CIVIL ACTION NOS. 03-172 (MLC) & 02-5880 (MLC)
The opinion of the court was delivered by: Cooper, District Judge
This matter comes before the Court on appeal of the Order of the United States Bankruptcy Court for the District of New Jersey ("the bankruptcy court") dated November 21, 2002 ("11-21-02 bankruptcy order") pursuant to 11 U.S.C. § 363, approving the sale of real property from debtor-appellee WDH Howell, LLC ("WDH") to appellee Solomon Dwek ("Dwek") free and clear of all liens, claims, and encumbrances. Creditor-appellant, Criimi Mae Services Limited Partnership ("Criimi Mae"), opposed the sale before the bankruptcy court and now (1) appeals; and (2) moves to stay pending appeal. We have jurisdiction pursuant to 28 U.S.C. § 158(a). For the reasons stated herein, we will (1) grant the appeal; (2) reverse the 11-21-02 bankruptcy order; and (3) deny as moot the motion to stay pending appeal.
WDH owns environmentally contaminated commercial real estate in Howell, New Jersey ("the property") as a debtor-in-possession. *fn1 (App., Ex. B ("Sale Motion") ¶ 5; Addendum to Designation of Items in Record on Appeal ("Record Addendum"), Ex. 13, Appellant's Obj. to Sale Motion, Exs. 1-8.) See 11 U.S.C. § 1107. In October 1997, WDH executed a promissory note ("the note") in the principal amount of nine million dollars, repayment of which is secured by a mortgage on the property ("the mortgage"). (Appellant's Proof of Claim, Addendum at 1-2 & Exs. A-B.) Criimi Mae is the beneficial owner of the note and the mortgage and, therefore, has a first-priority lien against the property. *fn2 (Id.)
WDH filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code ("the Code"), on January 16, 2001. (Record Addendum, Ex. 1.) See 11 U.S.C. §§ 1101-74. The property is the principal asset of the bankruptcy estate. (Record Addendum, Exs. 1-2.) Criimi Mae claims that WDH owed $11,882,560.92 in principal, interest, fees, and costs as of the petition date. (Appellant's Proof of Claim, Addendum at 2.) Accordingly, Criimi Mae filed a proof of claim on June 14, 2001. (Id.)
WDH, on July 19, 2002, filed a motion to approve the sale of the property ("sale motion") to Rocky Stefansky ("Stefansky") for $8,250,000.00, pursuant to § 363. *fn3 (Sale Motion.) Criimi Mae filed an objection to the sale motion on August 14, 2002. (Record Addendum, Ex. 13.)
The bankruptcy court conducted a non-evidentiary hearing on the sale motion on August 21, 2002 ("8-21-02 hearing"), where it heard oral argument from the parties' counsel regarding the viability of the sale to Stefansky. (App., Ex. F, Bankr. Tr. dated 8-21-02 ("1st Tr.").) The bankruptcy court adjourned the 8-21-02 hearing to allow for further discovery on the availability of funding for investigation and remediation of environmental contamination on the property, including (1) $280,000.00 already remitted by WDH to the NJDEP; and (2) existing insurance coverage. (Id. at 27-28, 66-70, 75-92.)
The bankruptcy court continued the hearing on October 9, 2002 ("10-9-02 hearing"). (App., Ex. G, Bankr. Tr. dated 11-21-02 ("2d Tr.").) Two new bidders in addition to Stefanksy appeared at the 10-9-02 hearing, and the bankruptcy court permitted all three bidders to participate in an auction to sell the property. (Id. at 90.) Dwek was the highest bidder. (Id. at 120-21.)
Criimi Mae reserved its rights on appeal by (1) requesting to present live testimony and other evidence; (2) arguing that WDH had the burden to present evidence demonstrating the appropriateness of the sale; and (3) noting that the bankruptcy court had not received any evidence as to the value of the property once remediated or the existence of insurers who are willing or obligated to pay for remediation. (1st Tr. at 30; 2d Tr. at 104.) However, the bankruptcy court did not conduct an evidentiary hearing or accept any evidence regarding, inter alia, the value of the property or the business propriety of the sale. *fn4
The bankruptcy court found that (1) WDH provided "proper, timely and sufficient notice" of the sale motion; (2) the sale of the property to Dwek reflected a "sound exercise of WDH's business judgment;" (3) Dwek was a good faith purchaser; and (4) the requirements of §§ 363(b) and (f) were satisfied. (App., Ex. A ("11-21-02 Bankr. Order") ¶¶ 3, 7-9.) Accordingly, the bankruptcy court approved the sale of the property free and clear of all liens, claims, and encumbrances to Dwek for $10,100,000.00, with $1,720,000.00 set aside in escrow with WDH's counsel for investigation and remediation of environmental contamination on the property. (11-21-02 Bankr. Order ¶ 4.) We construe this arrangement as creating an actual sale price of $8,380,000.00. *fn5
Criimi Mae now appeals the 11-21-02 bankruptcy order, arguing, inter alia, that the sale free and clear of all liens, claims, and encumbrances was inappropriate under § 363(f) which requires that the sale price be greater than the aggregate "face amount" of all liens on the property. (Appellant's Br. at 9-11.) WDH and Dwek oppose the appeal, arguing that (1) § 363(f) only requires that the sale price equal or exceed the aggregate economic value of all liens on the property; and (2) the sale to Dwek satisfied this requirement. (Dwek's Br. at 5-7; WDH's Br. at 4.) Criimi Mae counters that even if its interpretation of § 363(f) is wrong, the sale was inappropriate under §§ 363(b) and (f) ...