Presenting a 90-Minute Encore Presentation of the Teleconference with Email Q&A Successor Liability in Bankruptcy Asset Sales Navigating the Limitations on "Free and Clear" in Section 363 Sales TUESDAY, JUNE 19, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: George W. Shuster Jr., Partner, Wilmer Hale , Boston Meg McKenzie Feist, Associate, Choate Hall & Stewart , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Unsuccessful Successors? Limits on Bankruptcy Sales “Free and Clear” of Successor Liability June 19, 2012 George W. Shuster, Jr. Meg McKenzie Feist george.shuster@wilmerhale.com mfeist@choate.com 617-526-6572 (t) 617-248-5000 (t) 212-937-7232 (t) George Shuster is a partner in WilmerHale’s bankruptcy and financial restructuring practice group and debt finance group. Meg McKenzie Feist is an associate in Choate Hall & Stewart’s finance and restructuring group.
Overview “Free and Clear” Protections in Section 363 Sales Successor Liability Under Non-Bankruptcy Law Successor Liability & Section 363 Sales Recent Decisions Limiting Buyer Protections Beyond Bankruptcy Code Boundaries Practice Tips 6
“Free and Clear” Protections in Section 363 Sales In bankruptcy sales outside a plan of reorganization, purchasers rely on Bankruptcy Code Section 363(f), which permits bankruptcy estate property to be sold “free and clear of any interest in such property .” The level of protection that purchasers can obtain in bankruptcy “free and clear” sales depends on the scope of the phrase “interest in property,” which is not defined by the Bankruptcy Code. What the phrase means, and whether it encompasses in personam claims as well as in rem interests, has been the subject of significant debate. While Section 363(f) clearly provides in rem relief, cleansing transferred assets of attendant liens , many courts, especially those in the Second and Third Circuits, have concluded that Section 363(f) also offers certain in personam relief, releasing the asset purchaser from certain claims . 7
Successor Liability Under Non-Bankruptcy Law General Rule: A buyer of assets does not take on liability for claims running against the seller. Exception: Under the doctrine of successor liability, a plaintiff may be permitted to assert against an asset purchaser a claim based on the seller’s pre -sale actions. Required Showing: To sustain a successor liability claim, a plaintiff is typically required to show that: (1) plaintiff has a meritorious claim against the seller; (2) defendant/purchaser bought the seller’s assets related to the claim; and (3) plaintiff has satisfied one or more additional elements rendering the purchaser’s liability appropriate. 8
Successor Liability Under Non-Bankruptcy Law As an example of this “additional element” , successor liability may in some states be imposed on a purchaser “for injuries caused by defective products manufactured by a predecessor if the successor continues to manufacture the product.” Cont’l Ins. Co. v. Schneider Inc. , 582 Pa. 591 (Pa. 2005): Discusses “product - line” exception to the general rule against successor liability. Because the doctrine of successor liability arguably requires particular conduct on the part of the defendant/purchaser, successor liability claims have been characterized as in personam claims against the defendant/purchaser , rather than in rem interests in the purchased assets . 9
Successor Liability & Section 363 Sales As a matter of policy, consideration of whether successor liability claims should be extinguished in a Section 363 sale involves competing goals : Compensating Plaintiffs’ Injuries: On one hand, parties injured by the seller pre-sale should be able to recover damages — from the purchaser of the seller’s assets, if necessary. Maximizing Value for Creditors: On the other hand, a broad “free and clear” power has been viewed by courts as: • maximizing the value of estate assets, and the return to all creditors, by encouraging purchasers; and • maintaining Bankruptcy Code priorities by preventing unsecured claimants from proceeding against a successor entity while leaving secured creditors with recourse only to the estate’s limited assets. These “competing” goals can sometimes overlap— sometimes potential plaintiffs are also creditors of the bankruptcy estate. 10
Successor Liability & Section 363 Sales Even though successor liability claims have been characterized as in personam , rather than in rem , many courts have placed those claims into the category of “interests in property” that can be extinguished in sales under Section 363, so long as the claims are connected to or arise from the transferred assets . In re Trans World Airlines , 322 F.3d 283 (3d Cir. 2003): Certain discrimination claims of TWA’s employees, as well as claims related to a travel voucher program awarded to TWA’s flight attendants in settlement of a sex discrimination class action, could be extinguished as against the buyer in Section 363 sale of TWA’s airline assets to American Airlines because those claims would not have arisen but for TWA’s investment in airline assets and commercial aviation. Bankruptcy sale orders typically contain robust language purporting to extinguish successor liability claims, even though decisions (and informal guidance from bankruptcy judges) have called into question the ability to sell free and clear of all such claims. 11
Successor Liability & Section 363 Sales Debtor/Seller Sale Order Language [Subject to limited exceptions,] the Purchaser’s acquisition of the Purchased Assets shall be free and clear of any “successor liability” claims or theories of any nature whatsoever, whether known or unknown and whether asserted or unasserted as of the time of Closing to the extent permitted by applicable law. The Purchaser’s business and operations shall not be deemed a continuation of the Debtors’ business or operations as a result of the acquisition of the Purchased Assets or the Transactions. Order Authorizing and Approving Free and Clear Sale, In re Nortel Networks Inc. , No. 09-10138 (KG) (Bankr. D. Del. July 11, 2011) (Dkt. No. 5935). [Subject to limited exceptions,] the transfer of the Assets to Purchaser under the Purchase Agreement shall not result in (i) the Purchaser or the Assets having any liability or responsibility for any Interest against the Debtors or against an insider of the Debtors, (ii) the Purchaser or the Assets having any liability whatsoever with respect to or be required to satisfy in any manner . . . any Interest or Excluded Liability, or (iii) the Purchaser or the Assets, having any liability or responsibility to the Debtors except as is expressly set forth in the Purchase Agreement. Without limiting the effect or scope of the foregoing, as a result of the closing of the Sale Transaction, the Purchaser shall have no successor, derivative or vicarious liabilities of any kind or character . . . . Order Authorizing and Approving Free and Clear Sale, In re Blockbuster Inc. , No. 10-14997 (BRL) (Bankr. S.D.N.Y. April 14, 2011) (Dkt. No. 1602). 12
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