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After identifying certain problems presented by these models I suggest how the new paradigm I propose might solve those problems. WBQ received Medicaid payments from the state agency responsible for administering the federal Medicaid program in Virginia. and successorship liability accrued up to the date of closing of such sale. , section 363(f)(5), was satisfied because all of the discrimination claims were “reducible to, and [could] be satisfied by, monetary awards”; (2) as an alternative to section 363(f), preclusion of the successor liability claims was justified on policy grounds; and (3) bankruptcy courts’ inherent equitable powers, as recognized in poses no impediment. authority to conduct such sales is within the court’s equitable powers when necessary to carry out the provisions of title 11.” addressed the issue of whether a supplier’s affirmative defenses to the debtor’s claim for breach of contract constituted an “interest in property” within the meaning of section 363(f) that was rendered unenforceable against the entity that purchased the debtor’s assets, including the breach of contract claim, in a sale free and clear of interests. For example, the successor liability doctrine of express or implied assumption of liability is rooted in the actions of the purchaser (agreeing or appearing to agree to assume liability).

BANKRUPTCY SALES IN GENERAL There are essentially two ways that a bankruptcy trustee or debtor-in-possession can sell assets, i.e., a sale pursuant to section 363 of the Code My 1996 article noted that under the reported case law, the rule was that to sell the major assets of a bankruptcy estate in a Chapter 11 case, the sale had to be implemented pursuant to a plan of reorganization rather than under section 363 absent a “good business reason.” authorizes the trustee or debtor-in-possession to sell property of the estate free and clear of the “interest” of another entity “in such property” if any one of the following five alternative conditions are satisfied: In 1997 the National Bankruptcy Review Commission recommended that sections 3 of the Code be amended to expressly authorize the sale of property of the estate free and clear of successor liability for “mass future claims” if certain specified conditions are met. Among the costs reimbursable under the program was depreciation of a nursing home’s tangible assets. WBQ filed for Chapter 11 relief in Virginia and moved to sell all of its assets to a purchaser pursuant to section 363(f) free and clear of interests. Purchaser shall not be liable in any way (as a successor to the Debtors or otherwise) for any claims that any of the foregoing or any third party may have against any of the Sellers; provided that, with regard to employees’ claims, the free and clear delivery of the Assets shall include, but not be limited to, all asserted or unasserted, known or unknown, employment related claims . * * * Pursuant to Sections 105(a) and 363 of the Bankruptcy Code, all Persons are enjoined from taking any action against Purchaser or Purchaser’s Affiliates including, without limitations, TWA Airlines LLC, to recover any claim which such Person had solely against Sellers or Sellers’ Affiliates. This authority is implicit in the court’s general equitable powers and in its duty to distribute debtor’s assets and determine controversies thereto . Similarly, when a de facto merger is found, or mere continuation of an enterprise justifies imposing successor liability, it is the purchaser’s post sale conduct (in continuing the business in substantially the same form and manner) that gives rise to liability.

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In any event, the Commission’s recommendation was not enacted. If a nursing home sold an asset for which it had received depreciation payments, the state was authorized to “recapture” the depreciation it had paid to the extent that the sales price exceeded the depreciated original cost of the asset. The purchaser agreed to acquire WBQ’s assets for cash with the intention of continuing to operate the nursing home. court relied upon both policy and statutory construction in determining that the state’s statutory successor liability claim constituted an “interest in property” under section 363(f) that was properly cut off by the bankruptcy court. The same is true for successor liability founded upon fraudulent transfer and continued manufacture of a product line. Section 363(h) provides: (h) Notwithstanding subsection (f) of this section, the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if— (1) partition in kind of such property among the estate and such co-owners is impracticable; (2) sale of the estate’s undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners; (3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and (4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.

The United States Supreme Court has never addressed the scope of section 363(f) of the Code. 1982) (“the creditor’s right to adequate protection is limited to the lesser of the value of the collateral or the amount of the secured claim.”). If the seller failed to reimburse the state for the recaptured depreciation, the state was authorized to collect the debt by offsetting it against Medicaid payments that would otherwise be owed to the buyer, as the new operator of the nursing home. Based upon the sale price and the depreciation previously paid, the state asserted that it was entitled to payment of $196,000 on account of recaptured depreciation. In this respect, the Virginia statute creates an interest or charge on the property, even though the federal statute, § 363(f), authorizes the property to be sold free and clear of such interests. 322 F.3d at 286 (Third Circuit’s recitation of bankruptcy court’s finding). All these successor liability doctrines are grounded upon the acts or implications from acts of the at 261 (footnotes omitted).

Indeed, as of the date this article was written, it appears that the Court has never even cited section 363(f), although Justice Scalia did make a passing reference to it in his dissenting opinion in At the time the 1996 article was published, the First, Fifth, Sixth and Seventh Circuits had considered the authority of a bankruptcy court to insulate an asset purchaser from successor liability through a free and clear sale order. My contention is that, while the risk of successor liability may have an economic impact on a sale, e.g., by causing the buyer to discount the purchase price on account of that risk (65), the holder of a successor liability claim, like the holder of any other unsecured monetary claim, has no entitlement to adequate protection under sections 361 and 363(e) because the value of its contingent interest in the debtor’s property does not decrease when the interest is extinguished in a section 363(f) sale. As an unsecured creditor, the state was likely to receive only a small portion of its depreciation recapture claim from the bankruptcy estate. The state asserted that any portion of its depreciation recapture claim that it did not recover from the bankruptcy estate would be recovered from the purchaser as an offset against amounts otherwise payable to the purchaser under the Medicaid program for services it provided after it took over the nursing home. .” Section 32.1-329 of the Virginia Code mandates the opposite result: if estate property is sold, and the debtor is unable to reimburse DMAS for the recaptured depreciation, DMAS may collect it, using “any means available by law,” which includes an action for attachment or levy, and a setoff against the Medicaid reimbursements owed to the buyer. The Virginia statute thus interferes with the federal statute, and accordingly, the federal statute, 11 U. The bankruptcy court entered its order pursuant to sections 105(a) and 363 of the Code with the following language: The sale of the Transferred Assets to Purchaser shall be free and clear of Liens and other claims (other than Liens created by Purchaser) pursuant to section 363(f) of the Bankruptcy Code whatsoever known or unknown including, but not limited to, Liens and claims of any of the Sellers’ . Does a bankruptcy court have jurisdiction and power to enjoin claims based upon the purchaser’s post-sale conduct? Section 363(f)(3) of the Code provides that the trustee may sell property free and clear of any interest in such property of an entity other than the estate if “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.” 11 U.

have been the only significant court of appeals decisions examining the reach of section 363(f) in the context of successor liability. Section 363(f), unlike section 1141(c), refers only to interests. The purchaser was unwilling to proceed with the acquisition at the price it had offered under those circumstances. § 363(f) provide that a trustee or debtor-in-possession may sell estate property “free and clear of any interest in such property . While the transferee’s conduct, rather than the transferred assets, may be the primary basis of successor liability, the transfer of assets from the transferor to the transferee is an element of the successor claim.

I discussed the subject of successor liability and bankruptcy sales. The inference that Congress intended to include claims within the scope of “interest in property” because the latter term was intended to encompass more than ownership interests and liens disregards the various other types of property interests that have been or might be included within that term, such as a homestead exemption, a recorded right of first refusal and options.