What Is a Section 363 Sale? How Bankruptcy Equipment Sales Work

A Section 363 sale is a sale of bankruptcy estate property outside the ordinary course of business, made by a trustee or debtor in possession under 11 U.S.C. 363 after notice to creditors and an opportunity for a hearing, typically under a bankruptcy court order approving it. When one of the five conditions in Section 363(f) is met, the court can approve the sale free and clear of liens and other interests, and the sale order commonly attaches those interests to the sale proceeds instead.

For trustees, debtors in possession, secured lenders and their counsel, a 363 sale is how an estate sells machinery outside the ordinary course in Chapter 7 or Chapter 11, short of a sale under a confirmed plan. This is general education, not legal advice: estate counsel and the court's local rules govern every case.

What Section 363 Authorizes

Section 363(b)(1) provides that the trustee, "after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." In Chapter 11, Section 1107 generally gives a debtor in possession the same powers. Under Section 102(1), no actual hearing is needed if notice was proper and no party in interest timely requests one.

Four other subsections do most of the work in an equipment sale:

• Section 363(e): on request of an entity with an interest in the property, such as a lienholder, the court must prohibit or condition the sale as necessary to provide adequate protection of that interest.
• Section 363(f): a sale free and clear of an interest is allowed only if one of five conditions applies, for example the holder consents, the interest is a lien and the price exceeds the aggregate value of all liens on the property, or the interest is in bona fide dispute.
• Section 363(k): the holder of a lien securing an allowed claim may bid at the sale and, if it buys, offset its claim against the purchase price, unless the court for cause orders otherwise.
• Section 363(m): reversing or modifying the sale authorization on appeal does not affect the validity of the sale to a good faith purchaser, unless the authorization and sale were stayed pending appeal.

Court Approval: Two Orders, Two Hearings

When an auction is contemplated, the Southern District of New York bankruptcy court's Amended Guidelines for the Conduct of Asset Sales call for one motion seeking two orders at two hearings: a Sale Procedures Order approving the process and any stalking horse protections, then a Sale Order approving the sale to the winning bidder. Other districts have their own local rules.

For the sale hearing, the guidelines expect evidence supporting findings that a sound business reason exists, the property was adequately marketed, the price is fair and reasonable, the deal was negotiated in good faith and at arm's length, and notice was adequate. In a free and clear sale, liens attach to the proceeds with the same validity and priority they had in the equipment. The marketing record matters as much as the price.

Bidding Procedures

The SDNY guidelines recommend bidding procedures that include:

• Bidder qualification: financial information showing the bidder can close.
• Qualified bid criteria and a bid deadline, with bids that may be marked against the stalking horse agreement.
• A good faith deposit, generally in the same form for every qualified bidder and non-refundable if the winner fails to close.
• An open auction in which each bidder learns the terms of the previous bid, transcribed or videotaped if the judge is not present.
• An optional backup buyer the debtor can close with if the winner does not perform.

Procedures must not chill higher or better offers, and bidding on less than all of the assets normally should be permitted, so a buyer for one production line is not shut out by a whole-plant stalking horse.

Stalking Horse Bids

A stalking horse is an initial bidder whose signed purchase agreement becomes the opening bid the auction must beat. In exchange, it may ask for a break-up fee, expense reimbursement, or both. Under the SDNY guidelines, those protections are judged case by case, must be conspicuously disclosed, and the first bidding increment must be more than enough to pay them, so a topping bid still leaves the estate ahead. A sale can also proceed without a stalking horse.

Credit Bids

A credit bid lets a secured creditor bid the debt it is owed instead of cash. Under Section 363(k), a lienholder with an allowed claim may bid and offset the claim against the price, unless the court for cause orders otherwise. Because a credit bid can set the price others must beat, a lender benefits from a current orderly liquidation value and forced liquidation value on its collateral before bidding.

Objections

Under Bankruptcy Rule 2002, the notice of sale must state the time to file objections. Under Rule 6004, objections generally must be filed and served at least 7 days before the sale date, or within the time the court sets. An objector may argue, for example, that no Section 363(f) condition is met, that an interest holder lacks adequate protection, that the stalking horse protections are too generous, or that the assets were not adequately marketed.

Timing

The Code sets no single timeline, but the rules set minimums:

• At least 21 days' notice by mail of a proposed sale outside the ordinary course, unless the court for cause shortens the time (Rule 2002(a)(2)).
• Objections due at least 7 days before the sale date, or as the court sets (Rule 6004(b)).
• A 14-day stay of the order authorizing the sale after it is entered, unless the court orders otherwise (Rule 6004(h)).

Unless the court shortens or waives them, those minimums alone put about five weeks between the mailing of notice and the day a sale order takes effect. Marketing and bidding add to that, so each schedule is set case by case.

How Industrial Equipment Is Marketed and Sold in a 363 Sale

A typical industrial sale moves through these stages:

• Employment. Under Section 327(a), the trustee may employ disinterested appraisers and auctioneers with the court's approval, and under Section 330 the court awards their compensation after notice and a hearing. KD's fees are tailored to the engagement and quoted upfront; most sellers pay nothing out of pocket.
• Valuation. An appraisal of orderly and forced liquidation value gives the trustee and lenders a benchmark for judging a stalking horse, a credit bid and the auction result.
• Cataloging and marketing. Lot-by-lot photos and nameplate data, inspection days, and exposure to dealers, end users and export buyers build the record that the property was adequately marketed.
• Reporting. Under Rule 6004(f), an auctioneer who conducts the sale files an itemized statement of the property sold, each purchaser and the price, and sends a copy to the United States trustee and to the trustee or debtor in possession.
• Closing. Buyers pay and remove equipment on the order's terms. Liens follow the proceeds, and in Chapter 7 the trustee distributes the rest under the priority rules of Section 726.

How KD Auctions Works on 363 Sales

KD Auctions works with trustees, debtors in possession, secured lenders and their counsel on court-supervised sales of industrial equipment and whole plants, and has run hundreds of auctions since 1996. KD's appraisals are prepared by our AMEA Certified Equipment Appraisers, Tim Pfister, CEA, and Peter Lenstrohm, CEA. Their work is USPAP-compliant and prepared in the form lenders, courts, and trustees expect. KD Auctions is licensed and bonded in every state that requires it, markets each sale to 500,000+ industry contacts, and can typically dispatch a team onsite within 48 to 72 hours.

See how we support lenders and trustees, how our equipment appraisals work, and how we run manufacturing plant liquidations. For a state court case, see receivership liquidation. To discuss an estate, Request a Confidential Consultation or call 480.455.3910.

Frequently Asked Questions

Is every 363 sale an auction?

No. Rule 6004(f) allows a sale outside the ordinary course by public auction or private sale. Many equipment sales are auctions under court-approved bidding procedures.

Does the buyer take the equipment free of liens?

Only if the court finds that one of the five Section 363(f) conditions is met and the sale order says so. The liens then generally attach to the proceeds instead.

What happens to leased equipment in a 363 sale?

First, counsel decides whether the agreement is a true lease or a security interest; under UCC 1-203 that turns on the facts, not the label. For a true lease, Section 365 lets the trustee assume or reject it with the court's approval, and assign an assumed lease to a buyer who gives adequate assurance of future performance.