'Free and Clear' Has Broad Reach in Bankruptcy Sales

One of the most significant tools of federal bankruptcy law is the authority of a trustee or debtor-in-possession to conduct a “free and clear” sale of a bankruptcy estate’s assets. Many may think of such sales in terms of being able to sell (or acquire) assets free and clear of the traditional “liens, claims and encumbrances” that may attach to an asset. The Bankruptcy Code provision providing for free and clear sales, however, is more expansive than that, providing that an asset may also be sold free and clear of “interests.” Courts have disagreed on the exact breadth of this term—which the Bankruptcy Code does not define. Most courts, however, have construed the term broadly, holding that it encompasses more than just “in rem” interests in property. Two recent bankruptcy court decisions from courts located within the Second Circuit, In re Tougher Indus., No. 06-12960, 2013 WL 1276501 (Bankr. N.D.N.Y. March 27, 2013) (Tougher) and In re USA United Fleet, 496 B.R. 79 (Bankr. E.D.N.Y. 2013) (USA United)—each holding that a debtor’s assets may be sold free and clear of the New York Department of Labor’s statutory right to transfer a company’s unemployment experience rating to a purchaser of the company’s assets—illustrate the reach and vibrancy of the “free and clear” bankruptcy tool.

Bankruptcy Free and Clear Sales

Whether a business that has filed for bankruptcy is seeking to reorganize or liquidate, the ability to sell assets for maximum value is often critical. Section 363(b) of the Bankruptcy Code permits a trustee (or debtor in possession) to sell assets outside the ordinary course of business after notice and an opportunity for a hearing.¹ Section 363(f) provides that such a sale may be “free and clear of any interest in such property of an entity other than the estate” if one of the five conditions set forth in the statute is satisfied:

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) 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;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding to accept a money satisfaction of such interest.²