## Facts

- A Chapter 11 debtor-in-possession owned and operated a marina and related real property and sought to sell substantially all real estate and physical assets.
- The property had been appraised at $1,250,000, but evidence showed market value had declined by the time of sale.
- The assets were over-encumbered by three mortgages, three judgments, and delinquent real estate taxes totaling more than $1.3 million.
- The debtor moved to sell under 11 U.S.C. § 363(b) and (f) based on a $750,000 offer; at the hearing, a higher bid of $776,000 was submitted and accepted subject to resolving objections.
- A principal objector was a judgment creditor asserting an approximately $600,000 judgment lien, arguing the property could not be sold free and clear because it would not be paid in full.
- The debtor had filed adversary proceedings to set aside two judgments and stated it intended to contest the objector’s judgment, placing lien validity and priority in active dispute.

## Issues

1. Whether a debtor-in-possession may sell substantially all assets outside a plan under § 363(b) based on a sound business justification.
2. Whether the court may authorize a sale free and clear of a judgment lien under § 363(f) over the lienholder’s objection when the sale price is less than the face amount of recorded liens.
3. Whether the objecting lienholder is adequately protected when its lien is transferred to sale proceeds and lien validity and priority remain subject to adjudication.

## Decision

- The court authorized the sale of the debtor’s real estate and physical assets to the highest bidder for $776,000 under § 363(b).
- Applying the Second Circuit’s business-justification standard, the court found an immediate sale warranted given declining value, inability to obtain a better offer, and the adverse effect of continued holding costs and accruals.
- The court approved the sale free and clear of liens under § 363(f) despite the judgment creditor’s objection because at least one statutory condition was satisfied.
- The court ruled that liens would attach to the sale proceeds with the same validity and priority they held against the property, subject to later determination in pending litigation.
- Objections were overruled, without prejudice to the creditors’ rights to litigate lien validity, amount, and priority and to seek appropriate distributions from proceeds under the Bankruptcy Code.

## Legal Principles

- A sale outside the ordinary course under § 363(b) requires a sound business reason; relevant considerations include the asset’s importance to the estate, timing, prospects for reorganization, impact on reorganization, and sale price compared to appraisals.
- Section 363(f) is disjunctive: satisfying any one subsection permits a sale free and clear of an interest, with the interest typically shifting to proceeds.
- A sale may be free and clear under § 363(f)(4) when the lien or interest is in bona fide dispute, including where the debtor is actively challenging judgments through adversary proceedings.
- A sale may be free and clear under § 363(f)(5) when the lienholder could be compelled in a legal or equitable proceeding to accept a money satisfaction of its interest.
- Even where total recorded liens exceed the purchase price, courts may treat § 363(f)(3)’s “aggregate value of all liens” as tied to collateral value in an over-encumbered context, rather than the liens’ full face amounts.
- Adequate protection and due process may be satisfied where the objecting creditor receives notice and a hearing and retains the ability to assert its lien against proceeds and litigate priority and validity.

## Conclusion

The court permitted a Chapter 11 debtor-in-possession to sell substantially all assets for the highest available bid and to do so free and clear of a contested judgment lien, reasoning that § 363(b) was satisfied by a sound business justification and § 363(f) allowed a free-and-clear sale because the lien was in dispute and the creditor’s rights were preserved by attachment to the sale proceeds pending further adjudication.


In re Oneida Lake Dev., Inc., 114 B.R. 352 (Bankr. N.D.N.Y. 1990)