## Facts

- Hamilton Road Realty LLC (the debtor) filed for bankruptcy under Chapter 11.
- The case was later converted to Chapter 7, and a Chapter 7 trustee was appointed.
- The debtor’s main asset was a piece of non-residential (commercial) real property.
- The trustee obtained a proposed buyer and moved for authority to sell the property for $1.92 million, subject to higher and better offers.
- The trustee sought to sell the property “free and clear” of liens, claims, and encumbrances under 11 U.S.C. §§ 363(b) and 363(f).
- The property was encumbered by a first mortgage, a junior mortgage, tax liens, and several nonconsensual judicial liens.
- The total face amount of the liens substantially exceeded the proposed sale price.
- The property had been transferred into the debtor entity from the debtor’s principal shortly before the bankruptcy filing, after judgments had been entered against the principal (and/or the principal’s spouse) that resulted in liens affecting the property.
- The debtor opposed the sale motion, arguing that the trustee could not satisfy § 363(f) as to the judicial liens (and related lien interests) when the sale price was less than the lien amounts.
- The trustee responded that the sale could proceed free and clear under either § 363(f)(3) or § 363(f)(5).

## Issues

1. Whether the debtor had standing to object to the Chapter 7 trustee’s motion to sell estate property under § 363.
2. Whether § 363(f)(3) permits a sale free and clear when the sale price is less than the face amount of the liens on the property.
3. Whether § 363(f)(5) permits a sale free and clear of nonconsensual judicial liens (and tax liens) when lienholders could be compelled in another legal or equitable proceeding to accept money satisfaction of their interests.

## Decision

- The court held the debtor had standing to be heard on the trustee’s requested sale relief.
- The court held § 363(f)(3) did not authorize the proposed free-and-clear sale because the face amount of the liens encumbering the property exceeded the sale price.
- The court held § 363(f)(5) was satisfied and authorized the trustee to sell the property free and clear of the nonconsensual judicial liens (and tax liens) on the record presented.
- The court granted the trustee’s motion and approved the sale process and the sale free and clear of liens, claims, and encumbrances, subject to higher and better offers.

## Legal Principles

- A Chapter 7 debtor may have standing to object to a trustee’s § 363 sale motion when the debtor demonstrates a sufficient stake in the requested relief to justify participation.
- Section 363(f)(3) is not met where the proposed sale price is less than the face amount of the liens against the property.
- Section 363(f)(5) permits a sale free and clear when the trustee shows that the lienholder “could be compelled” in a legal or equitable proceeding to accept a monetary satisfaction of its interest, even if the sale proceeds will not pay that lien in full.
- In applying § 363(f)(5), the court may consider whether lienholders retain rights to seek recovery from non-debtor obligors (such as a debtor’s principal or spouse) or other non-estate sources, so that releasing liens from the estate property does not eliminate collection rights on the underlying judgments.
- Approval of a free-and-clear sale under § 363(f)(5) can turn on the case’s specific circumstances, including how the liens arose and how the property became part of the estate.

## Conclusion

In In re Hamilton Road Realty LLC, the bankruptcy court authorized a Chapter 7 trustee to sell the debtor’s commercial real property free and clear of mortgages, tax liens, and nonconsensual judicial liens, rejecting § 363(f)(3) because lien face amounts exceeded the $1.92 million sale price but finding § 363(f)(5) satisfied because the affected lienholders could be forced in other proceedings to accept money satisfaction and retained potential recovery avenues beyond the sale proceeds.


In re Hamilton Road Realty LLC, 2021 WL 1620046 (2021)