In a Section 363 Sale, a Lienholder’s Silence is Not Consent

A chapter 7 bankruptcy trustee recently sought permission to sell a piece of real property, free and clear of liens and interests under 11 USC § 363(f).  The proposed sale price was far less than the amount of the liens against the property, but the lienholder received notice of the proposed sale and did not file an objection.  Citing decisions from other jurisdictions, the trustee argued that the lienholder’s failure to file an objection was tantamount to “consent,” and therefore the proposed sale should be authorized under 11 USC § 363(f)(2) (providing that the property may be sold free and clear if the lienholder “consents” to the sale).

In an unpublished opinion, Judge Frank R. Alley III of the United States Bankruptcy Court for the District of Oregon rejected the notion that silence equals “consent” under 11 USC § 363(f)(2).  See In re Smith, Case No. 13-61627-tmr7 (Feb. 26, 2014).  The Court held that more than mere inaction is required to sell property free and clear of a lienholder’s lien.  To meet the “consent” requirement of  § 363(f)(2), the party seeking to sell the property must approach the lienholder and secure the lienholder’s actual assent.

Practice Tips:

There are other ways to sell property free and clear, even without a lienholder’s consent, such as where the sale price exceeds the value of all liens against the property (§ 363(f)(3)), the liens are in bona fide dispute (§ 363(f)(4)), or the lienholder could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest (§ 363(f)(5)).  But when purchasing encumbered property in a case, like Smith, in which the proposed sale price is far lower than the liens against the property, and there are no legitimate bases to dispute the liens or to compel the lienholder to accept a money satisfaction of its interest in the property, parties should be certain to obtain the actual consent of the lienholder in advance of the sale hearing.

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