Nance Properties, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
NEW BERN DIVISION
IN RE:
NANCE PROPERTIES, INC.,
DEBTOR.
CASE NO. 11-06197-8-JRL
Chapter 11
ORDER
This case is before the court on the debtor’s motion to sell property free and clear of liens
and motion for private sale. A hearing took place in Raleigh, North Carolina on October 3, 2011.
The debtor, Nance Properties, Inc., is a North Carolina corporation engaged in the
business of owning and operating Valvoline stations and car wash facilities. The debtor filed for
protection under chapter 11 of the Bankruptcy Code on August 12, 2011, and is currently
operating as debtor in possession. First-Citizens Bank & Trust Company (“First-Citizens”) has
pre-petition claims against the debtor, secured by liens on substantially all of the real property, as
well as certain equipment, owned by the debtor. On September 14, 2011, the debtor moved the
court to approve the private sale of certain properties free and clear of all liens and other
interests, pursuant to 11 U.S.C. § 363(f). First-Citizens objected to the sale on the grounds that
the debtor does not satisfy the requirements of § 363(f).
SO ORDERED.
SIGNED this 08 day of November, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
The debtor seeks to sell the real property located in Swansboro, North Carolina, and
Richlands, North Carolina, together with all of the business assets relating to the respective real1
property, including inventory, furniture, fixtures, tools, and equipment, but excluding a computer
system located at the Swansboro Property (collectively “the Property”). The Property is subject
to multiple promissory notes and security interests granted by the debtor in favor of First-
Citizens. The relevant details of these transactions are summarized as follows:
Date of
Loan
Property Priority of
Deed of Trust
Original
Amount of
Loan
Amount
Owing on
Petition Date
Interest
Per Day
4/23/2001 Swansboro
Property
First Priority $728,000.00 $418,357.97 $64.73
3/14/2006 Swansboro
Property
Second Priority $334,480.00 $312,603.24 $48.14
2/27/2009 Swansboro
Property
Third Priority $105,000.00 $106,657.65 $16.43
11/9/2005 Richlands
Property
First Priority $575,000.00 $519,787.55 $80.05
10/3/2002 Richlands
Property
Second Priority $450,000.00 $312,824.11 $48.41
In addition, First-Citizens has a first priority lien on the Swansboro property inventory, which
was valued in the debtor’s schedules at $9,830.55. First-Citizens also has a first priority lien on
all of the debtor’s equipment, which was valued in the debtor’s schedules at $105,500.00.
The debtor wishes to sell the Property free and clear of First-Citizens’ existing liens. It
Specifically, the Swansboro Property is comprised of 1.2 acres of land located at 1071 West1
Corbett Avenue, Swansboro, North Carolina, 28584. The Richlands Property is comprised of 1.55 acres
of land located at 100 Woodson Avenue, Richlands, North Carolina, 28540.
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has negotiated a purchase price with an independent buyer in the amount of $1,200,000.00. In its
schedules, the debtor valued its interest in the Swansboro property at $623,689.50 and its interest
in the Richlands property at $250,000.00. Accordingly, the negotiated purchase price exceeds
the value of the Property as stated by the debtor. However, the purchase price is less than the
total amount of all debt against the Property owing to First-Citizens. First-Citizens has objected
to the debtor’s motion to sell the Property free and clear of all liens, arguing that the debtor fails
to satisfy any of the requirements set forth in § 363(f) of the Bankruptcy Code.2
DISCUSSION
Section 363(f) allows a debtor in possession to sell property of the debtor free and clear3
of liens and other interests. However, because this deprives secured creditors of a significant
right, § 363(f) provides only five narrow circumstances in which a debtor may sell property free
of all liens:
(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.
11 U.S.C. § 363(f). Of its five provisions, only § 363(f)(3) arguably applies in the present case.
First-Citizens made two additional objections to the debtor’s motion for the sell free and clear2
of liens, but since the court denies the debtor’s motion, those objections are moot and will not be
discussed.
See 11 U.S.C. § 1107 (providing that “a debtor in possession shall have all the rights . . . and3
powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this
chapter.”).
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The precise issue before the court is whether § 363(f)(3) permits the debtor to sell the Property
free and clear of all liens at a purchase price that exceeds the actual economic value of the liens
but is less than the aggregate amount of all debt against the Property.
Two distinct lines of case law have developed as to the interpretation of the phrase
“greater than the aggregate value of all liens on such property.” Id. § 363(f)(3) (emphasis added).
Some courts have found that § 363(f)(3) requires a sale price greater than the aggregate “face
value” of the liens. See, e.g., Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R.
25 (B.A.P. 9th Cir. 2008); Criimi Mae Servs. Ltd. P’ship v. WDH Howell, LLC (In re WDH
Howell, LLC), 298 B.R. 527 (D.N.J. 2003); In re Canonigo, 276 B.R. 257 (Bankr. N.D. Cal.
2002); In re Feinstein Family P’ship, 247 B.R. 502 (Bankr. M.D. Fla 2000); In re Perroncello,
170 B.R. 189 (Bankr. D. Mass. 1994); Richardson v. Pitt County (In re Stroud Wholesale, Inc.),
47 B.R. 999 (E.D.N.C. 1985), aff’d mem., 983 F.2d 1057 (4th Cir. 1986); Scherer v. Fed. Nat’l
Mortgage Ass’n (In re Terrace Chalet Apartments, Ltd.), 159 B.R. 821 (N.D. Ill. 1993). On the
other hand, some courts have found that § 363(f)(3) refers to the “economic value” of the liens,
i.e., the present value of the property. See, e.g., In re Bos. Generating, LLC, et al., 440 B.R. 302
(S.D.N.Y. 2010); In re Collins, 180 B.R. 447, 450–01 (Bankr. E.D. Va. 1995); Milford Group,
Inc. v. Concrete Step Units, Inc. (In re Milford Group, Inc.), 150 B.R. 904, 906 (Bankr. M.D. Pa.
1992); In re WPRV-TV, Inc., 143 B.R. 315, 320 (D.P.R. 1991); In re Oneida Lake Dev., Inc.,
114 B.R. 352 (Bankr. N.D.N.Y. 1990); In re Terrace Gardens Park P’ship, 96 B.R. 707 (Bankr.
W.D. Tex. 1989); In re Beker Indus. Corp., 63 B.R. 474, 476–77 (Bankr. S.D.N.Y. 1986).
The U.S. District Court for the Eastern District of North Carolina is among the courts that
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hold the former view. See In re Stroud Wholesale, Inc., 47 B.R. at 1001–02 (holding that4
statutory “aggregate value of all liens” means the full amount of all debt secured by the liens).
In Stroud Wholesale, the district court held that
sales free and clear of liens and interests may be justified by (f)(3) only if the sale
price will exceed the aggregate value of all liens on the property. This interpretation
is consistent with the well-established rule that the bankruptcy court should not order
the sale of property free and clear of interests and liens unless the court is satisfied
that the sale proceeds will fully compensate the secured lienholders and produce
some equity for the estate.
Id. (citations omitted). The court relied on the 1984 congressional amendment that replaced
“such interest” at the end of § 363(f)(3) with “all liens on such property.” Id. (citing Bankruptcy
Amendment & Federal Judgeship Act of 1984, Pub. L. No. 95-353, 95 Stat. 353, 372).
According to the district court, this amendment manifested Congress’ intent that sales free and
clear of liens pursuant to § 363(f)(3) are permitted only if the proceeds from the sale exceed the
total amount of all liens on the property. Id. Since Stroud Wholesale was decided, however, an
abundance of case law has developed, and the divide among courts over the correct interpretation
of § 363(f)(3) has become more prevalent.
The debtor argues that the court should follow In re Collins, 180 B.R. 447 (Bankr. E.D.
Va. 1995), the “leading case in the Fourth Circuit.” In Collins, a chapter 11 debtor entered into a
contract to sell property for a purchase price of $100,000.00, and the property was valued at the
same amount on the bankruptcy schedules. Id. at 449. However, the property was encumbered
This Court also recognizes that the Fourth Circuit, in an unpublished opinion, affirmed the4
decision reached by the district court in Stroud Wholesale, stating, “while we do not necessarily agree
with all that was said in the opinion of the district court in reversing the bankruptcy court, we think that
the district court reached a correct, proper, and equitable result.” Richardson v. Pitt County (In re Stroud
Wholesale, Inc.), No. 85-1422, 1986 WL 181749 (4th Cir. 1986) (unpublished opinion).
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by several liens, totaling $128,000.00. Id. The debtor filed a motion to sell the property free and
clear of liens to which one of the lienholders objected. Id.
The U.S. Bankruptcy Court for the Eastern District of Virginia held that the requirements
of § 363(f)(3) were satisfied and allowed the motion for sale of the property free and clear of
liens, finding that “the interpretation of value within the context of § 506(a) provides a better
reasoned solution to this dilemma.” Id. at 450. The court reasoned,
The Supreme Court has ruled that value in § 506(a) means the same as “value” under
other provisions of the Code, specifically §§ 361(1) and (2) which address adequate
protection. In light of § 363(e) which makes adequate protection an integral element
of any proposed sale under § 363(f), it is therefore logical to extend the definition of
“value” with regard to a secured creditor’s interest to “value” in § 363(f)(3). . . .
Rather than establishing “value” by the face amount of all the liens on the property,
. . . the Court would need to determine the actual “value” of the secured creditor’s
interest (i.e., value of the property).
Id. at 451 (citations omitted). Aside from the fact that the property was being sold for its
“value,” the Collins court identified equitable factors that contributed to its decision. Id. at 451.5
The debtor in this case argues that the court should apply the more reasoned interpretation of §
363(f)(3) adopted in Collins. Furthermore, the debtor argues that all the additional factors
discussed in Collins are present in this case.
This court acknowledges that both interpretations of § 363(f)(3) have valid justifications,
as well as criticisms. Given the present economic climate, the situation presented in this case
will become increasingly more prevalent. However, while the court sympathizes with the
The factors included: (1) the case was a chapter 11 reorganization rather than a chapter 75
liquidation; (2) the property was not the sole asset of the estate; (3) the proposed sale was a prudent
decision and not a substitution for a plan a reorganization; (4) the sale benefitted the estate; and (5) the
sale prices was the best obtainable price under the circumstances. In re Collins, 180 B.R. 447, 451
(Bankr. E.D. Va. 1995)
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debtor’s position, the decision of the District Court for the Eastern District of North Carolina in
Stroud Wholesale has been the settled law in this district for more than twenty-five years and
remains binding on this court. Accordingly, this Court finds that in order for a debtor in
possession to sell property free and clear of liens pursuant to § 363(f)(3), the purchase price must
exceed the face amount of all liens against the property. The negotiated purchase price of
$1,200,000.00 fails to exceed the face amount of First-Citizens’ liens on the Property. Based on
the foregoing, the debtor’s motion to sell property free and clear of liens and motion for private
sale are DENIED.
END OF DOCUMENT
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