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

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 B.R.at 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 B.R.at 29.

Analysis and Holding

Mootness

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.

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).

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 ...to 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.

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.

Footnote

^{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.