This article examines the two approaches to take when construing the term "value" as set forth in §363(f)(3) of the Bankruptcy Code.¹ The issue was recently addressed by District Judge Cooper in Criimi Mae Servs. Ltd. P'ship. v. WDH Howell LLC (In re WDH Howell LLC).² The "face value" approach adopted by Judge Cooper, requiring a sale price not less than the face amount of the claim of the creditor whose collateral is being sold by the debtor, is the better approach, and one more consistent with the language of the statute.

Under §363(f)(3), a bankruptcy court-authorized sale made pursuant to §363(b)³ can be made "free and clear of any interest" in property of an entity other than the estate if "such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property."⁴ As noted by Judge Cooper, "[s]ome courts interpret value in §363(f)(3) to mean the 'face amount' of the claim secured by the lien, i.e., the amount owed to the lienholder," while "[o]ther courts have interpreted it to mean the economic value of the lien as determined by the fair market value of the property."⁵

Initially, Judge Cooper noted that courts following both approaches attempt to interpret the term "value" in a manner that is consistent with other provisions in the Code.⁶ Judge Cooper noted that courts following the "economic value" approach reason that the term "value" in §363(f)(3) should have the same meaning as in §506(a).⁷ The term "value" as used in §506(a) "indicates the economic value of a creditor's interest for purposes of determining whether and to what extent the creditor's claim is secured."⁸ On the other hand, courts following the "face value" approach would point out that Congress consistently refers to the value of a secured party's "interest" when it intends to denote economic value and, because §506(a) refers to "the extent of the value of such creditor's interest," that language actually supports the "face value" approach.⁹

Judge Cooper further noted that courts applying both approaches attempt to support their respective conclusions with the well-accepted tenet of statutory construction that courts should avoid an interpretation of a statute that would render another section of the statute superfluous.¹⁰ A court following the "economic value" approach would argue that the "face value" approach obviates the need for §363(k), which authorizes a secured creditor to credit bid its debt to prevent a sale for less than that amount.¹¹ Judge Cooper disagreed with this reasoning, stating that a creditor might very well have a good reason for not submitting a credit bid and instead avail itself of the protections afforded creditors under chapter 11.¹² For example, in the case before him, Judge Cooper recognized that Criimi Mae did "not wish to foreclose or credit bid on environmentally contaminated property."¹³

On the other hand, a court applying the "face value" approach would reason that application of the "economic value" approach would render superfluous §363(f)(5), which provides for a §363(b) sale "free and clear of any interest" in the property of an entity other than the estate if "such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest."¹⁴ Such a court would assert that the language in §363(f)(5) implicitly refers to §1129(b)(2), which provides that a secured creditor could be compelled to accept the economic value of its lien, providing certain other requirements were met, and therefore a debtor would not need attempt to meet the further requirements set forth in §363(f)(5) if it could compel the creditor to accept economic value as contemplated by §363(f)(3).¹⁵ Judge Cooper disagreed with this analysis, stating that §363(f)(5) would not become superfluous because it also applies to unsecured interests in property that could be reduced to a specific monetary value.¹⁶

After rejecting the reasoning underlying the divided line of cases, Judge Cooper set out on his own analysis premised on the "plain language" of the statute at issue, and whether the meaning of the term "can be 'gleaned from the surrounding language' of the provision of which it is part."¹⁷ Judge Cooper noted that the Code does not define the term "value" but that the term as used in §363(f)(3) cannot mean economic value if it is read in the context of the preceding phrase "greater than."¹⁸ Because economic or fair-market value "is 'the amount at which property would change hands between a willing buyer and a willing seller,' 'the sale price for over-encumbered property can never be greater than the aggregate economic value of the liens on the property.'"¹⁹ According to Judge Cooper, "[t]he sale price could be greater than the aggregate economic value of the liens on a piece of property only if the property was under-encumbered; i.e., the sale price also exceeded the face value of the liens."²⁰ Judge Cooper stated that "courts following the economic value approach have either overlooked or dodged this dilemma, allowing the sale free and clear of liens even when the sale price equaled the aggregate economic value of the liens."²¹

Judge Cooper stated that the conclusion he reached adopting the "face value" approach was "consistent with the 'general rule' that 'the bankruptcy court should not order property sold free and clear of liens unless the court is satisfied that the sale proceeds will fully compensate secured lienholders and produce some equity for the benefit of the bankrupt's estate.'"²² Judge Cooper further stated that §363 is an exception to the general rule that a debtor must obtain confirmation of a chapter 11 plan of reorganization before selling all or substantially all of its assets²³ and that he was holding that the "plain language of §363(f) indicates Congress's intent to limit this exception so that it does not swallow the general rule."²⁴

Conclusion

Unless and until the Supreme Court weighs in on this issue, the courts will remain divided based on the analyses as summarized by Judge Cooper. We agree with the reasoning behind the "face value" approach to the term "value" as set forth in §363(f)(3). This approach gives secured creditors the benefit of their bargain and allows them to make use of other creditor protections provided for in the Code if they so choose. Finally, it is the only approach that fits within the unambiguous terms of the statute.

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Footnotes

¹ 11 U.S.C. §363(f)(3). References to various sections of the Bankruptcy Code, 11 U.S.C. §§101 et seq., shall be cited to herein. Return to article

² 298 B.R. 527 (D. N.J. 2003). Because Judge Cooper conducted the most recent and extensive analysis of the issue, this article is based almost exclusively on his analysis. Return to article

³ Pursuant to §363(b), a trustee (or DIP, §1107(a)), "after notice and a hearing, may use, sell or lease, other than in the ordinary course of business, property of the estate." Return to article

⁴ Note 1, supra. Return to article

⁵ 298 B.R. at 531 (citing multiple cases for each interpretation). Return to article

⁶ Id. Return to article

⁷ Id. (citing In re Beker Indus. Corp., 63 B.R. 474, 476 (Bankr. S.D.N.Y. 1986)). Return to article

⁸ Id. (citing In re Beker Indus. Corp., 63 B.R. at 476 ). In In re Feinstein Family Partnership, 247 B.R. 502, 509 (Bankr. M.D. Fla. 2000), Judge Alexander Paskay flatly rejected the application of the standard set forth in §506(a), stating, in part:

Section 506(a) was designed for the purpose of determining the allowance of secured claims and not for the purpose of selling encumbered property without satisfying in full all liens from the sale proceeds. This conclusion is further fortified by Sub-clause (d), which provides that to the extent a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void. It is evident that §506 was designed to deal with claims actually filed. It is elementary that secured creditors are not required to file proofs of claim in a chapter 7 case. F.R.B.P. 3002(a). Consequently, their claims cannot be disallowed and, in turn, their liens voided pursuant to §506(d). It follows that the reliance on the provisions of §506 is misplaced and they are irrelevant to a §363(f)(3) sale." [Authors' Note: The court's opinion refers to a "§362(f)(3) sale," which is an obvious typo; the court was clearly referring to a "§363(f)(3) sale."].

Id. (italics added). Cf. United Savings Ass'n. of Texas v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 372 (1988) ("The phrase 'value of such creditor's interest' in §506(a) means 'the value of the collateral.'"). Return to article

⁹ Id. at 531-32 (citing In re Terrace Chalet Apts. Ltd., 159 B.R. 821, 827 (N.D. Ill. 1993)). Return to article

¹⁰ Id., 532 n.8 (citing Idahoan Fresh v. Advantage Produce Inc., 157 F.3d 197, 202 (3d Cir. 1998)). Return to article

¹¹ Id. (citing In re Terrace Gardens P'ship., 96 B.R. 707, 712 (Bankr. W.D. Tex. 1989); In re Collins, 180 B.R. 447, 450 n.4 (Bankr. E.D. Va. 1995)). Return to article

¹² Id. (citing In re WBO P'ship., 189 B.R. 97, 102 (Bankr. E.D. Va. 1995)). Return to article

¹³ Id. Return to article

¹⁴ Id. (citing In re Terrace Chalet Apts., 159 B.R. at 827). Return to article

¹⁵ Id. (citing In re Terrace Chalet Apts., 159 B.R. at 827). Return to article

¹⁶ Id. (citing In re Trans World Airlines Inc., 322 F.3d 283, 289-91 (3d Cir. 2003)). Judge Cooper cited Trans World Airlines as distinguishing §363(f)(5), which applies to any interest in property, from §363(f)(3), which applies specifically to liens. Id. Accord, In re Canonigo, 276 B.R. 257, 265 (Bankr. N.D. Cal. 2002) ("The court concludes that §365(f)(5) was not intended to apply to liens at all, only to other types of interests in property."). Return to article

¹⁷ Id. at 532 (citing Idahoan Fresh, 157 F.3d at 202, and Scafar Contracting Inc. v. Sec. of Labor, 325 F.3d 422 (3d Cir. 2003)). Return to article

¹⁸ Id. Return to article

¹⁹ Id. at 532-33 (quoting from Black's Law Dictionary 597 (6th ed. 1990) for the definition of "fair market" value, and In re Canonigo, 276 B.R. at 262-63)). Accord, In re Canonigo, 276 B.R. at 262-63 ("Although the word 'value' is ambiguous, as used in §363(f)(3), the word 'greater' is not. Assuming the sale price determines the value of the property to be sold, the sale price for overencumbered property can never be greater than the aggregate economic value of the lines on the property."). While §363(f)(3) usually comes into play in chapter 11 proceedings, it also comes into play in chapter 7 proceedings. See, e.g., In re Cramer, 295 B.R. 397, 398 (Bankr. S.D. Fla. 2003) ("In order for a trustee to sell property free and clear of liens and encumbrances under 11 U.S.C. §363(f)(3), the sale price must be greater than the total value of the liens on the property.") (citing In re Canonigo (italics in original). Return to article

²⁰ Id. at 533 (italics added). Return to article

²¹ Id. Judge Cooper stated that while unnecessary to turn to extrinsic evidence of legislative intent, he noted that the legislative reports and history supported the "face value" conclusion he had reached. Id. at 534 n. 11 (noting that according to the House and Senate reports, a DIP "may sell free and clear if...the sale price of the property is greater than the amount secured by the lien" and that §363(f)(3) previously provided that property could be sold free and clear of all interests if "the price at which the property is sold is greater than the aggregate value of such interest" and amended in 1994 to replace "such interest" with "all liens on such property."). Accord, Feinstein Family P'ship., 247 B.R. at 508-09 ("These [House and Senate] reports make it clear that Congress intended §363(f)(3) to protect the amount of the secured debt and not the economic value of the lien." After making this statement, Judge Paskay conducted the same analysis of the language of §363(f)(3), as previously worded and as amended, as did Judge Cooper, above); see, also, Canonigo, 276 B.R. at 259-60 ("Collier on Bankruptcy acknowledges the split of authority and does not expressly endorse one view over another. However, it describes the 'face amount' approach as 'consistent with the legislative history and the plain language of the statute.' It also states that a contrary interpretation would make §363(f)(3) a 'loophole,' permitting a trustee or debtor to avoid the requirements of §363(f)(5) through the use of §363(f)(3).") (quoting 3 Collier on Bankruptcy §363.06[4][a], at 363-47 (15th ed. 2001)); Epstein, David G., et al., Bankruptcy §4-7 at 402 (West Publishing Co. 1992) ("We believe that the amendments were designed also to make it clear that the debtor must have an equity in the property as a condition to the use of (f)(3). Put another way, we believe the DIP may not use (f)(3) unless the face amount of the secured claims against a piece of property are less than the price for which that property will be sold.") (quoted in Canonigo, 276 B.R. at 260). Return to article

²² Id. at 534 (quoting Matter of Riverside Inv. P'ship., 674 F.2d 634, 638-41 (7th Cir. 1982)). Like Judge Cooper, Judge Paskay cited to Riverside Inv. Partnership for the general rule that a bankruptcy court should not authorize a sale free and clear of liens "unless the sale proceeds will fully compensate secured lienholders and produce some equity for the benefit of the estate...." Feinstein Family P'ship., 247 B.R. at 508. Return to article

²³ See, e.g., Stephens Indus. Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986) (requiring debtor to demonstrate a sound business purpose for conducting a §363(b) sale prior to confirmation); In re Lionel Corp., 722 F.2d 1063, 1068-69 (2d Cir. 1983) (same); In re Del. & Hudson Ry. Co., 124 B.R. 169, 175-76 (D. Del. 1991) (same). These cases were cited by Judge Cooper in footnote 12 of his opinion. Return to article

²⁴ Id. Return to article