Does a First Mortgage Deed of Trust Automatically Attach to the Proceeds of a 363(b) Sale in Bankruptcy Court in the USA?

Question from Anni, Does a First Mortgage Deed of Trust Automatically Attach to the Proceeds of a 363(b) Sale in Bankruptcy Court in the USA?

Answer from AI:

In a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, a debtor may sell its assets “free and clear” of any interests, such as liens, under Section 363(b). However, this does not mean that the liens or interests are extinguished. Instead, they typically attach to the proceeds of the sale.

Understanding the Role of a First Mortgage Deed of Trust in a 363(b) Sale

A first mortgage deed of trust is a type of lien that secures the repayment of a loan by placing a legal claim on the property. In a 363(b) sale, the lien does not disappear but rather follows the proceeds of the sale. This is based on the principle that liens pass through bankruptcy unaffected.

How Liens Attach to the Proceeds of a 363(b) Sale

The process of how liens attach to the proceeds of a 363(b) sale can be generally outlined as follows:

1. The debtor files a motion to sell the property “free and clear” of liens under Section 363(b).
2. The bankruptcy court approves the sale.
3. The property is sold, and the proceeds are held by the bankruptcy estate.
4. The lienholder files a claim to the proceeds based on their lien.
5. The bankruptcy court determines the validity, priority, and amount of the claim.
6. If the claim is approved, the lienholder receives payment from the proceeds.

Legal Advice and Consultation

While this provides a general understanding of how a first mortgage deed of trust might attach to the proceeds of a 363(b) sale, the specifics can vary based on the details of the bankruptcy case and the terms of the deed of trust. Therefore, it is strongly recommended that individuals or businesses involved in a 363(b) sale consult with a legal professional who specializes in bankruptcy law.

For more information on Section 363(b) sales and how liens are treated in bankruptcy, you can refer to the Chapter 11 Bankruptcy Basics provided by the United States Courts.

Please note: This information is intended to provide a general understanding of the law. It is not intended to provide legal advice. Always consult with a lawyer for legal advice tailored to your specific circumstances.