Section 363 Sale: 5 Steps to Sell the Business Free and Clear

Section 363(f) grants the words "free and clear" and, before the sentence is over, attaches the word "only." A business can be sold out of Chapter 11 without its liens following it to the buyer, and buyers pay for exactly that, but the sale clears each lien on one of five stated grounds or it does not clear that lien at all.

The steps below follow the order a court encounters them. The debtor in possession holds the trustee's power to sell under section 1107, and the procedure comes from section 363 and the Federal Rules of Bankruptcy Procedure as restyled in December 2024.

1. File the Motion and Give Twenty-One Days' Notice

Section 363(b)(1) permits a sale of estate property "other than in the ordinary course of business" only "after notice and a hearing." Selling the whole company is about as far outside the ordinary course as a business can go.

Bankruptcy Rule 2002(a)(2) requires at least 21 days' notice by mail to the debtor, the trustee, all creditors, and indenture trustees of a proposed sale outside the ordinary course, unless the court for cause shortens the time or orders another method. Rule 2002(c)(1) prescribes the contents: a general description of the property, the time and place of any public sale, the terms and conditions of any private sale, and the deadline for objections. Under Rule 6004, objections are due at least seven days before the date set for the sale unless the court sets another time, and a motion to sell free and clear of liens must be brought as a contested matter under Rule 9014 and served on each party holding a lien or other interest.

A lienholder that was never served is a lienholder whose objection has not yet been heard.

2. Match Every Lien and Interest to One of Five Grounds

The statute allows a sale free and clear of an interest "only if" one of five conditions holds as to that interest: nonbankruptcy law would permit the sale free of it; the holder consents; the interest is a lien and the price "is greater than the aggregate value of all liens on such property"; the interest is "in bona fide dispute"; or the holder "could be compelled, in a legal or equitable proceeding, to accept a money satisfaction." The grounds are alternatives. Each interest needs one, and different interests can rest on different grounds.

Suppose a buyer offers $900,000 for the business. The bank holds a blanket lien securing $600,000, and a merchant cash advance funder has filed a UCC financing statement and asserts a lien for $450,000. The two liens total $1,050,000, which exceeds the price, and the third ground is at least doubtful as to the funder (what "aggregate value of all liens" measures, whether the face amount of the debts or the value of the collateral standing behind them, is a question worth settling with counsel before the motion is drafted rather than at the hearing, since the answer determines whether this ground is available at all). The bank, if the sale pays it in full, has every reason to consent. The funder may consent too, for a price, though what a funder charges for consent is its own negotiation.

If the debtor contests in good faith whether the funder's agreement created a security interest at all, or what the funder is owed, the fourth ground may apply. The dispute must be bona fide. A disagreement manufactured to clear a lien is not one.

Whatever ground clears the lien, the holder is not left with nothing. Section 363(e) requires the court, on request of an entity with an interest, to prohibit or condition the sale as necessary to provide adequate protection of that interest, and the order approving the sale is where that protection is written.

3. Hold the Sale in Public View and Let the Lienholder Bid Its Claim

Rule 6004(f)(1) permits either a public auction or a private sale, and requires an itemized statement after the sale showing the property sold, each purchaser, and the consideration received. Procedures for soliciting competing bids, including any protections for an initial bidder, are set by court order; the Code contains no provision describing them.

Two statutory rules shape the bidding. Under section 363(k), a creditor whose lien secures an allowed claim may bid at the sale and, if it buys, offset its claim against the price, unless the court for cause orders otherwise. And under section 363(n), a sale whose price "was controlled by an agreement among potential bidders" may be avoided, the shortfall recovered with costs and attorneys' fees, and punitive damages imposed on a party who acted "in willful disregard" of the rule.

4. Obtain an Order That Protects a Good-Faith Buyer

Section 363(m) provides that reversal or modification of the sale order on appeal "does not affect the validity of a sale" to a buyer who purchased in good faith, "unless such authorization and such sale ... were stayed pending appeal." An objecting creditor's hope of unwinding the sale later (a hope the subsection was written to disappoint) depends on obtaining that stay, unless the buyer's good faith is itself in doubt.

Rule 6004(h) adds a waiting period. Unless the court orders otherwise, an order authorizing a sale is stayed for 14 days after entry. A buyer that wants to close sooner has to ask for that relief in the order itself.

5. Decide What the Case Does After the Money Arrives

A 363 sale ends the business as the debtor knew it. It does not end the case. The proceeds must still be distributed, and the Code offers three vehicles for that: a plan, conversion to Chapter 7, or dismissal.

A plan can provide for the sale of all or substantially all of the estate's property and distribute the proceeds, as section 1123(b)(4) permits, and a sale made under a confirmed plan carries a benefit a stand-alone 363 sale lacks. Section 1146(a) bars any stamp tax or similar tax on a transfer "under a plan confirmed under section 1129 or 1191."

In June 2008, in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., the Supreme Court held that the exemption reaches only transfers made under a plan that has been confirmed, and not a sale the bankruptcy court approved before the plan was submitted. The timing of the closing can therefore change the tax bill on the deed.

The plan route has limits of its own. A company that sells substantially everything and stops operating receives no discharge from a liquidating plan under section 1141(d)(3). When a plan is not worth its cost, the case may end by conversion or by a structured dismissal, which after Czyzewski v. Jevic Holding Corp. cannot distribute the proceeds out of priority order without the affected creditors' consent.

Before a Buyer Is Found

A 363 sale suits a business whose value lies in its customers, its equipment, or its name, and whose debts have outrun it. Some owners with debt of that kind first test whether the debt itself can be reduced by agreement, leaving the business unsold. Delancey Street reviews merchant cash advance and other business debt without charge and in confidence for that purpose. As it is not a law firm, it neither files bankruptcy cases nor conducts sales, and independently licensed counsel handles anything legal. Where a buyer is already waiting and a lender is already foreclosing, the right adviser is bankruptcy counsel who has run a sale before.

The buyer receives the business. The creditors receive the price, in the order the Code sets, and not in the order anyone would prefer.