Delaware District Court Holds That Certain Federal Labor Law Successor Obligations Were Not Extinguished By A "Free And Clear" Section 363(f) Bankruptcy Sale

• Jurisdiction: United States,Federal
• Law Firm: Arnold & Porter
• Subject Matter: Employment and HR, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Employee Rights/ Labour Relations
• Author: Mr Benjamin Mintz, Rosa J. Evergreen and Justin Imperato
• Published date: 03 October 2023

Bankruptcy Code section 363(f) authorizes a debtor to sell assets "free and clear" of "any interest" in property asserted by non-debtors. This is an important tool designed to maximize value for the benefit of stakeholders in a debtor's bankruptcy case. However, the potential to strip away a party's interest in property through a section 363 bankruptcy sale may be objectionable to some, resulting in litigation among the purported interest holder, the debtor-seller, and/or the asset purchaser. The District Court for the District of Delaware (the District Court) recently examined whether the term "any interest" in property includes post-sale successor liability obligations under the National Labor Relations Act (the NLRA), notwithstanding language in the sale approval order transferring the debtor's assets to the purchaser "free and clear" of successor liability obligations, and held that it does not.¹

"Free and Clear" Section 363 Sales in Bankruptcy

Section 363(b)(1) of the Bankruptcy Code provides in relevant part that a debtor, "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 sale of estate property under section 363(b)(1).² Under this deferential standard, a bankruptcy court will generally approve a reasoned decision by a debtor to sell estate property outside the ordinary course of business. ³

Section 363(f) of the Bankruptcy Code authorizes a debtor to sell estate property "free and clear of any interest in such property of an entity other than the estate," 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)(1)-(5). Many courts have construed the term "interest in property" broadly to encompass obligations that flow from the ownership of property: e.g., many "successor liability" claims are included within the scope of "interests" under section 363(f), such that asset sales in bankruptcy may occur "free and clear" of successor liability claims, provided one of the requirements in sections 363(f)(1)-(5) is met.⁴In the Braeburn Decision, the District Court addressed whether an asset purchaser was subject to successor liability for obligations imposed on it under the NLRA following the sale.

CCX Bankruptcy and Sale Overview

CCX Inc. (CCX or the Debtor) was a specialty steel manufacturer that operated a factory in Pennsylvania, where it employed hourly workers represented by the United Steel, Paper, and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO/CLC (the Union). CCX and the Union were parties to a collective bargaining agreement (the CBA), which set forth the terms and conditions of employment for those Union-represented workers. On March 27, 2022, CCX filed a chapter 11 bankruptcy petition in the Bankruptcy Court for the District of Delaware (the Bankruptcy Court).⁵On April 21, 2022, the Bankruptcy Court entered a bidding procedures order authorizing Braeburn Alloy Steel LLC (Braeburn) to be designated the stalking horse bidder for the proposed sale of substantially all of CCX's assets.⁶

During the negotiation of the asset purchase agreement (the APA) and the contract assumption and assignment process, Braeburn declined to assume the CBA. At the sale hearing, the Union expressed its hope that Braeburn would offer jobs to CCX's employees, but the Union did not object to the proposed sale. ⁷The Bankruptcy Court entered an order (the Sale Order)⁸that approved the proposed sale, approved the APA, and...