Legal Updates /

Delaware Bankruptcy Court Denies Sale Motion

By Justin R. Alberto

On July 30, 2015, Judge Mary F. Walrath of the Delaware Bankruptcy Court denied a Bankruptcy Code section 363 sale of certain property of chapter 11 debtors.  Ferris Properties (the “Debtors”) filed for chapter 11 protection in March 2014.  One year later, the Debtors sought to sell 11 properties free and clear of liens, claims and encumbrances pursuant to section 363 of the Bankruptcy Code.  Wells Fargo, which held mortgages on each property, objected to the sale because the expected proceeds were less than what is owed on the properties.  The proponents of the sale argued that the sale was proper under section 363(f)(5) and certain other state law theories, including monition and partition.  Wells Fargo responded that the sale must be denied because it cannot be compelled to accept a money satisfaction of its interests in the properties under any of the legal theories advocated by the proponents.

Bankruptcy Code section 365(f)(5) allows a debtor to sell property free and clear of any liens, claims and encumbrances of a third party if that party could be compelled to accept monetary satisfaction of its interests.  The proponents contended that Wells Fargo could be compelled under either section 724(b) or 1129(b)(2)(a).  The Court found section 724(b), which subordinates certain tax liens to administrative expenses, inapplicable as Wells Fargo is not a tax lienor but rather the first lien mortgagee.  With respect to section 1129(b)(2), the Court assumed that a cram down proceeding is a legal proceeding by which a sale proponent could satisfy section 363(f)(5), notwithstanding a noted split in authority.  The Court, however, found that the Debtors could not satisfy any of the bases for a cram down since Wells Fargo is not retaining its lien, receiving deferred payments totaling the amount of its claim, or receiving the indubitable equivalent of its claim.

The Court next turned to the state law arguments, namely monition and partition.  In a monition sale, property with delinquent tax liens is sold free and clear of other liens to satisfy the tax debt.  While certain of the Debtors’ properties had delinquent taxes, the Court found the monition theory inapplicable.  The Court noted that the purpose of a monition sale is to either sell the property to satisfy tax debt or allow any person to cure the delinquent taxes.  Since Wells Fargo did not have a chance to cure the delinquent taxes, the Debtors could not use a monition sale theory to force Wells Fargo to accept a monetary satisfaction of the mortgage interests.  The Court also dismissed the partition theory because, while a partition sale could theoretically force a party to accept monetary satisfaction of its lien, Wells Fargo is not a joint tenant or tenant in common in the properties.

A copy of the opinion can be found here.

Scroll to top