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The purchase and sale of assets by a debtor is governed by Section 363 of the Bankruptcy Code. So-called “363 sales” are typically attractive from a buyer’s perspective (and may be a primary reason for a bankruptcy filing). Perhaps the most important benefit afforded to buyers in 363 sales is the ability to acquire assets “free and clear” of claims and interests of third parties. Section 363(f)(5) of the Bankruptcy Code provides that a debtor can sell property free and clear of any interest in such property when a third party “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” But what constitutes an “interest” remains the subject of some debate, particularly as it relates to successor liability claims. One category of successor liability claims that may arise in traditionally unionized industries are the claims of pension funds that are triggered by a participant’s withdrawal. “Withdrawal liability” arises under the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) and may, at times, be asserted against a purchaser of the participant’s assets, typically where it had notice of the claim at the time of the acquisition and where there exists a “substantial continuity” in the business operations following the purchase. 

The survivability of a pension fund’s potential successor liability claim was recently tested in In re Norrenberns Foods, Inc., 2022 WL 2657213 (S.D. Ill. 2022). The Bankruptcy Court approved the sale of the debtor’s assets free and clear of all withdrawal liability claims over the objection of the United Food and Commercial Workers Unions and Employers Midwest Pension Fund (the “Pension Fund”). The debtor, the operator of a grocery store, commenced its case under Subchapter V of Chapter 11 of the Bankruptcy Code and thereafter sought approval for the sale of substantially all of its assets under Section 363. The Pension Fund asserted a multi-million dollar claim stemming from the debtor’s alleged withdrawal from the fund, Outside of bankruptcy, and without the benefit of a “free and clear” order, the purchaser might remain liable to the Pension Fund for its claim considering that it intended to operate the assets as a grocery store. In order to preserve the viability of the transaction, the debtor sought approval of the sale free and clear of all liens, claims, interests and encumbrances, including claims “related to… collective bargaining and other labor agreements.” The Pension Fund posited that the sale could not extinguish its claim, arguing that it did not constitute an “interest” in the property being sold within the meaning of Section 363(f) of the Bankruptcy Code. Given the magnitude of the potential claim, the sale would not close without the protection from successor liability, putting at risk the jobs of the debtor’s employees and greatly impairing the recovery of its secured creditor. 

While the Bankruptcy Code does not define the term “interest,” the “trend seems to be in favor of a broader definition that encompasses other obligations that may flow from ownership of the property.” Id. (citations omitted).  Indeed, “the use of the term ‘any’ counsels in favor of a broad interpretation.” Id. (citations omitted). The Second Circuit, in a matter arising from General Motors’ bankruptcy case, provided guidance regarding successor liability claims: “a bankruptcy court may approve a § 363 sale ‘free and clear’ of successor liability claims if those claims flow from the debtor’s ownership of the sold assets. Such a claim must arise from a (1) right to payment (2) that arose before the filing of the petition or resulted from pre-petition conduct fairly giving rise to the claim. Further, there must be some contact or relationship between the debtor and the claimant such that the claimant is identifiable.” See In the Matter of Motors Liquidation Co., 829 F.3d 135 (2nd Cir. 2016). Despite this trend and Circuit Court guidance, the Pension Fund sought a narrow interpretation, one that would treat an “interest” similar to that of an in rem interest the property being sold (e.g., a lien or deed). Under the Pension Fund’s theory, virtually any unsecured claim that might be asserted against a successor would survive a free and clear order, impairing a debtor’s ability to maximize the value of its assets. Unfortunately for the Pension Fund, the issue was recently addressed in a similar case. That court ruled that, while a successor liability claim of a pension fund is not an in rem interest in the debtor’s property, it nonetheless constituted an interest in such property for purposes of Section 363(f). See In re K&D Industrial Services Holding Co., Inc., 602 B.R. 16 (E.D. Mich. 2019). In that case, the court went further to consider whether the public interest of protecting multi-employer pension plans (and the individuals that rely on them) trumps the protections afforded in favor of asset purchasers by Section 363(f). The court determined that, while the public policies that underly the MPPAA and ERISA are real and significant, so are those that underpin Section 363. Moreover, nothing in Section 363(f) requires a court to weigh competing public interests when determining whether to approve a sale free and clear of interests. Id. These cases provide further certainty for both debtors and the purchasers of distressed assets in bankruptcy — greater certainty both increases the value of those assets for the benefit of the debtor’s estate and provides comfort for purchasers that they will not be subject to the seller’s legacy claims. In re Norrenberns Foods is further evidence that court’s support a broader application of Section 363(f) of the Bankruptcy Code.