Will Section 363 Become A New Chapter Of The Bankruptcy Code?

During the volatile economic climate of recent years, expedited 363 sales have been favored over more traditional reorganizations under Chapter 11. The benefits of facilitating a quick sale under §363 of the Bankruptcy Code have often served as the impetus for many Chapter 11 case filings of large public companies. The use of expedited 363 sales prior to, or in place of, plan confirmation has generated much debate among the bankruptcy bench, bar and creditor groups. The competing tension at the heart of this debate is whether a fast track sale prior to the filing of a plan is justified in light of the resultant impact on well-established procedural and substantive rules designed to address stakeholder due process and bankruptcy protections in bankruptcy. Notwithstanding this debate, however, bankruptcy courts throughout the nation have approved these types of sales in light of competent evidence of deteriorating asset values.

Section 363 of the Bankruptcy Code originally was enacted as a tool to allow debtors to shed unnecessary or burdensome assets in furtherance of their reorganization effort1 (although, at times, it did become a last resort for a failed struggling company). Following the 2008 financial crisis, many banks were reluctant or unwilling to provide post-petition financing, leaving many debtors with a lack of liquidity and few options other than a sale in Chapter 11— "free and clear of liens, claims and encumbrances" under §363 of the Bankruptcy Code. More recently, as the financial markets have begun to improve, debtors have been able to obtain post-petition financing; however, the terms have largely dictated the debtors' bankruptcy exit strategy and the use of 363 sales in Chapter 11 have continued to rise.

Historically, 363 sales in Chapter 11 would occur 90 to 120 days after filing. In recent years, however, the 363 sale timeline has been significantly truncated. The speed of the 363 sale process is largely attributable to aggressive lenders, deteriorating value, short post-petition loan terms to maturity and the desire for reduced administrative costs to closing. Additionally, the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub. L. 109-8, 119 Stat. 23, enacted April 20, 2005) (BAPCPA) aided in the compression of Chapter 11 time frames, generally. Specifically, the changes implemented to the key time frames and timelines for assumption or rejection of real estate leases as well as the limitations imposed on exclusivity periods have led to the need for an expedited decision-making process in the first several weeks of a case. 11 U.S.C. §§365(d)(4) & 1121(c). The creation of administrative priority status for vendor claims tied to goods sold within the 20 days prior to the bankruptcy filing under BAPCPA also had a tremendous influence on the ability of a company to survive and this additional administrative burden has caused many debtors to fail. 11 U.S.C. §503(b)(9). These amendments, along with the desire to reduce administrative costs in bankruptcy and achieve a...