U.S. Court Of Appeals For The Sixth Circuit Bolsters Free And Clear Sales Under Section 363 Of The Bankruptcy Code

One of the primary advantages of purchasing assets in a sale under Section 363 of the Bankruptcy Code is that a prospective purchaser can acquire the assets "free and clear of any interest" in the assets if the sale complies with Section 363(f). Purchasers have come to assume, albeit with inconsistent judicial concurrence, that a sale "free and clear of any interest" in the assets sold under Section 363(f) necessarily insulates them from successor liability for pre-petition "claims" against the seller. On September 27, 2007, the U.S. Court of Appeals for the Sixth Circuit issued a decision in Al Perry Enters. v. Appalachian Fuels, LLC,1 that buyers and debtors will applaud for its broad reading of Section 363(f) and resulting limitation on the types of claims that survive a Section 363 sale.

Background

Prior to filing for bankruptcy protection, Bowie Resources Limited entered into a sales agency agreement with Al Perry Enterprises pursuant to which Perry agreed to serve as a sales agent for Bowie. Under the sales agency agreement, Perry attempted to procure coal supply contracts for Bowie in exchange for commissions on coal sold under those contracts. Relevant to the instant dispute, Perry secured a supply contract with the Tennessee Valley Authority for Bowie. A dispute arose over Bowie's obligation to pay commissions to Perry in connection with the TVA contract and Perry filed a lawsuit against Bowie in the U.S. District Court for the Southern District of Indiana. The lawsuit resulted in an agreed judgment that obligated Bowie to continue paying commissions to Perry in connection with the TVA contract. The judgment further required Bowie to assume its contractual obligations to Perry under the sales agency agreement in the event that Bowie filed for bankruptcy.

Bowie subsequently filed a Chapter 11 petition and, after a false start with one prospective purchaser, proposed a sale of substantially all of its assets to Appalachian Fuels. Bowie provided notice of the proposed sale, along with a copy of the asset purchase agreement, to all its creditors, including Perry. The asset purchase agreement provided, among other things, that (i) the TVA contract was among the assets to be sold to Appalachian Fuels, (ii) the assets were to be delivered "free and clear of all Liens" (except "Permitted Liens"), and (iii) Appalachian Fuels would not assume any of Bowie's debts other than those specifically set forth in the asset purchase agreement. The...