- Category: Judge Nugent
- Published on 27 December 2013
- Written by Judge Nugent
SIGNED this 11th day of December, 2013.
OPINION DESIGNATED FOR ONLINE PUBLICATION
BUT NOT PRINT PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: ) Jointly Administered
WK LANG HOLDINGS, LLC, ) Case No. 13-11934
) Chapter 11
ORDER ON DEBTORS’ AMENDED MOTION FOR SALE NO. 1
Chapter 11 debtors in possession may exercise a trustee’s power to sell assets
free and clear of liens under § 363(b) and (f). Even when a sale is proposed outside the
plan process and includes all or a substantially portion of the debtor’s assets, the
bankruptcy court may approve it under subsection (b) as long as it meets certain
benchmarks. The sale must (1) be based on sound business reasons; (2) be adequately
noticed to interested parties with full disclosure both of the sale terms and the debtor’s
Case 13-11934 Doc# 115 Filed 12/11/13 Page 1 of 23
relationship with the buyer; (3) be for a fair and reasonable price; and (4) be in good
faith. In the Tenth Circuit, the price is reasonable if the sale will yield 75% of the fair
market value of the assets sold. Case law in many circuits also suggests that a sale by
the debtor to an insider of the debtor is not in bad faith, per se, so long as there is no
fraud, collusion or unfair advantage.1 To sell the assets free and clear of interests in
the property, the court must find that the sale satisfies one of the five conditions
enumerated in § 363(f). Here, the debtors submit that (f)(3) and (f)(5) are satisfied.
Debtors WK Lang Holdings, L.L.C., Hardwood Millwork and Supply, L.L.C.,
Hardwood Manufacturing, L.L.C., and Hardwood Cabinets, L.L.C. filed their amended
motion to sell assets free and clear of liens to HWM, Inc. on November 15, 2013.2 Under
the proposed agreement, HWM will acquire certain real estate, some vehicles,
accounts, inventory, general intangibles, and a line of woodworking equipment. HWM
is a new entity owned and organized by one of the current owners of the debtors, the
Lang living trust. Current creditor First Bank of Newton proposes to finance this
purchase. Midland Bank, the secured creditor that holds a lien on the equipment,
objects that the sale price is not fair and reasonable and that the sale is not in good
faith. After hearing evidence concerning the structure of the debtors, the proposed
1 See In re Medical Software Solutions, 286 B.R. 431, 445 (Bankr. D. Utah2002) (citing In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 842 (Bankr. C.D. Cal.
1991)); see also In re Condere Corp., 228 B.R. 615, 632 (Bankr. S.D. Miss. 1998)
(Where debtor and purchaser share the same management the proposed sale wouldbe subjected to heightened scrutiny.).
2 Dkt. 96, amending dkt. 75.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 2 of 23
transaction, and the value of the property to be sold, I conclude that the sale complies
with § 363 and, as orally modified at the hearing, may be approved.
The debtors in these jointly-administered cases have interlocking ownership and
management. WK Lang Holdings, LLC (WKL) owns Hardwood Manufacturing
(Manufacturing) and Hardwood Cabinets (Cabinets).3 Manufacturing owns Hardwood
Millwork and Supply (Millwork), the operating entity. The Steve C. Lang Revocable
Trust, Melinda Lang Revocable Trust, and Steven C. Lang Irrevocable Trust No. 2 each
own a third of the interest in WKL. The Lang family has been in the custom hardwood
millwork and cabinet business in Burrton, Kansas since 1988, specializing in millwork
and cabinetry for homes selling for not less than $300,000. Ninety percent of their
business is in new home construction. At one time, the business had as many as 135
workers, but now employs 25. Manufacturing holds all the assets, pays overhead, and
manages payroll for the various other debtors. Cabinets is a regional maker and seller
of custom cabinetry. Manufacturing, through its operating subsidiary Millwork, makes
hardwood trim and moldings and engages in other millwork that is sold locally and
regionally. When the economy faltered in 2008 and 2009, Cabinet lost over 75% of its
sales in a 45-day period.4 Steve Lang is the managing member and chief executive
3 WKL formerly owned an interest in a third affiliated entity McKinleyHardwoods, LLC located in Oklahoma City but McKinley was sold to the minorityinterest holder Mike McKinley in 2010.
4 Cabinets was a stand alone manufacturer of cabinets but ceased business
operations in 2011 and only minor amounts of equipment and inventory remain
Case 13-11934 Doc# 115 Filed 12/11/13 Page 3 of 23
officer who makes the debtors’ business decisions. The business is currently operated
at 202 East Dean in Burrton.
Midland National Bank holds a variety of claims against the debtors. Other
banks, including Kanza Bank, signed participation agreements with Midland and
under those agreements, one lender, Kanza Bank, could assert control of the credits
and act as lead lender if it became dissatisfied with Midland’s servicing efforts.
Midland’s claims filed in this case that are affected by the proposed sale are:
Note ***89 dated November 1, 2007 with a remaining balance of $830,300.89.
Note ***73 dated November 1, 2007, with a remaining balance of $761,262.38,
All four Lang companies co-made notes 73 and 89 and cross guaranteed them.
Those two notes are secured by real estate mortgages covering land commonly
described as 302 E. Dean (the former Cabinet location that was sold in 2011), 110 N.
Reno, and 115 N. Reno, all in Burrton. Those two notes are also secured by a security
interest in all of the debtors’ machinery and equipment. The mortgages and liens are
perfected. In addition to the security held by Midland, the United States Department
of Agriculture Rural Development Service has guaranteed repayment of up to 75% of
the unsecured portion of these two notes.5 Midland’s president indicated that these
USDA guaranties are provided through the Business and Industry Loan Program.
They are similar to SBA (Small Business Administration) guaranties. The USDA
after an online auction of assets was held.
5 Ex. S and T.
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guaranty comes with a variety of conditions, three of which are that the full amount
of debt must be obtained before it will consent to the release of collateral, USDA must
approve all modifications to guarantied loans, and any sales of collateral must be for
a proper business purpose.6
Midland also holds other notes of the various debtors as follows:
WKL Note ***78 dated January 18, 2011, with a remaining balance of $153,034.
WKL Note ***86, dated January 18, 2011, with a remaining balance of
Millwork Note ***70 dated January 18, 2011, with a remaining balance of
Millwork Note ***74 dated January 15, 2012, with a remaining balance of
Millwork and Cabinet have guaranteed repayment of Notes 78 and 86. Millwork
and WKL have guarantied Notes 70 and 74. Each of these notes is also secured by the
above-referenced security interests in the companies’ machinery and equipment as well
as mortgages on the real property, cross-guaranties among the companies, and
personal guaranties of Mr. and Mrs. Lang. These notes are not, however, backed by the
In addition to these debts and claims, several of the debtors owe the First Bank
of Newton on the following obligations:
6 See also Ex. U, providing that USDA’s policy is to “not allow debt writedown/
adjustments and leave the same principals in charge of the business.”
Case 13-11934 Doc# 115 Filed 12/11/13 Page 5 of 23
Cabinet Note *4299, dated January 12, 2011 with a remaining balance of
Note *2423, dated April 7, 2011 with a remaining balance of $1,150,890.79.
Mr. and Mrs. Lang co-signed the Cabinet note and are the makers of Note *2423.
These notes are secured by Cabinet’s inventory, accounts, and general intangibles,
along with a series of real estate mortgages that encumber farm ground owned by the
Langs as well as the company’s current manufacturing facility located at 202 East
Dean in Burrton, whose construction First Bank originally financed in 2004.
As part of the proposed Sale No. 1,7 debtors offer to sell 202 East Dean and the
personal property collateral to the new Lang entity HWM in exchange for HWM
assuming the First Bank real estate mortgages of $1.15 million on East Dean and
payment of $725,000 cash for accounts receivable and inventory. The Steve C. Lang
Revocable Trust owns the equity in HWM; he is the president and sole director of
HWM. Charity Bowman, the debtors’ chief financial officer, is the secretary/treasurer
of HWM.8 The original Notice of Sale provided for the debtors to also sell Millwork’s
machinery and equipment to the new entity for $350,000 cash. As orally amended at
trial, that offer has increased to $410,000 cash. The vehicles will be sold for $50,000
cash. Midland has a security interest in the vehicles and machinery and equipment
that secures its guarantied debt. First Bank will extend the necessary credit to fund
7 See Dkt. 96.
8 Ex. 9
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the cash purchases.9 Midland specifically objects to the sale of the machinery,
equipment, and vehicles on a number of grounds.
We now turn to the circumstances leading up to proposed Sale No. 1. In 2010,
Kanza asserted its right to act as lead lender under the Midland participation and
foreclosed. To resolve the foreclosure, the Lang entities sold an affiliated entity,
McKinley Hardwood, at a substantial loss, leaving Midland with a substantial
deficiency, but also temporarily resolving the foreclosure which Kanza dismissed. In
2011, Cabinet sold most of its assets. The building at 302 E. Dean in Burrton brought
$1.0 million. The machinery and equipment was sold via online auction, the results of
which were disappointing, again leaving Midland short. Cabinet, which had operated
at a loss since its inception in 2006, closed its doors.
In 2012, the debtors entered into a workout agreement with Midland and First
Bank that allowed them to pay interest-only on their debts for a brief time. But in
2013, the debtors were again unable to service their principal debt and requested
further forbearance. Kanza refused, causing Midland, as lead lender to encourage the
Lang entities to seek other lenders. The debtors sought financing from several area
lenders and considered selling the companies. They also sought outside investment.
They received offers of financing from two banks in Wichita and Newton as well as a
9 The original motion to sell included the real estate at 115 E. Reno. Dkt. 75.
After Midland objected to the sale, the debtors amended their notice of sale andremoved that tract. Dkt. 96.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 7 of 23
new proposal from First Bank.10 They held an informal creditors’ meeting in May of
2013 that included Midland, First Bank, the Kansas Department of Commerce, and the
USDA. Kanza opted not to participate and again foreclosed. The debtors responded by
filing these chapter 11 cases on July 26, 2013.11 Shortly after the filings, Steve Lang
formed HWM, Inc. to acquire the assets subject to this sale with the intention of
seeking another lender to finance the acquisition and satisfy the Midland loan.12
Less than two months later, on September 16, 2013, the debtors filed their
initial sale motion, drawing an immediate objection from Midland who says that the
contemplated sale by these debtors to a new entity formed and owned by the debtors’
ownership was not negotiated at arm’s length, is not in good faith, and is for
insufficient consideration.13 Under Midland’s and USDA’s guaranty agreement,
Midland has a variety of servicing duties to the Government and cannot unilaterally
agree to the sale because it is to Steve Lang’s newly formed company. As a matter of
policy, the USDA does not fund insiders’ acquiring assets from affiliates. Exceptions
to this policy must be obtained from the Administrator of the Rural Business-
Cooperative Service, a division of that agency.14 In response to this objection, the
10 Ex. 3, 4, and 5.
11 Ex. 18, Foreclosure petition filed June 7, 2013.
12 See Ex. V, Articles of Incorporation of HWM, Inc., dated August 20, 2013.
13 Dkt. 74 (Amended Asset Purchase Agreement), 75 (sale motion), 86 (sale
motion addendum), and 83 (Midland objection).
14 Ex. U.
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debtors filed a motion asking the court to “denominate the U.S. Department of
Agriculture as a Party in Interest” to which the government has objected.15 That
motion has been deferred pending the outcome of this sale motion.
An evidentiary hearing was held on November 20, 2013 and the parties offered
closing arguments on November 25, 2013.16 Shortly before the hearing, debtors and
HWM filed their Amended Motion for Sale No. 1 and submitted a Second Amended
Asset Purchase Agreement entered into on November 18, 2013.17 This amendment
deleted from proposed Sale No. 1, the 115 North Reno property mortgaged to Midland.
Good Faith and Sound Business Reasons
The debtors pursued a number of avenues in their attempt to preserve the core
business and its highly-skilled employees. These included obtaining several loan
proposals, including First Bank’s commitment to lend and attempts to secure outside
investment. Lang and Bowman dealt openly with all of the creditors concerned, even
convening a creditors meeting with them and including them in the negotiation process
and terms of the proposed sale. Both Midland’s and First Bank’s presidents stated that
the lending relationship with the companies had been cordial and cooperative.
Steve Lang stated that he hadn’t considered selling what remained of the
15 Dkt. 46, 63.
16 The debtor Lang entities appeared by their counsel Edward J. Nazar.
Midland Bank appeared by its attorney David Burns. First Bank of Newton
appeared by its attorney Timothy Hodge.
17 Dkt. 96, 103.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 9 of 23
business because he was concerned about a possible poor return. When he sold the 302
East Dean property as part of the 2011 workout after the first Kanza foreclosure, it
was the first such building to sell in Burrton in 10 years. The results of the online
equipment auction the debtors conducted as part of that workout were acutely
disappointing. The debtors received roughly ten cents on the dollar.18 Lang believes
that selling the business would not serve the lenders well and would be harmful to the
business, the community, and, of course, his experienced and loyal employees. He
considers that the likely prospective purchasers in such a sale would be his competitors
who survived the 2009 collapse.19 He points out that those competitors don’t need the
equipment or real estate, rather they seek debtors’ customers. Such a sale is likely to
result in Burrton losing an employer and 25 skilled employees losing their jobs. Lang
believes that his 12-year borrowing relationship with First Bank makes the HWM sale
the best option for all concerned. While the operating margin is thin, HWM is capable
Ms. Bowman, who is a certified public accountant, agreed that what First Bank
is prepared to lend and Steve Lang is prepared to pay exceeds what any outsider might
pay for the equipment and land. She and First Bank’s president stressed that the
18 For that auction, Midland and the USDA approved minimum bids.
19 Midland’s equipment valuation expert Dan Bashaw estimated that 80% ofthe woodworking industry market “went under.”
20 Ex. 19. Under Bowman’s cash-flow analysis, the business would generate amonthly margin of approximately $1,900, but would be able to make the principaland interest loan payments for the first time in several years.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 10 of 23
Bank’s offer to finance had a short deadline, creating time pressure in completing this
transaction. Adding to that pressure is the ongoing push-back the company receives
from its customers and the competitive disadvantage that being in bankruptcy
presents. A further source of concern is the looming expiration of a state tax exemption
in January of 2014. All of these factors militate against the debtor taking the time that
filing and confirming a plan and disclosure statement might take.
Value of machinery, equipment and vehicles
Midland’s principal factual dispute centers on the value of the line of machinery
and equipment to be acquired by HWM. Both WKL and Midland presented value
testimony at the hearing on this motion. The debtors relied on the appraisal report of
Duckwall & Company, Inc. Daniel Duckwall inspected some, but not all, of the
equipment at Burrton shortly before the hearing. He is certified as compliant with
USPAP21 and works as an auctioneer and appraiser of industrial equipment and
machinery. He presented a written report that included photographs of some of the
Duckwall testified that the fair market value of the equipment to be sold to
HWM is $474,610. In that report, he defines “fair market value” as what a willing
buyer would pay a willing seller, not under compulsion, and with full knowledge of
21 The Uniform Standards of Professional Appraisal Practice are thegenerally accepted standards for professional appraisal practice in North America,
as developed by the Appraisal Standards Board of the Appraisal Foundation. See
www.appraisalinstitute.org/ppc/ethics_standards.aspx on December 5, 2013.
22 Ex. 7.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 11 of 23
what is being sold. Duckwall also testified that, at liquidation, this equipment would
be worth not more than $278,325.23 Duckwall’s fair market valuation assumed that the
goods would be exposed to the market in place at Burrton for as long as six months. His
liquidation value opinion assumed that the equipment would be sold over a period not
to exceed 90 days. He suggested that the equipment being in Burrton, Kansas might
depress its value, but that the greatest single factor depressing its value is the
significant increase in competition in the domestic and international cabinet business.
He also noted that woodworking equipment auctions that he has recently observed
have not been well attended.
On cross examination, Midland established that Duckwall’s appraisal did not
include a few items of property, most notably several forklifts and a table saw. These
items, taken together at Bashaw’s values, amount to $28,810.24 But, as noted below,
these are retail, not fair market, values. The other discrepancies are explained by
Duckwall’s grouping various related component items together, rather than listing
them by line item. Adding the missing components at Bashaw’s values increases the
total fair market value of the equipment to $493,420.
Midland relied on the valuation testimony of Dan Bashaw of Overland Tool and
Machinery. While Bashaw did not state that he was a certified appraiser, his business
is the onsite sale and brokerage of equipment. Indeed, some of the debtors’ equipment
23 Ex. 8.
24 See Ex. W, lines 103, 104, 118 and at top of page 4.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 12 of 23
was purchased from Overland. He has performed valuation services from time to time
and bases his opinions upon information he accumulates in his business and on his 36
years in the equipment sales business. Bashaw did not supply a typical expert report.
Instead, he testified from a spreadsheet inventory of equipment based on lists he
received from Lang and Bowman with values attributed to each line item.25 Bashaw
opined that the value of the equipment where it is located and if well-maintained in a
safe environment is $777,811. He based that opinion on his experience as a dealer and
broker. His pricing is based on information available to Overland through trade group
member databases. His value opinion assumes a transaction between an unrelated
buyer and seller after exposing to the market for between a few weeks and a number
of months. If Bashaw were to buy all of this equipment in a lot, he would expect to
receive a 10% discount. He admitted that it would be difficult to obtain fair market
value for this equipment if it were sold piecemeal. Bashaw considers himself a retail
dealer. He admitted that his approach to valuing the equipment was affected by that
Bashaw also testified that the liquidation value of the equipment is $466,000,
though, on cross examination, he stated that he would only pay $350,000 for all of it
if he were buying it for resale. He also noted that he would liquidate the equipment by
25 Ex. W.
26 Bashaw estimated that 95% of Overland’s business is retail and a verysmall percentage (less than 8%) of Overland’s inventory is comprised of usedequipment.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 13 of 23
selling it at a dispersal auction as opposed to selling it as a package. He conceded that
he typically sells new equipment and that what he sells used he acquires via trading
or purchases for resale. He noted, too, that there are valuation resources for
equipment, but he did not cite to any in his testimony.
I credit Mr. Bashaw’s experience in the field, but note that he is, in fact, a
retailer whose opinion was not based on auction or liquidation experience. Nor was it
based on any comparative sales information. By contrast, Mr. Duckwall’s testimony
was based on his experiences as an auctioneer and appraiser of industrial equipment
with significant experience in appraising and selling woodworking tools. Given the
wide range in values testified to at trial, from Duckwall’s liquidation value of $278,000
to Bashaw’s fair market value of $778,000, and given the two witnesses’ agreement
that the market for this equipment is challenged at best, I conclude that Mr.
Duckwall’s report, as modified by the few pieces of equipment he appears to have
missed, better reflects the fair market value of this equipment where it is situated
today. I accordingly find that the fair market value of the equipment offered for sale
in the motion is not less than $474,610 and not more than $493,420 if full credit at
Bashaw’s values of the omitted pieces is added to Duckwall’s value. I also find that its
liquidation value does not exceed $350,000, the amount that Bashaw said he would pay
if he were to purchase all of it for resale.
Section 363(b) Sales in General
As debtors in possession, the debtors in this case may sell estate assets outside
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the ordinary course of business under § 363(b) after notice and a hearing. Case law and
practice have developed a set of standards for determining whether a proposed sale
may be approved under subsection (b).
The Debtor must show (1) that a sound business reason exists for thesale; (2) there has been adequate and reasonable notice to interestedparties, including full disclosure of the sale terms and the Debtor'srelationship with the buyer; (3) that the sale price is fair and reasonable;
and (4) that the proposed buyer is proceeding in good faith.27
Turning first to the basic sale approval factors, there are sound business reasons
to proceed as the debtors have requested.28 This business cannot long languish in
chapter 11 and remain viable. If, however, the principals are permitted to convey its
assets to a new entity that is financed by a willing lender on reasonable terms, and if
all parties will receive something akin to what they would get in a conventional
chapter 11 plan, there is no reason not to permit a sale, assuming the proposal meets
the other terms and provisions of § 363. The risks of waiting for a plan to be confirmed
include (1) that the debtors’ tax exemptions and deferral of principal payments will
soon expire; (2) that 25 highly skilled people will lose their jobs; (3) that uncertainty
about the enterprise’s future has become a tool for its competitors to use against it in
the marketplace; and (4) that an ongoing business in a very small town will collapse.
Considering the efforts the debtors’ management has made to resolve the debts outside
27 In re Medical Software Solutions, 286 B.R. 431, 439-40 (Bankr. D. Utah2002).
28 There were no objections to the sufficiency of notice here, nor does anyoneallege that the sale terms and the debtors’ relationship with the buyer were notfully disclosed.
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of bankruptcy and to secure replacement financing, the debtors have exercised sound
management practices in trying to move the business to safe ground in the most
The third and fourth general sale factors are whether the price is fair and
reasonable and whether the buyer has acted in good faith. These factors overlap.
Again, case law provides the controlling standard. In the Tenth Circuit, courts have
long held that a sale is in good faith if the price received is 75% of the appraised value
of the assets.29 Following the Tenth Circuit’s Bel Air decision, the Bankruptcy
Appellate Panel has recently reaffirmed that “[i]n order to obtain good faith status
under § 363(m), a purchaser must (i) buy the property without “fraud, collusion
between the purchaser and other bidders or the trustee, or an attempt to take grossly
unfair advantage of other bidders” and (ii) pay “at least 75% of the appraised value of
I have concluded that the fair market value of the machinery and equipment to
be sold under this agreement is not more than $493,420. Seventy-five percent of that
amount is $370,065. Lang testified that the Bank was prepared to lend up to $410,000
to consummate the sale of the equipment line. The debtors orally amended their
motion to sell to reflect an increased offer by HWM in that amount. Under Tenth
29 Tompkins v. Frey (In re Bel Air Assocs., Ltd.), 706 F. 2d 301, 305 n. 12 (10thCir. 1983), citing Greylock Glen Corp. v. Community Sav. Bank, 656 F. 2d 1, 4 (1stCir. 1981) and In re Rock Indus. Machinery Corp., 572 F. 2d 1195, 1197 n.1 (7th Cir1978).
30 In re Crowder, 314 B.R. 445, 450 (10th Cir. B.A.P. 2004).
Case 13-11934 Doc# 115 Filed 12/11/13 Page 16 of 23
Circuit authority, that amount is more than sufficient to support a finding that the sale
is for a fair and reasonable price and in good faith.
Good faith in this context is based not only on the adequacy of proposed sale
price, but also on whether the purchaser bought “without fraud, collusion between the
purchaser and other bidders or the trustee, or an attempt to take grossly unfair
advantage of other bidders.”31 When the purchaser at the proposed sale is an insider
of the debtor, heightened scrutiny of the circumstances is required.32 While sales to
fiduciaries are not per se prohibited, they should be carefully examined for fraud or
collusion. After hearing the testimony of the debtors’ principal owner, the debtors’ chief
financial officer, and Ray Penner, president of First Bank, I am comfortable that no
fraud or collusion informs this transaction. Lang has openly interacted with his lenders
and other creditors throughout the case. The terms and provisions of the sale as well
as his involvement in it have been fully disclosed. While he may benefit from its
approval, his intentions to continue to operate the business and employ residents of a
small country town belie any assertion of misconduct on his part. The sale was legally
and appropriately noticed and no other bidders have cropped up. I cannot conclude that
Lang or the trusts are taking unfair advantage of other participants in the
marketplace.33 Moreover, preserving established businesses in small agrarian
31 Id. See also In re Bel Air Assocs., Ltd., 706 F.2d at 305 nn. 11–12.
32 In re Medical Software Solutions, 286 B.R. at 445; In re Bidermann Inds.,
Inc., 203 B.R. 547, 553 (Bankr. S.D.N.Y. 1997);
33 See In re Condere Corp., 228 B.R. 615, 631-32 (Bankr. S.D. Miss. 1998).
Case 13-11934 Doc# 115 Filed 12/11/13 Page 17 of 23
communities is entirely consistent with the overarching goals and policies of the USDA
Rural Development programs.34
When a pre-plan sale is proposed in a chapter 11, courts often refer to the
“Lionel Factors” to determine whether such a sale comports with sound business
judgment and is appropriate. Those factors include:
(1) the proportionate value of the asset to the estate as a whole; (2) theamount of elapsed time since the filing; (3) the likelihood that a plan ofreorganization will be proposed and confirmed in the near future; (4) theeffect of the proposed disposition on the future plans of reorganization; (5)
the proceeds to be obtained from the disposition vis-a-vis any appraisalsof the property; (6) which of the alternatives of use, sale or lease theproposal envisions; and (7) most importantly perhaps, whether the asset
is increasing or decreasing in value. 35
Applying the Lionel factors here, those that weigh against permitting the sale
to go forward are outweighed by those that condone it. The short time between filing
and the sale and the fact that this machinery and equipment are among the last
saleable assets from which Midland can expect to realize on its security interest weigh
against approval of the proposed sale. And, as Midland points out, a future
reorganization of the remaining debtor assets seems unlikely once this sale is
34 See www.rurdev.usda.gov/BCP_gar.html on December 6, 2013, describingthe purpose of the Business and Industry Guaranteed Loan Program “to improve,
develop, or finance business, industry and employment and improve the economicand environmental climate in rural communities.” See also
www.rurdev.usda.gov/Business.html on December 6, 2013, for the articulated
mission of the USDA Rural Development.
35 Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.), 722
F.2d 1063, 1071 (2nd Cir. 1983) (enumeration and emphasis added).
Case 13-11934 Doc# 115 Filed 12/11/13 Page 18 of 23
complete.36 But the likelihood that this business will survive long enough to make it
through the confirmation process is low. The property will be sold for a large proportion
of its value compared to appraisals. The business is deteriorating and the current
proposed lender may well back out if forced await the outcome of confirmation hearing.
The most important Lionel factor, whether the assets are increasing or decreasing in
value, weighs in favor of the proposed sale. Both valuation witnesses noted the lack
of a favorable market to sell the equipment as a lot and agreed that a piecemeal sale
would lower its value.37 On balance, the Lionel factors weigh in favor of permitting the
proposed pre-plan sale.
Section 363(f): Sales Free and Clear of Interests in Property.
Section 363(f) of the Code permits § 363(b) sales of property to be free and clear
of liens and interests in the property. Subsection (f)(1)-(5) sets out five conditions for
sales free and clear. Because those conditions are listed in the disjunctive, satisfying
any one of them is all that is necessary for the trustee or a debtor in possession to sell
free and clear, so long as the other elements of § 363 are met. Midland argues that the
debtors’ proposed sale does not meet any of the subsection (f) criteria and relies
primarily on subsections (f)(2) and (f)(3). Subsection 363(f)(2) requires that the secured
36 The 115 N. Reno property that was removed from proposed Sale No. 1 bythe amended sale motion will be the debtors only remaining asset. Its futureseparate sale is contemplated and Lang has offered to assist Midland to sell theReno property.
37 The debtors’ experience when they sold the Cabinet equipment in Octoberof 2011 undoubtedly lends credence to debtors’ view that the equipment in Sale No.
1 is more likely decreasing in value.
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creditor consent to the sale and Midland refuses to do that. Subsection 363(f)(3),
requires that the sale be for not less than an amount greater than the “aggregate value
of all liens.”
The courts are somewhat divided on the meaning of § 363(f)(3). Most courts have
concluded that the “aggregate value” of the liens is equal to or not greater than the
value of the collateral being sold. But one court disagrees. In Clear Channel Outdoor,
Inc., the Ninth Circuit Bankruptcy Appellate Panel held that the price of the property
sold must be greater than the aggregate amount of all claims held by the lienholders
and rejected the view that the statutory language refers to the economic value of the
liens, i.e., the value of the collateral.38 No court of appeal has adopted this view and the
great weight of lower court authority is to the contrary. Most courts reason that if § 363
sales had to generate proceeds in excess of all of the claims that attached to the assets
sold, few, if any of them would ever be approved.39 This is the better view.
Nevertheless, this sale does not meet (f)(3) under either view, because the fair market
value of the property to be sold exceeds the actual sales price. While meeting the 75%
good faith threshold may suffice to gain a sale’s approval under § 363(b), it does not
stretch to § (f)(3).
The proposed sale meets the requirement of subsection (f)(5). This subsection
allows the property to be sold free and clear of an entity’s lien if “such entity could be
38 Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 41
(9th Cir. B.A.P. 2008).
39 In re Boston Generating, LLC, 440 B.R. 302, 323 (Bankr. S.D.N.Y. 2010).
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compelled, in a legal or equitable proceeding, to accept a money satisfaction of such
interest.”40 Midland’s “interest” is an Article Nine security interest in personal property
that, outside of bankruptcy, could be enforced by self-help or foreclosed in a court of
appropriate jurisdiction.41 Midland could be compelled to accept less than payment in
full of the debt in a state law foreclosure and, to the extent the proceeds of the
foreclosure sale were insufficient to pay the claims in full, Midland would receive an
unsecured deficiency or, if it wished, Midland could credit-bid up to the amount of its
claim under at the foreclosure sale. Here, Midland had the right to credit-bid up to the
amount of its claim under § 363(k).42 Midland chose not to do that.
Were these debtors to attempt to cram Midland down in a chapter 11 plan, §
1129(b)(2)(B) would permit them to pay Midland a stream of payments with a present
value equal to the value of Midland’s collateral and the balance of Midland’s claim, at
least as to the machinery, would be unsecured.43 Several courts have held that “[b]y its
express terms, Section 363(f)(5) permits lien extinguishment if the trustee can
demonstrate the existence of another legal mechanism by which a lien could be
40 11 U.S.C.A. § 363(f)(5). See In re Gulf States Steel, Inc. of Alabama, 285
B.R. 497, 508 (Bankr. N.D. Ala. 2002) (Section 363(f)(5) refers to a legal or equitableproceeding “in which the nondebtor could be compelled to take less than the value ofthe claim secured by the interest;” it requires a showing that some mechanismexists to address extinguishing the lien without paying in full).
41 See Clear Channel Outdoor, Inc., 391 B.R. at 42 (The term “interest” insubsection (f)(5) includes a lien.)
42 Boston Generating, LLC, 440 B.R. at 323.
43 Scherer v. Fed. Nat’l Mortgage Assoc. (In re Terrace Chalet Apartments,
Ltd.), 159 B.R. 821, 829-30 (N.D.Ill.1993).
Case 13-11934 Doc# 115 Filed 12/11/13 Page 21 of 23
extinguished without full satisfaction of the secured debt. Section 1129(b)(2) cram
down is such a provision.”44 Midland could be crammed down and, therefore, compelled
to accept a money satisfaction of its lien.45 Therefore, the proposed Sale No. 1 satisfies
§ 363(f)(5) and may be approved as a sale free and clear of liens.
The proposed sale free and clear of liens noticed by the debtors in their Amended
Notice for Sale No. 1 (dkt. 96) and as orally amended at the hearing to increase the
price offered for the equipment to $410,000 meets the requirements of § 363(b) and
(f)(5) and is approved. Midland did not exercise its right to credit bid. Its objections are
OVERRULED and the debtors’ Motion for Sale No. 1, as amended and modified herein,
is GRANTED. The debtors may sell the property that secures Midland’s claim to HWM
44 Id. at 829. See also Compass Bank v. Investment Co. of the Southwest, Inc.
(In re Investment Co. of the Southwest, Inc.), 302 B.R. 112 (unpublished table
decision) (10th Cir. B.A.P. Dec. 8, 2003) (recognizing chapter 11 cram down as a legalor equitable proceeding under § 363(f)(5), citing Collier’s bankruptcy treatise); In re
Healthco Intern., Inc., 174 B.R. 174 (Bankr. D. Mass. 1994) (hypothetical chapter 11plan cramdown qualified as money satisfaction of taxing authority’s interest withinmeaning of § 363(f)(5)). But see Clear Channel Outdoor, Inc., 391 B.R. at 45-6
(Holding that § 1129(b)(2) cramdown is not a legal or equitable proceeding underthis section; if Code provided elsewhere for money satisfaction, there would be noneed for § 363(f)(5)).
45 See also, In re Jolan, Inc., 403 B.R. 866, 869-70 (Bankr. W.D. Wash. 2009)
where the bankruptcy court identified a number of legal or equitable proceedings inthe State of Washington where a lienholder’s interest could be cleared: its UniformCommercial Code Article 9 default remedies permitting a senior secured party todispose of collateral, a receiver’s authority to sell free and clear, a personal propertytax sale, a federal tax lien sale, and judicial and nonjudicial foreclosure sales.
Case 13-11934 Doc# 115 Filed 12/11/13 Page 22 of 23
and the lien of Midland will attach to the proceeds of that sale in the hands of the
# # #
Case 13-11934 Doc# 115 Filed 12/11/13 Page 23 of 23
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