A sale of property that is determined by a bankruptcy court, using 20-20 hindsight, to have characteristics evidencing the intent of the buyer and seller to enter into a “true” sale of the property, transferring all of the seller’s interest in the property to the buyer. A “true” sale is often described as having transferred all of the significant risks and rewards of ownership to the buyer. In contrast, a transaction may be called a “sale” by the parties but recharacterized by the court as something else where, for example, the “sale” does not sufficiently transfer the risks and rewards of ownership to the buyer. Such a transaction creates, at best, a lien in favor of the “buyer.”
In the seller/debtor’s subsequent bankruptcy proceeding, property that the debtor sold in a true sale is no longer property of the bankruptcy estate and is not protected by the automatic stay. But if the sale is not “true,” the property remains property of the debtor’s bankruptcy estate and is subject to the automatic stay. The “buyer” is treated as a creditor with a claim that will be subject to treatment in a plan. Also, if the lien was not properly perfected, the debtor may use its strong arm powers under Section 544 to avoid the lien.