Debtor Can Sell Assets Free And Clear Of Successor Liability Claims Asserted By Union Pension Funds

• Published date: 08 December 2022
• Subject Matter: Employment and HR, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: Jones Day
• Author: Mr T. Daniel Reynolds and Mark Douglas

The ability of a bankruptcy trustee or chapter 11 debtor-in-possession to sell assets of the bankruptcy estate "free and clear" of "any interest in property" asserted by a non-debtor is an important tool designed to maximize the value of the estate for the benefit of all stakeholders. The U.S. Bankruptcy Court for the Southern District of Illinois recently examined whether such interests include "successor liability" claims that might otherwise be asserted against the purchaser of a debtor's assets. In In re Norrenberns Foods, Inc., 642 B.R. 825 (Bankr. S.D. Ill. 2022), appeal dismissed, No. 22-1460 (S.D. Ill. Aug. 5, 2022), the court granted a debtor-in-possession's motion to sell substantially all of its assets free and clear of claims asserted by a union pension fund against the debtor and the purchaser for withdrawal liability under the Employment Retirement Income Security Act ("ERISA"). In so ruling, the bankruptcy court "follow[ed] the majority trend to interpret the term 'interest' broadly," finding that "successor liability claims are an 'interest' for purposes of Section 363(f) of the Bankruptcy Code."

Free and Clear Bankruptcy Sales

Section 363(b)(1) of the Bankruptcy Code provides in relevant part that a bankruptcy trustee or chapter 11 debtor-in-possession, "after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." Courts generally apply some form of a business judgment test in determining whether to approve a proposed use, sale, or lease of estate property under section 363(b)(1). See ASARCO, Inc. v. Elliott Mgmt. (In re ASARCO, L.L.C.),650 F.3d 593, 601 (5th Cir. 2011); In re Stearns Holdings, LLC, 607 B.R. 781, 792 (Bankr. S.D.N.Y. 2019); In re Friedman's, Inc., 336 B.R. 891, 895 (Bankr. S.D. Ga. 2005); see generally Collier on Bankruptcy ("Collier") ' 363.02[4] (16th ed. 2022).

Under this deferential standard, a bankruptcy court will generally approve a reasoned decision by a trustee or debtor-in-possession to use, sell, or lease estate property outside the ordinary course of business. See In re Alpha Nat. Res., Inc., 546 B.R. 348, 356 (Bankr. E.D. Va.), aff'd, 553 B.R. 556 (E.D. Va. 2016). However, when a transaction involves an "insider," courts apply heightened scrutiny to ensure that the transaction does not improperly benefit the insider at the expense of other stakeholders. See In re Alaska Fishing Adventure, LLC, 594 B.R. 883, 887 (Bankr. D. Alaska 2018); In re Family Christian, LLC, 533 B.R. 600, 622, 627 (Bankr. W.D. Mich. 2015).

Section 363(f) of the Bankruptcy Code authorizes a trustee or debtor-in-possession to sell estate property "free and clear of any interest in such property of an entity other than the estate," but 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.

11 U.S.C. ' 363(f). A bankruptcy court's power to order sales free and clear of a competing interest without the...