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Debtors Cannot Sell Unsecured Creditor's Collateral
Under a common Chapter 11 scenario, a debtor and its prepetition lender agree to the filing of a Chapter 11 proceeding with the goal of selling the lender's collateral (either to a third party or to the lender) pursuant to 11 U.S.C. Section 363. The purchaser will acquire the assets free and clear of liens, claims and encumbrances and the lender's liens will attach to the sale proceeds. The lender therefore benefits from an expeditious and efficient sale process and, in exchange, usually agrees to provide a modest carve-out for unsecured creditors.
A Rare Scenario
However, in In re Ferris Properties, No. 14-10491 (MFW) (Bankr. D. Del. July 30, 2015), U.S. Bankruptcy Judge Mary F. Walrath of the District of Delaware was faced with a relatively rare scenario. In that case, the debtors owned 37 parcels of real estate. After selling 26 parcels, the debtors sought to sell the remaining 11 parcels for $240,000 to a purchaser under a “bulk sale” agreement. The sale proceeds would be less than the outstanding indebtedness to the first lien lender, Wells Fargo Bank. Wells Fargo objected to the sale.
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