An Appeal to Equity: Why Bankruptcy Courts Should Resort to Equitable Powers for Latitude in Their Interpretation of "Interests" under Section 363(F) of the Bankruptcy Code

By Gunlock, Matthew T. | William and Mary Law Review, October 2005 | Go to article overview

An Appeal to Equity: Why Bankruptcy Courts Should Resort to Equitable Powers for Latitude in Their Interpretation of "Interests" under Section 363(F) of the Bankruptcy Code


Gunlock, Matthew T., William and Mary Law Review


INTRODUCTION

The last several years have witnessed a markedly high number of corporate bankruptcy proceedings, including many high profile petitioners such as Enron, Adelphia Communications, WorldCom and Global Crossing. (1) Record numbers of public corporate bankruptcies were set in 2001 and again in 2002; during this time, 191 such companies filed for bankruptcy protection. (2) The bankruptcy process often involves the sale of corporate assets to raise money for creditors of the business, and the Bankruptcy Code (3) offers two means by which a debtor or trustee may sell business assets: sections 363(b) and (f), (4) which govern sales prior to approval of a reorganization plan, and sections 1123(a)(5)(D) (5) and 1141(c), (6) which govern sales made pursuant to a reorganization plan. Debtors and trustees most often prefer a pre-plan sale under [section] 363 because in comparison to sales pursuant to a reorganization plan, pre-plan sales impose the Bankruptcy Code's minimum notice and hearing requirements and, accordingly, are usually quicker and less expensive. (7)

Section 363(f) of the Bankruptcy Code provides a mechanism by which a debtor's assets may be sold "free and clear of any interest in such property." (8) Such a "free and clear" pre-plan sale under [section] 363(f) not only saves time and money in terms of decreased notice and hearing requirements when compared to a sale pursuant to a reorganization plan, (9) but it also provides a valuable means to raise funds for the debtor because a purchaser of bankruptcy assets will pay more for the assets when they are sold without the risk of successor liability. (10) Accordingly, the purchaser, debtor, creditors, and general public are beneficiaries of the "free and clear" sale process under [section] 363(f). There has been ample debate, however, with respect to what constitutes an "interest" within the meaning of [section] 363(f). (11)

It has been argued that bankruptcy courts and other courts have adopted a far too expansive view of what falls within the definition of an "interest" and have thereby impermissibly extinguished certain claims that might otherwise be rightfully pursued against the purchaser of the bankruptcy assets. (12) In contrast, others have argued that successor liability in the context of [section] 363(f) amounts to a regulatory taking in violation of the Takings Clause of the Constitution and that "interest" should be construed broadly. (13) Case law has provided little guidance as to whether the narrow or expansive interpretation of "interest" is more compelling. (14) A proponent of either side of the argument has little difficulty in marshaling decisions supporting his particular view of what interpretation is proper, and there is currently a marked split in the bankruptcy courts and courts reviewing their decisions. (15)

The importance of determining whether an item falls within the definition of "interest" according to [section] 363(f) cannot be overemphasized. A specific court's interpretation of what constitutes an "interest" can mean the difference between the termination of a plaintiffs claim against a successor purchaser and unbounded successor liability for the purchaser of the bankruptcy assets. As sales pursuant to [section] 363(f) become more widespread as a means to liquidate debtors' assets quickly and efficiently without having to satisfy the extensive requirements of developing and implementing a reorganization plan under other provisions of the Bankruptcy Code, (16) the importance of resolving the uncertainty will grow increasingly acute. Some courts have found certain liabilities to be categorically unseverable from purchased assets. (17) Other courts have allowed all liabilities to be severed from the debtor's assets, regardless of character. (18) Still other courts have permitted successor liability in some circumstances while disallowing it in others by finding subtle distinctions between facially similar cases. …

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