Clear Channel Affects Debtors´ Ability To Sell Assets Under Section 363 - Insolvency/Bankruptcy - United States (2023)

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In Clear Channel (Clear Channel Outdoor, Inc. v.Knupfer, 391 B.R. 25 (B.A.P. 9th Cir. 2008)), the BankruptcyAppellate Panel for the Ninth Circuit (BAP) issued a potentiallysweeping decision on the ability of a debtor to sell its assets"free and clear" of "out-of-the-money" liensunder § 363(f) of the Bankruptcy Code. The BAP held that thedebtor could not sell its property to a senior lienholder (under a"credit bid") free and clear of the liens of a juniorlienholder on the property. Although the decision came in thecontext of a credit bid, the Court's reasoning could apply toprevent the sale of property free and clear of a junior lien under§ 363(f) of the Bankruptcy Code in any case where the saleprice is less than the amount of the junior lienholder'sclaim.

If the Clear Channel opinion is followed by courtsoutside of the Ninth Circuit, it could have a dramatic impact onthe growing trend of quick § 363 sales, especially in small-to mid-size Chapter 11 cases. The opinion also changes the balanceof power in a Chapter 11 case, as out-of-the-money juniorlienholders will have substantial leverage to use"hold-up" tactics to obtain payoffs or other concessionsfrom the senior lienholder and/or the debtor.

Relevant Background and Summary of the Issues

In Clear Channel, PW, LLC (PW) owned large parcels ofland (Property) in Burbank, California. A hedge fund, DB Burbank,LLC (DB), held a $40 million claim against PW that was secured bythe Property. Clear Channel Outdoor, Inc. (Clear Channel) held a$2.5 million claim against PW that was secured by a junior lien onthe Property.

On November 20, 2006, PW filed a voluntary Chapter 11 petition.Shortly thereafter, the Chapter 11 trustee for PW's estate(Trustee) began the process of marketing the Property for a saleunder § 363 of the Bankruptcy Code. In March 2007, the Trusteeand DB negotiated the terms of a "stalking horse bid" forthe Property, under which DB would credit-bid its secured claimunder § 363(k) of the Bankruptcy Code. The Bankruptcy Courtapproved bid procedures for the sale of the Property, includingDB's right to credit-bid. DB's bid was the highest bid forthe Property. Accordingly, on April 26, 2007, over an objection byClear Channel, the Bankruptcy Court entered an order (Sale Order)authorizing "the sale free and clear of Clear Channel'slien under § 363(f)(5)" of the Bankruptcy Code. 391 31-32. Because DB's credit bid was solely the amount of itsdebt (other than payment of certain Trustee fees and relatedcosts), Clear Channel received no consideration from the sale ofthe Property.

Clear Channel appealed the Sale Order to the BAP. DB and theTrustee moved to dismiss the appeal as moot. The BAP considered twoissues on appeal. First, was Clear Channel's appeal moot underprinciples of equitable mootness or under § 363(m) of theBankruptcy Code? Second, "outside a plan of reorganization,does § 363(f) of the Bankruptcy Code permit a secured creditorto credit-bid its debt and purchase estate property, taking titlefree and clear of valid, nonconsenting junior liens?" 391 29.

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Analysis and Holding


I. Equitable Mootness

The BAP first considered whether the appeal was equitably moot.In evaluating whether the appeal was equitably moot, the BAPanalyzed "the consequences of the remedy and the number ofthird parties who have changed their position in reliance on theorder that is being appealed." 391 B.R. at 33-34. Equitablemootness typically focuses on the difficulty of "unscramblingthe egg" after a sale is closed and money changes hands.

The BAP acknowledged the changes that had taken place since thesale closed.

The changes that have taken place inconnection with and since the closing of the sale are numerous andcomplex, which calls into question whether this appeal is equitablymoot. Title to PW's property has been transferred to DB, andthe Trustee has relinquished control over the development ofPW's property to DB. DB has assumed the executory contracts andunexpired leases. DB has also executed and recorded a number ofdocuments necessary to effectuate the sale. All of these haverequired significant expenditures. Id. at 33-34.

The BAP nevertheless held that the appeal was not equitablymoot. DB was the only party impacted by the appeal, not any thirdparties, and DB "was aware of the risks of going forward withthe sale." Id. at 34. The BAP also could grant reliefon the appeal without undoing the sale by merely finding that ClearChannel's lien attached to the Property, now owned by DB.

II. Statutory Mootness

Section 363(m) of the Bankruptcy Code protects sales under§ 363 made in good faith from being reversed on appeal, absentthe grant of a stay pending appeal. The BAP held that § 363(m)did not make the appeal moot because that subsection applies onlyto sales under §§ 363(b) and (c), and not to "lienstripping" under § 363(f). The BAP also noted that asophisticated lender like DB was aware of the risks of closing onthe sale and cannot use § 363(m) to avoid appellatereview.

The BAP's mootness analysis ignores that DB likely would nothave bid, or would have negotiated different terms for the deal,had it known that it would be acquiring the Property subject toClear Channel's lien. Prior to the BAP's decision, it waswell established that a buyer could acquire property free and clearof junior liens under § 363(f)(5) of the Bankruptcy Code.See, e.g., In re Trans World Airlines,Inc., 322 F.3d 283, 290-91 (3d Cir. 2003); In reJames, 203 B.R. 449, 453 (Bankr. W.D. Mo. 1997); In reGrand Slam U.S.A., Inc., 178 B.R. 460, 462 (E.D. Mich. 1995).DB should have been entitled to rely on those decisions in closingon the sale, especially when the Bankruptcy Court followed theirreasoning in entering the Sale Order.

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While Clear Channel had the right to challenge that line ofauthority at a hearing on approval of the sale, allowing apost-closing attachment of a junior lien through an appellateattack unfairly defeats the benefit of DB's bargain. It alsointroduces a whole new layer of uncertainty to § 363 sales, asbuyers may price assets differently or refuse to bid at all due tothe possibility that § 363(f) challenges are not cut off by anunstayed order approving the sale.

Sale Free and Clear of Liens Under Section 363(f)

The BAP next analyzed whether the Trustee could sell theProperty to DB free and clear of Clear Channel's lien under§ 363(f) of the Bankruptcy Code. The two potentiallyapplicable provisions were §§ 363(f)(3) and (5), whichprovide as follows:

(f) The trustee may sell propertyunder subsection (b) or (c) of this section free and clear of anyinterest in such property of an entity other than the estate, onlyif ...

(3) such interest is a lien and theprice at which such property is to be sold is greater than theaggregate value of all liens on such property; ...

(5) such entity could be compelled,in a legal or equitable proceeding, to accept a money satisfactionof such interest.

I. Section 363(f)(3)

The BAP held that § 363(f)(3) could not be used as a basisto sell assets free and clear of a junior lien. The disputecentered around whether the phrase "aggregate value of allliens" means (a) the face value of all claims with a lien onthe assets being sold, or (b) the value of the lienholder'ssecured claim under § 506(a) of the Bankruptcy Code. DB arguedthat the BAP should choose (b), which essentially would allow aBankruptcy Court to approve a free and clear sale over allout-of-the-money liens under § 363(f)(3).

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The BAP ruled that DB's interpretation, followed by somecourts,1 was too broad. The BAP noted that theinterpretation:

... would essentially mean that anestate representative could sell estate property free and clear ofany lien, regardless of whether the lienholder held an allowedsecured claim. We think the context of paragraph (3) isinconsistent with this reading. If Congress had intended such abroad construction, it would have worded the paragraph verydifferently. 391 B.R. at 40.

The BAP therefore held that § 363(f)(3) does not authorizea sale of assets free and clear of a lien "if the price of theestate property is equal to or less than the aggregate amount ofall claims held by creditors who hold a lien or security interestin the property being sold." 391 B.R. at 41. Because the saleprice for the Property was not greater than the claims held byClear Channel, a junior lienholder, § 363(f)(3) did not allowthe Trustee to sell the Property free and clear of the ClearChannel lien.

II. Section 363(f)(5)

The BAP next considered whether the Trustee could sell theProperty free and clear of Clear Channel's lien under §363(f)(5). The BAP held that the Trustee could not do so.

The BAP held that Clear Channel could not be "compelled accept a money satisfaction" of its interest within themeaning of § 363(f)(5). The BAP began by rebuking theBankruptcy Court's contention that § 363(f)(5) appliedwhenever a claim could be satisfied with money. Instead, the BAPreasoned that § 363(f)(5) applies only when a procedure existsto force a creditor's interest to be completely satisfiedwithout full payment of the amount owed (e.g., a liquidated damagesclause or other contractual provision).

The BAP also held that § 363(f)(5) required the Trustee orDB to point to a specific "legal proceeding" in whichClear Channel could be compelled to accept a money satisfaction ofits interest. 391 B.R. at 48-49. The BAP stated that neither theparties nor the Bankruptcy Court had identified any suchproceeding. While some courts have considered a cramdown(nonconsensual plan confirmation) under § 1129(b)(2) of theBankruptcy Code as a qualifying "proceeding," the BAPrefused to follow that line of authority. The BAP reasoned that"[i]f the proceeding authorizing the satisfaction was foundelsewhere in the Bankruptcy Code (i.e., in § 1129(b)(2)), thenan estate would not need § 363(f)(5) at all; it couldsimply use the other Code provision." 391 B.R. at 50-51. Inaddition, the BAP noted that § 1129 only allows a cramdown ofa lien "in the context of plan confirmation."Id.

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Because the Trustee could not sell the Property free and clearof Clear Channel's lien, it reversed the portion of the SaleOrder under § 363(f). The BAP, however, remanded the case tothe Bankruptcy Court to determine if the parties could identify aqualifying "proceeding" (perhaps a mortgage foreclosure)under non-bankruptcy law that would allow the sale free and clearof Clear Channel's lien under § 363(f)(5).

Implications of the Decision

The Clear Channel case could have a significant impacton § 363 sales if it is adopted by other courts. In manycases, especially small- to mid-size cases, an expeditious §363 sale for less than the value of all liens on the property isthe only viable "exit strategy" for the case. If partiescannot rely on § 363(f)(5) to sell assets free and clear ofjunior liens outside of a plan, senior secured lenders may bedisinclined to lend money and more cases will end up in a Chapter 7liquidation. Buyers of assets also may reduce their purchase priceor demand escrows if they cannot be assured of buying free andclear of all liens. The entire § 363 process could lackcertainty under a Clear Channel regime, which will reducecompetition for assets and drive down value for creditorconstituencies.

Moreover, Clear Channel changes the balance of power ina Chapter 11 case. Before the decision, undersecured or unsecuredjunior lienholders had little power in a Chapter 11 case. UnderClear Channel, out-of-the-money junior lienholders willhave substantial leverage to use hold-up tactics to obtain payoffsor other concessions from the senior secured creditor and/or thedebtor. At a minimum, the case will be cited by every litigiousjunior lienholder until the opinion is either discredited oroverruled. A thoroughly researched decision by the Bankruptcy Courton remand identifying a mortgage foreclosure (or UCC sale, in thecase of a sale of personal property) as a qualifying"proceeding" under § 363(f)(5) is the best hope foran appropriate conclusion to this hasty and (in our view) incorrectdecision.


1 See, e.g., In re Beker Indus. Corp., 63B.R. 474, 476-77 (Bankr. S.D.N.Y. 1986); In re Terrace GardensPark P'ship, 96 B.R. 707, 713-15 (Bankr. W.D. Tex. 1989);In re Oneida Lake Dev., Inc., 114 B.R. 352, 357 (Bankr.N.D.N.Y. 1990); In re WPRV-TV, Inc., 143 B.R. 315, 320(D.P.R. 1991); In re Milford Group, Inc., 150 B.R. 904,906 (Bankr. M.D. Pa. 1992); In re Collins, 180 B.R. 447,450-01 (Bankr. E.D. Va. 1995).

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.


How does a 363 asset sale work? ›

What is a 363 Sale? A 363 Sale refers to the sale of an organization's assets under Section 363 of the US Bankruptcy Code. The sale enables debtors to fulfill their obligations to creditors by selling their assets and using the funds collected to settle their debts.

What are the advantages of a 363 sale? ›

A key benefit of a 363 sale is that a purchaser takes the assets free and clear of any liens and encumbrances.

What is a section 363? ›

Bankruptcy Code section 363(m) protects a good faith purchaser and provides that the authorisation or modification on appeal of an order authorising the sale of assets does not invalidate such sale if the purchaser bought such property in good faith (regardless of whether the purchaser was aware of the pendency of the ...

What is the difference between Article 9 sale and 363? ›

Under Article 9 of the UCC, a secured creditor's remedies include a sale of its collateral. As with a sale under section 363 of the Bankruptcy Code, the secured lender may choose to credit bid in connection with a sale of its collateral and thereby become the owner of the collateral.

What are the benefits of an asset sale? ›

Asset sales are types of business transaction where buyers purchase assets from a business, and the sellers retain legal ownership of the company. They carry less risk for buyers while allowing sellers to perform fair market value due to diligence measures thoroughly.

What are the advantages and disadvantages of sale of assets? ›

The buyer can purchase the specific assets they want. – This type of sale allows the owner to remain in legal control of the business. – The buyer can record depreciated assets at an increased fair value. – Asset sales have the potential to incur a terminal loss which can be used to offset business income.

Why is sale of assets important? ›

You can sell or transfer assets, use them to lower your tax bill and increase the efficiency of your business. Understanding the importance of assets can help you achieve potential savings. In some cases, for example, leasing assets such as machinery, cars or furniture may be cheaper than buying them outright.

What is Section 363 of Insolvency Act 1986? ›

363 General control of court.

(1)Every bankruptcy is under the general control of the court and, subject to the provisions in this Group of Parts, the court has full power to decide all questions of priorities and all other questions, whether of law or fact, arising in any bankruptcy.

What is Article 9 sale of assets? ›

Article 9 sets out a framework that permits a secured creditor to repossess and dispose of its collateral efficiently and inexpensively while providing the debtor with various procedural protections. The trigger for the sale is the debtor's default on its obligations to the lender under the applicable loan documents.

What happens in a strict foreclosure? ›

Strict Foreclosure.

A small number of states allow this type of foreclosure. In strict foreclosure proceedings, the lender files a lawsuit on the homeowner that has defaulted. If the borrower cannot pay the mortgage within a specific timeline ordered by the court, the property goes directly back to the mortgage holder.

How does a UCC sale work? ›

A UCC sale, or Article 9 sale, is the public or private nonjudicial auction of secured real collateral after compliance with state notice requirements. For lenders enacting a foreclosure, a UCC property sale is the final stage in the process before asset recovery.

What is the most important asset for seller? ›

Time is a salesperson's most important asset. Salespeople waste most of that critical asset by talking to people that aren't going to buy from them.

What is the disadvantage of selling assets? ›

Disadvantages of an Asset Sale

Seller is exposed to higher income taxes on the sale of buildings, equipment, fixtures, and other hard assets and capital gains tax on intangible assets, like goodwill. C-Corporations are subject to tax on the sale of assets as well as the taxes to shareholders upon cash distributions.

What is an example of sale of assets? ›

For example, a rental car company may sell a group of cars via an asset sale contract. The sale of the rental car business itself would involve a business sale agreement under which it would sell all of its assets (or at least all of the assets needed to operate the rental car business).

What happens to cash in an asset sale? ›

Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale.

What assets are included in an asset sale? ›

In an asset sale, you (the seller) retain possession of the legal entity used to operate your business, and the buyer purchases the individual assets of your company. Asset sales usually do not include cash, and you will retain long-term liabilities on your company's balance sheet.

When should you sell an asset? ›

The asset no longer meets your portfolio needs.

At some point, the asset might no longer meet the needs of your portfolio. When that happens, it's time to sell your investment and use the proceeds to buy something that better meets your needs.

What is the process of asset sale? ›

An asset sale is typically undertaken through a Business Transfer Agreement (“BTA”), where the individual assets are listed down which the acquirer wishes to acquire. The specific liabilities are also listed which the acquirer has cherry-picked. The terms and conditions of the acquisition are listed down.

How do you treat sale of assets? ›

When there is a gain on the sale of a fixed asset, debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account.

Is selling assets considered income? ›

When a taxpayer sells an asset for more than its basis, it's generally regarded as taxable income. This can be any asset - from a real estate investment property to your car or even your TV. These are considered capital gains, and taxpayers are responsible for accurately reporting this information to the IRS.

How does an asset sale work? ›

In an asset sale, a firm sells some or all of its actual assets, either tangible or intangible. The seller retains legal ownership of the company that has sold the assets but has no further recourse to the sold assets. The buyer assumes no liabilities in an asset sale.

How do you calculate Proceeds from sale of assets? ›

The original purchase price of the asset, minus all accumulated depreciation and any accumulated impairment charges, is the carrying value of the asset. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss.

How are you taxed in an asset sale? ›

As mentioned previously, asset sales generally result in gains taxed at both ordinary and capital gains tax rates. Gains characterized as capital may be subject to the federal 3.8% net investment income tax (NIIT).

Why would a seller want an asset sale? ›

Asset sales are types of business transaction where buyers purchase assets from a business, and the sellers retain legal ownership of the company. They carry less risk for buyers while allowing sellers to perform fair market value due to diligence measures thoroughly.

What is an example of selling assets? ›

For example, a rental car company may sell a group of cars via an asset sale contract. The sale of the rental car business itself would involve a business sale agreement under which it would sell all of its assets (or at least all of the assets needed to operate the rental car business).

What are examples of asset sale? ›

An asset sale involves the purchase of some or all of the assets owned by a company. Examples of common assets which are sold include; plant and equipment, land, buildings, machinery, stock, goodwill, contracts, records and intellectual property (including domain names and trademarks).

What are the criteria of an assets held for sale? ›

Key provisions of IFRS 5 relating to assets held for sale
  • management is committed to a plan to sell.
  • the asset is available for immediate sale.
  • an active programme to locate a buyer is initiated.
  • the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)

How do you calculate proceeds of disposition? ›

The proceeds of disposition are calculated by subtracting the total of the property's adjusted cost base and any outlays and expenses incurred in selling your property from the proceeds of disposition.

How do you calculate total proceeds? ›

Proceeds refers to the cash received from the sale of goods or assets during a particular period. The total is obtained by multiplying the quantities sold by the selling price per unit.

What is the profit from the sale of an asset? ›

CGT is a tax you pay on any capital gain (profit) made when you dispose of an asset. It is the chargeable gain that is taxed, not the whole amount you receive. The chargeable gain is usually the difference between the price you paid for the asset and the price you disposed of it for.

Do you pay tax when you sell a business asset? ›

The sale of a business usually triggers a long-term capital gain for the seller and federal capital gains taxes will apply.

What happens to liabilities in an asset sale? ›

When a company purchases the assets of another company, the general rule is that all debts and liabilities of the selling company will remain with it and are not assumed by the buying company.

When would sale of assets be used? ›

An asset sale happens when you sell or transfer the assets of your company, rather than shares or stock. These assets can be tangible (eg machinery and inventory) or intangible (eg intellectual property). In an asset sale, you can typically choose what you want to sell.

What are the disadvantages of selling assets? ›

Disadvantages of an Asset Sale

Seller is exposed to higher income taxes on the sale of buildings, equipment, fixtures, and other hard assets and capital gains tax on intangible assets, like goodwill. C-Corporations are subject to tax on the sale of assets as well as the taxes to shareholders upon cash distributions.


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