disposition with sound business reasons." 

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