Selling Assets In Chapter 11, Subchapter V & Chapter 12: Under § 363/§ 1206 vs. Under A Confirmed Plan?

The better way (photo by Marilyn Swanson)

Bankruptcy may not be very good at a lot of things. But one thing bankruptcy is good at is this: selling assets. Bankruptcy sales outside the ordinary course of business traditionally perform well at achieving top dollar.

Two separate procedures are authorized for sales of bankruptcy assets free-and-clear of liens in both Chapter 11 cases (including Subchapter V cases) and Chapter 12 cases:

the first procedure is a sale under § 363 in Chapter 11 cases (including Subchapter V) and under § 1206 in Chapter 12 cases, prior to confirmation of a bankruptcy plan; and
the second procedure is a sale under a confirmed plan.

For some reason, the first of the two procedures (under §§ 363 & 1206) gets all the publicity—but that procedure has significant limitations under § 363(f).

The second of the two procedures (under a confirmed plan) is actually the better . . . and more powerful . . . and less-limited procedure.

I’ll try to explain by highlighting the statutes involved.

Selling Assets Under § 363—A Procedure with Limitations

Prior to confirmation of a bankruptcy plan, a debtor may sell its assets outside the ordinary course, under § 363(b).

However, § 363(f) places the following limitations on a § 363(b) sale (emphasis added):

“The trustee may sell property . . . free and clear of any interest in such property of an entity other than the estate, only if—(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) 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) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”

–A § 363 Free-And-Clear Sale Problem

But what happens to a proposed § 363(b) sale outside the ordinary course (under § 363(f)), when a mostly out-of-the-money lienholder, whose lien is not disputable, objects to the sale?

An early case illustrating the § 363(f) problem with such a lienholder’s objection to a § 363 free-and-clear sale is Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP 2008) (§ 363(f) “cannot support transfer of [Debtor’s] property free and clear of Clear Channel’s lien”).

–Expansion of § 363 Free-And Clear Sale Powers in Chapter 12

§ 1206 is titled, “Sales free of interests” and expands the debtor’s power, beyond the provisions of § 363(f), to sell farm assets free-and-clear of liens in Chapter 12 cases. The § 1206 language is this (emphasis added):

“. . . in addition to the authorization contained in section 363(f), the trustee in a case under [Chapter 12] may sell property under section 363(b) and (c) free and clear of any interest in such property of an entity other than the estate if the property is farmland, farm equipment, or property used to carry out a commercial fishing operation (including a commercial fishing vessel), except that the proceeds of such sale shall be subject to such interest.”

Such § 1206 language appears to solve, for Chapter 12 cases, the § 363(f) problem of a non-consenting lienholder that won’t be paid in full.[Fn. 1]

Selling Assets Under a Confirmed Plan

Sales free-and-clear of liens under a confirmed plan, without any § 363(f) limitation, are expressly authorized in Chapter 11 (including Subchapter V) and in Chapter 12. See, e.g., In re Ditech Holding Corp., 606 B.R. 544 (Bankr. S.D.N.Y. August 28, 2019) (a standard Chapter 11 case). Such opinion makes the following points (606 B.R. at 586-87):

a chapter 11 plan is a contract between the debtor and its creditors;
through a chapter 11 plan, a debtor can resolve disputed claims and rights to property—that is one way a plan sale differs from an asset sale under § 363:
- a plan can provide for the distribution of sale proceeds among creditors; while
- as a general rule, a § 363 sale cannot; and
a plan confirmation process “is more fulsome” than a § 363 sale process—which only requires a motion and a hearing, with “business judgment” being the primary standard for approval.

Sale Under a Confirmed Plan—Authorizing Statutes

Chapter 11 (including Subchapter V) and Chapter 12 statutes authorize sales free-and-clear of liens under a confirmed plan, which sales are not subject to the § 363(f) limitations.

Here are the statutory provisions.

–For Standard Chapter 11

Statutory provisions, in standard Chapter 11 cases, for selling estate assets under a confirmed plan include:

§ 1123 is titled, “Contents of plan” and provides in subpart (b)(4) that a Chapter 11 plan “may . . . (4) provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests” (emphasis added); and
§ 1129 provides in subsection (b)(2)(A)(ii) that a bankruptcy court “shall confirm” a plan when: “(A) With respect to a class of secured claims, the plan provides—. . . (ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph” (emphasis added). As to the “§ 363(k)” and “clause (i) or (iii) of this subparagraph” limitations therein:
- § 363(k) authorizes a secured creditor to credit bid its lien in a bankruptcy sale; and
- clauses (i) and (iii) of § 1129(b)(A) provide basic protections for secured claims., like retaining liens and receiving an “indubitable equivalent.”

–For Subchapter V of Chapter 11

The same rules governing sales under confirmed plans in standard Chapter 11 cases also apply in Subchapter V cases. Here is why that is:

§ 1181(a) identifies the sections of the Bankruptcy Code in Chapter 11 that do not apply in Subchapter V, and § 1123(b) is not identified in § 1181(a), which means that the provisions of § 1123(b)(4) on sales of assets under a confirmed plan will apply in Subchapter V; and
confusingly, § 1181(a) specifically identifies § 1129(b) as not applying in Subchapter V cases, but a different Subchapter V statute, § 1191(c)(1), specifies that § 1129(b)(2)(A) provisions on sales of assets under a confirmed plan do apply in Subchapter V cases.

Here is the § 1129(b)(2)(A) specifying language, contained in § 1191(c)(1):

“(c) Rule of Construction.—For purposes of this section, the condition that a plan be fair and equitable with respect to each class of claims or interests includes the following requirements: (1) With respect to a class of secured claims, the plan meets the requirements of section 1129(b)(2)(A) of this title” (emphasis added).

–For Chapter 12

Chapter 12 authorizes sales of estate assets under a confirmed plan. And it does so in a manner similar to the corresponding Chapter 11 rule in § 1123(b)(4).

Here is Chapter 12’s authorizing statute:

§ 1222 is titled, “Contents of plan,” and provides in subsection (b)(8), “the plan may–. . . (8) provide for the sale of all or any part of the property of the estate or the distribution of all or any part of the property of the estate among those having an interest in such property” (emphasis added); and

Chapter 12 does not have a provision corresponding to the § 1129(b)(2)(A) discussed above. But caselaw does not see that as a problem. For example:

“a Chapter 12 debtor is entitled to completely liquidate a farming operation under § 1222(b)(8)”; and
such Code provision “reflects a recognition by Congress that many family farm reorganizations, to be successful would involve the scaling down of the farm operation.”

In re Mongeau, 633 B.R. 387, 396 (Bankr. Kan. 2021). Presumably, § 1206 fills any gap that might exist thereon.

Editorial Comment on Chapter 12 Sales of Farm Assets

§ 1206 enables a Chapter 12 debtor to sell farm assets free-and-clear of liens, before confirmation of a plan, without being subject to the limitations of § 363(f).

But why would a Chapter 12 debtor do such a thing?

Usually, a sale of assets is something creditors want and would like to see—when the sale is perceived to be conducted in a manner that will maximize value. So, why wouldn’t the debtor, in exchange for a proposed sale of farm assets, try to get some benefits in return?

Plan provisions are a way to identify and secure such benefits in return, especially when creditors are motivated to support debtor’s efforts toward a sale of assets under the plan.

Conclusion

While § 363 sales can be effective in liquidating assets of a bankruptcy estate free-and-clear of liens, such sales can have a § 363(f) problem with being approved in standard Chapter 11 cases and in Subchapter V cases. That makes sales under a confirmed plan the better way.

Such § 363(f) problems appear to be eliminated in Chapter 12 cases by § 1206, but sales free-and-clear of liens under a confirmed Chapter 12 plan can still be preferable because of the ability of debtors to bargain with creditors for retaining benefits in exchange—and for getting such benefits approved in a confirmed plan.

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Footnote 1. For a discussion of any alleged authority of a Chapter 12 trustee to sell assets, instead of the debtor in possession, see this linked article: Only The Debtor (Not The Chapter 12 Trustee) Can Sell Farm Assets Under § 1206 (In re Brilyea).

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