What Buyer's Counsel Needs To Know About Bankruptcy Sales

• Jurisdiction: United States,Federal
• Law Firm: Sacks Tierney
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Contracts and Commercial Law, Landlord & Tenant - Leases
• Author: Philip R. Rudd and James S. Samuelson
• Published date: 23 March 2023

Overview of the Sale Provisions of the Bankruptcy Code

Among other things, Section 363¹ of the Bankruptcy Code authorizes a bankruptcy trustee, or a Chapter 11 debtor-in-possession, to sell bankruptcy estate assets outside of the ordinary course of business free and clear of all liens, claims and encumbrances.

Section 363(f)² sets out the requirements for a sale free and clear of liens, claims and encumbrances. A discussion regarding the satisfaction of these requirements is beyond the scope of this seminar.

Notably, there is nothing in Section 363 that requires a bankruptcy sale to be by public sale with competitive bidding. Rather, Bankruptcy Rule 6004(f)(1) specifically provides that "all sales not in the ordinary course of business may be by private sale or by public auction."

Similarly, there is nothing in the Bankruptcy Code or the Bankruptcy Rules that discuss sale procedures, bidder protections, higher and better bids, back-up bids or other matters that routinely arise in bankruptcy sales. Rather, all of these matters have developed over the years through practical experience by practitioners and courts.

Advantages of Buying Assets from a Bankruptcy Estate

From a buyer's perspective, there are several significant advantages of buying assets from a bankruptcy estate through a Section 363 sale.

For example:

• A purchaser will take title to the assets free and clear of any "interests" of a third party in the assets (e.g., liens, claims, and encumbrances) pursuant to a federal court order.
• Generally, a buyer of assets under § 363 can avoid the potential risks of assuming a seller's liabilities that a purchaser of assets may be subject to, outside of bankruptcy, under theories such as the "mere continuity doctrine," "substantial continuity doctrine," "successor liability doctrine," "de facto merger doctrine," and the Bulk Sale Act that purchasers of substantially all of an insolvent business's assets will inherit some or all of the business's liabilities.
• A bankruptcy order approving a sale can bind non-consenting constituents and other parties that may have an interest in the property. For example:
• • Some corporate bylaws require the approval of a majority of shareholders in order to sell substantially all of the assets of a company. In bankruptcy, such provisions generally will not prevent the sale of assets free and clear of those requirements.
  • Section 363(h)³ allows for the sale of a non-debtor co-owner's interest in estate property under certain circumstances.
• Pursuant to Section 365 of the Bankruptcy Code, a purchaser will be able to assume beneficial unexpired leases and executory contracts while cumbersome agreements can be rejected with no liability to the buyer.

Disadvantages of Buying Assets from Bankruptcy Estates

There are some...