What happens in a bankruptcy Section 363 sale when the sale is subject to an existing lien and the existing lien has a due-on-sale clause? Is there a basis to eliminate the due-on-sale clause under state law? Does the fact that the sale occurred pursuant to Section 363 somehow eliminate the due-on-sale clause? Buyers beware: At least two courts have held that a due-on-sale clause is enforceable in a bankruptcy “363″ sale.
Section 363 of the Bankruptcy Code is a very useful provision that enables debtors (and trustees) to quickly monetize assets. Purchasers like to acquire assets via a 363 sale for the perceived, if not actual, benefit of obtaining assets “on the cheap.” Oftentimes the sale is “free and clear” of all liens, claims, and encumbrances; but on occasion, the sale will be subject to an existing lien.
