Clear Channel Outdoor, Inc. v. Knupfer (In Re PW, LLC)
391 B.R. 25 (2008)
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Rule of Law:
Section 363(f)(5) of the Bankruptcy Code does not authorize the sale of property free and clear of a nonconsenting junior lienholder's interest unless the trustee can demonstrate that the lienholder could be compelled to accept a monetary satisfaction of its interest in a specific legal or equitable proceeding cognizable under non-bankruptcy law.
Facts:
- PW, LLC (PW) owned real property in Burbank, California, which it was attempting to develop.
- DB Burbank, LLC (DB) held a first-priority lien of over $40 million on substantially all of PW's assets.
- Clear Channel Outdoor, Inc. (Clear Channel) held a valid, consensual junior lien of approximately $2.5 million on the same property.
- After PW filed for Chapter 11 bankruptcy, a trustee was appointed to manage the estate.
- The Trustee and DB arranged for a bankruptcy auction of PW's property, with DB acting as the stalking horse bidder.
- No qualified overbids were submitted, requiring the Trustee to sell the property to DB at the agreed-upon price.
- DB purchased the property by making a 'credit bid,' using the debt PW owed it as payment instead of cash.
- The credit bid was less than the total amount of DB's senior lien, resulting in no cash proceeds from the sale to satisfy Clear Channel's junior lien.
Procedural Posture:
- PW, LLC filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- The bankruptcy court appointed a Trustee to manage the debtor's estate.
- The Trustee filed a motion to sell PW's property to DB free and clear of all liens, including Clear Channel's lien, pursuant to § 363(f).
- Clear Channel filed an objection to the Trustee's motion.
- The bankruptcy court entered an order authorizing the sale free and clear of Clear Channel's lien, relying on § 363(f)(5).
- The bankruptcy court denied Clear Channel's motion to stay the sale order pending an appeal.
- Clear Channel appealed the bankruptcy court's sale order to the Bankruptcy Appellate Panel of the Ninth Circuit.
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Issue:
Does § 363(f)(5) of the Bankruptcy Code permit a bankruptcy trustee to sell estate property free and clear of a valid, nonconsenting junior lien when the sale is to a senior lienholder via a credit bid that generates no proceeds for the junior lienholder?
Opinions:
Majority - Markell, Bankruptcy Judge
No. Section 363(f)(5) of the Bankruptcy Code does not permit a trustee to sell property free and clear of a nonconsenting junior lien simply because the lien could theoretically be satisfied by money. The statute requires the trustee to identify a specific, cognizable legal or equitable proceeding outside of the bankruptcy itself where the lienholder could be compelled to accept a money satisfaction of its interest. The court rejected the argument that a lien's fundamental nature as a right to payment is sufficient to trigger § 363(f)(5), as this broad interpretation would render other subsections of § 363(f), particularly subsection (f)(3), superfluous. Furthermore, the court held that the potential for a 'cramdown' in a Chapter 11 plan confirmation under § 1129(b) cannot serve as the required 'legal or equitable proceeding,' because allowing this would improperly circumvent the procedural protections afforded to creditors in the plan confirmation process. The court also found that § 363(f)(3) was inapplicable because the sale price was not 'greater than' the aggregate value of all liens on the property.
Analysis:
This decision significantly restricts the ability of trustees and senior secured creditors to use § 363(f)(5) as a tool to extinguish junior liens in bankruptcy sales, especially in credit-bid scenarios where no proceeds are generated for junior stakeholders. By requiring the identification of a specific non-bankruptcy proceeding that could compel satisfaction, the court preserves the property rights of junior lienholders against being easily stripped outside the formal Chapter 11 plan confirmation process. This holding forces parties to either negotiate with junior lienholders for consent or utilize the more structured and creditor-protective cramdown mechanisms available only through a plan of reorganization. The decision thereby reinforces the distinction between a § 363 sale and a plan confirmation, preventing the former from being used as a functional equivalent of the latter without its attendant safeguards.
