Jones and Culler Co-Author "BAP Opinion in Clear Channel Likely to Chill Credit Bids”

O'Melveny partner Evan Jones and counsel Emily Culler recently co-authored “BAP Opinion in Clear Channel Likely to Chill Credit Bids” for the Fall 2008 issue of the American Bar Association's Commercial Law Newsletter. Jones and Culler discuss a recent decision by the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit in Clear Channel Outdoor, Inc. v. Nancy Knupfer that they believe is likely to have a chilling affect on bankruptcy sales by decreasing buyers' willingness to rely on bankruptcy court orders.

Bankruptcy Code Section 363(f) allows debtors to maximize the value of their estates by selling their assets free and clear of all liens, claims and interests. The free and clear sale and the finality of bankruptcy court orders attract buyers that would otherwise hesitate to participate in bankruptcy auctions. Section 363(f) sets forth several grounds under which a "free and clear" order may be entered, including consent of the competing interest holder and that the sale is for "more than the value of the lien." The authors note that in contrast to earlier opinions, which differed on whether the section's language should be read to require a sale above the value determined by the court for the collateral or more than the entire debt that was asserted, the BAP's decision in Clear Channel held that the provision required a sale price above the amount of debt absent consent. Additionally, the BAP held that a buyer who relied in good faith on the sale order had very limited protection and could have a junior lien reimposed on the property in the buyer’s hands.

"The BAP’s narrow interpretation of Sections 363(f) and 363(m) is problematic," the authors write. "Prior to the Clear Channel opinion, these Bankruptcy Code provisions attracted buyers to auctions and encouraged senior lienholders not to seek relief from the stay to foreclose. Creditors and other buyers agreed to participate in bankruptcy auctions because the buyer could rely on the order stating the property is free and clear of liens, claims and interests. While the BAP stated that DB knew or should have known that Section 363(f) lien-stripping might not work, prior to this opinion, buyers in bankruptcy sales routinely relied on the finality of Section 363(f) orders when they received a Section 363(m) good faith finding. If the BAP decision is followed, buyers no longer have such security in bankruptcy sales. As such, the opinion is likely to have a chilling affect on bankruptcy sales."

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