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Bankruptcy § 363 Free-and-Clear Sales

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Bankruptcy § 363 Free-and-Clear Sales

Federal-authority page. Legal information, not legal advice. Last verified: 2026-06-02.

Overview

Section 363 of the Bankruptcy Code, 11 U.S.C. § 363, governs how a bankruptcy trustee — or a Chapter 11 debtor-in-possession (DIP), who under § 1107 holds substantially all the rights and powers of a trustee — may use, sell, or lease estate property. Its most consequential feature for distressed real estate is subsection (f), which permits a sale “free and clear of any interest in such property of an entity other than the estate” when one of five enumerated conditions is met. A qualifying § 363(f) sale strips liens, claims, and (in most circuits) other obligations from the asset and reattaches them to the sale proceeds, delivering the buyer title that is clean as to the stripped interests.

This federal layer overrides ordinary state foreclosure and tax-sale procedure in two directions:

  • It can pre-empt a pending state sale. Once a bankruptcy petition is filed, the automatic stay of § 362(a) halts most acts to enforce liens against, or “exercise control over,” property of the estate — including a scheduled tax-deed sale, tax-lien foreclosure, or mortgage sheriff-sale. The distressed owner (or trustee) can then market and sell the same real property inside the bankruptcy under § 363, often at a higher price and free of the very liens that triggered the state proceeding. The former owner’s equity is realized as cash rather than absorbed by a strict title-taking foreclosure — the same equity-protection concern at the heart of tyler-v-hennepin-county, reached here through a federal sale mechanism rather than the Takings Clause.
  • But it does not erase a valid property-tax lien for free. Section 363(f) requires a condition to be satisfied before an interest is stripped (most commonly, that the price exceeds the aggregate value of all liens, or that the lienholder consents). A perfected ad valorem property-tax lien is a senior secured “interest” that ordinarily must be paid in full from the proceeds unless one of the (f) conditions independently applies. The Bankruptcy Code separately protects the taxing authority: § 362(b)(18) exempts from the automatic stay the creation or perfection of a statutory ad valorem property-tax lien that comes due after the petition date.

For an acquirer, a § 363 sale is the cleanest title path in distressed real estate; for a former owner, it is a mechanism that can convert lost equity into a distributable cash surplus. Both turn on the five conditions in (f) and the credit-bid right in (k).

Statutory / regulatory framework

All quotations are from the United States Code as published by the U.S. House Office of the Law Revision Counsel and the Cornell Legal Information Institute (LII); both were retrieved 2026-06-02 and matched verbatim.

§ 363(f) — the five free-and-clear conditions

“The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if— (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” (Source: https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title11-section363 and https://www.law.cornell.edu/uscode/text/11/363 , retrieved 2026-06-02.)

The conditions are disjunctive — satisfying any one of the five permits the free-and-clear sale. In real-property cases the workhorses are:

  • (f)(2) consent — the lienholder agrees (or, under the prevailing reading, fails to object after proper notice).
  • (f)(3) price-exceeds-liens — used when the property sells for more than the aggregate of all liens; note the long-standing dispute over whether “value of all liens” means the liens’ face/claim amount or their economic value. This affects whether an underwater senior lien blocks a (f)(3) sale; the split is real and is flagged below under needs_verification rather than asserted as settled.
  • (f)(5) compelled money satisfaction — used where the lienholder could, outside bankruptcy, be forced to accept cash for the interest (e.g., via a lien-payoff or statutory redemption-for-money mechanism).

The (f) authority is constrained by other subsections: the sale must satisfy the notice-and-hearing and business-judgment requirements of (b), and the lienholder’s adequate protection rights under (e).

§ 363(b)(1) — sales outside the ordinary course (notice and a hearing)

“The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate …” (Source: https://www.law.cornell.edu/uscode/text/11/363 , retrieved 2026-06-02.)

A one-off real-estate sale is “other than in the ordinary course,” so it requires notice and a hearing and court approval. (Routine sales by an operating debtor fall under § 363(c)(1), which permits ordinary-course transactions “without notice or a hearing.“)

§ 363(e) — adequate protection of the stripped interest

“Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property … sold … by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.” (Source: https://www.law.cornell.edu/uscode/text/11/363 , retrieved 2026-06-02.)

This is the lienholder’s principal defense: even where an (f) condition is met, the court must, on request, condition the sale to adequately protect the secured creditor — typically by ordering that the lien attach to the proceeds in the same priority it held in the property.

§ 363(k) — credit bidding

“At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.” (Source: https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title11-section363 and https://www.law.cornell.edu/uscode/text/11/363 , retrieved 2026-06-02.)

A secured creditor whose lien is being sold over may credit-bid — bid its allowed claim and offset that claim against the purchase price instead of paying cash — unless the court for cause orders otherwise. This protects a secured lender against having its collateral sold for less than the lender values it, by letting the lender become the buyer up to the amount it is owed.

§ 363(m) — finality / mootness of a good-faith sale

“The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale … to an entity that purchased … such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale … were stayed pending appeal.” (Source: https://www.law.cornell.edu/uscode/text/11/363 , retrieved 2026-06-02.)

This is the buyer’s finality shield: absent a stay pending appeal, a reversal on appeal does not unwind a sale to a good-faith purchaser. It is the doctrinal reason § 363 title is treated as durable.

§ 1129(b)(2)(A) — the plan-sale parallel (and the credit-bid link)

When the same kind of free-and-clear sale is accomplished through a Chapter 11 plan rather than a stand-alone § 363 motion, the cramdown standard of § 1129(b)(2)(A) governs. For a dissenting secured class, a plan is “fair and equitable” if it does one of three things: (i) the creditor retains its lien and receives deferred cash payments of at least the allowed claim value; (ii) the collateral is sold “free and clear of such liens,” with the liens attaching to the proceeds and the creditor’s § 363(k) credit-bid right preserved; or (iii) the creditor realizes the “indubitable equivalent” of its claim. (Source: https://www.law.cornell.edu/uscode/text/11/1129 , retrieved 2026-06-02.)

§ 362(b)(18) — the post-petition property-tax-lien carve-out

“[The filing of a petition does not operate as a stay] … of the creation or perfection of a statutory lien for an ad valorem property tax, or a special tax or special assessment on real property whether or not ad valorem, imposed by a governmental unit, if such tax or assessment comes due after the date of the filing of the petition …” (Source: https://www.law.cornell.edu/uscode/text/11/362 , retrieved 2026-06-02.)

This is why bankruptcy does not let an owner indefinitely escape post-petition property taxes: the taxing unit’s lien for taxes accruing after filing attaches and perfects despite the stay, and must be reckoned with in any § 363 sale.

How it interacts with tax sales and foreclosure

The operational reality, step by step:

  1. The petition triggers the automatic stay. Under § 362(a), filing halts most acts to enforce a lien against estate property or to “exercise control over property of the estate.” A scheduled tax-deed auction, tax-lien certificate foreclosure, or mortgage foreclosure sale is generally stayed the moment the case is filed; proceeding without relief from the stay risks the sale being void or voidable. (See bankruptcy-stay.) The carve-out in § 362(b)(18) permits the post-petition property-tax lien to attach, but does not authorize the sale itself to go forward.
  2. The trustee or DIP markets the property under § 363(b). Because a real-estate liquidation is outside the ordinary course, it proceeds by motion, on notice and a hearing, usually with court-approved bid procedures, often a stalking-horse bidder, and an auction.
  3. The sale is run “free and clear” under § 363(f) if a condition is met — most often (f)(3) (price exceeds aggregate liens) or (f)(2) (lienholder consent). Liens that are stripped — including a property-tax lien, a foreclosing mortgage, junior mortgages, judgment liens, and (in the broad-reading circuits) certain successor-liability and other claims — reattach to the cash proceeds in their pre-sale priority.
  4. Secured creditors may credit-bid under § 363(k) unless the court orders otherwise for cause. A foreclosing mortgagee or a tax-lien certificate holder with an allowed secured claim can therefore bid its debt and take the property, mirroring the credit-bid it would have made at a state foreclosure auction — but inside a process that delivers free-and-clear title.
  5. Proceeds are distributed by Code priority. Sale costs and senior secured claims (including the property-tax lien) are paid first; the residue, if any, flows down the priority ladder and ultimately to the estate for the benefit of unsecured creditors and, in a solvent estate, the debtor. Functionally, the equity above the debt is captured as a distributable surplus rather than forfeited — the federal analogue to the state surplus right discussed in surplus-funds.
  6. Finality attaches under § 363(m). Once the sale closes to a good-faith purchaser and no stay pending appeal was obtained, the transfer is durable even if the approval order is later reversed.

The net effect: § 363 is frequently the cleanest exit for distressed real property, because it produces a court order extinguishing liens that a state quiet-title action might take years to clear (compare the state-by-state quiet-title timelines on the jurisdiction pages).

▸ For Investors / Operators. A § 363(f) order is the gold standard of title certainty — it strips senior and junior liens at once and, under § 363(m), is largely appeal-proof once it closes without a stay. Diligence still matters: confirm which (f) condition the order rests on, that the property-tax lien is being paid from proceeds (it is senior and § 362(b)(18) keeps post-petition taxes alive), that any secured lender’s § 363(k) credit-bid right was honored or waived, and that the order contains the standard good-faith-purchaser finding. Watch the (f)(3) “value of all liens” split — an underwater senior lien can defeat a (f)(3) sale in some circuits.

▸ For Former Owners. If a tax or mortgage foreclosure sale is imminent, a bankruptcy filing triggers the automatic stay (§ 362(a)) that halts the sale, and a § 363 sale can realize your equity as cash instead of losing it to a title-taking foreclosure. Proceeds pay the tax debt and liens first; the surplus above those amounts belongs to the estate and, in a solvent case, ultimately to you. This is a federal route to the same equity protection recognized in tyler-v-hennepin-county and detailed in surplus-funds.

Leading cases

  • RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012). Decided May 29, 2012; opinion by Justice Scalia for a unanimous Court (Justice Kennedy not participating). The Court held that debtors may not confirm a Chapter 11 cramdown plan that sells a secured creditor’s collateral free and clear of its lien without permitting the creditor to credit-bid at the sale. Reasoning by the general/specific canon, the Court held that the specific credit-bid pathway of § 1129(b)(2)(A)(ii) governs sales of encumbered collateral and cannot be circumvented by routing the sale through the general “indubitable equivalent” pathway of clause (iii). This is the controlling authority protecting the § 363(k) credit-bid right in plan and sale contexts. Good law. (Source: https://www.law.cornell.edu/supremecourt/text/11-166 , retrieved 2026-06-02; citation, date, vote, and authorship corroborated at https://www.courtlistener.com/opinion/801109/radlax-gateway-hotel-llc-v-amalgamated-bank/ and https://www.oyez.org/cases/2011/11-166 , retrieved 2026-06-02.)

  • In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003). The Third Circuit affirmed a § 363(f) sale of TWA’s assets to American Airlines free and clear of successor-liability claims — employment-discrimination claims and a flight-attendant travel-voucher program. The court held that the phrase “any interest” in § 363(f) is “intended to refer to obligations that are connected to, or arise from, the property being sold,” and is not limited to in rem interests in the property. This is the leading authority for the broad reading under which a § 363(f) sale can strip more than recorded liens. Good law in the Third Circuit and widely followed. (Source: https://law.resource.org/pub/us/case/reporter/F3/322/322.F3d.283.01-4437.01-4159.01-1788.html , retrieved 2026-06-02.)

State interaction notes

Section 363 is federal and uniform across all 56 jurisdictions, so the statutory rule does not vary by state. What varies is the state-law backdrop that determines a sale’s practical effect:

  • What is being stripped depends on the state lien regime. Whether a tax interest is a certificate (tax-lien states) or a deed (tax-deed states) changes what the secured “interest” is and how it is paid from proceeds. See the tax-sale mechanics on each jurisdiction page (e.g., florida, texas, georgia, arizona, illinois tax-lien track; california, ohio tax-deed track).
  • § 363(f)(1) borrows state law. Condition (1) is satisfied only if “applicable nonbankruptcy law” — i.e., state law — would permit a free-and-clear sale of that interest; so the availability of that specific pathway is state-dependent.
  • HOA super-priority and other state lien priorities carry into the proceeds waterfall. A state that grants an HOA a super-priority position (and the size of that priority) changes who is paid first from § 363 proceeds. Each jurisdiction page states its HOA super-priority status; reconcile any § 363 distribution against it.
  • Redemption rights under state law (see right-of-redemption and federal-tax-lien-redemption) may survive or be addressed in the sale order depending on the state’s redemption structure and the case posture. Whether a state statutory redemption right is itself an “interest” stripped under § 363(f) is fact- and circuit-dependent — flagged needs_verification below.
  • Constitutional backstop. Where a state’s foreclosure design would otherwise let the government or a purchaser keep equity above the debt, a § 363 sale is a route to realize that equity as a distributable surplus — converging with the takings rule of tyler-v-hennepin-county without relying on it.

Needs verification

  • § 363(f)(3) “value of all liens” split. Whether the price must exceed the liens’ aggregate face/claim amount or their economic value (and thus whether an underwater senior lien blocks an (f)(3) sale) is the subject of a genuine split; no single controlling primary source was retrieved to state the rule as settled. needs_verification — circuit-specific case to be retrieved.
  • Whether a state statutory redemption right is an “interest” strippable under (f). Outcome varies by circuit and by how the state characterizes the right; no controlling retrieved authority. needs_verification.
  • Breadth of the TWA “any interest” reading outside the Third Circuit. Several circuits follow it; a comprehensive good-law survey across all circuits was not retrieved here. needs_verification.

bankruptcy-stay, surplus-funds, tyler-v-hennepin-county, federal-tax-lien-redemption, right-of-redemption, sheriff-sale, treasurer-sale, florida, texas, georgia, arizona, illinois, california, ohio

Sources

Disclaimer. This page is legal information, not legal advice. It is a general summary of federal bankruptcy law that may be incomplete or out of date; law changes and its application is fact-specific and varies by circuit. Nothing here creates an attorney-client relationship. Verify every statute and holding against the current primary source and consult a licensed attorney before acting.

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