If a debtor sells the assets of a business “free and clear,” the purchaser cannot be saddled with the seller’s workers’ compensation experience rating, according to Bankruptcy Judge Bruce A. Harwood of Manchester, N.H.
In his Jan. 20 opinion, Judge Harwood built on the First Circuit Bankruptcy Appellate Panel’s PBBPC decision from 2013 holding that a purchaser at a typical bankruptcy sale should not be afflicted with the debtor’s unemployment insurance rating.
Almost two years after approval of the sale of a temporary staffing agency, the purchaser filed a motion in bankruptcy court to enforce the sale order providing that the assets were sold free and clear of “all liens, claims, interests and encumbrances of any kind and nature.” The purchaser claimed that the National Council on Compensation Insurance was charging substantially higher rates for workers’ compensation insurance because the premiums were based on the debtor’s experience rating.
The NCCI said it was only following rules approved by state regulators.
For Judge Harwood, the outcome turned on whether the debtor’s experience rating was an “interest” within the meaning of Section 363(f), the provision that provides for sales “free and clear.”
While “any interest” is not defined in the Bankruptcy Code, Judge Harwood pointed to the Second, Third, Fourth and Seventh Circuits for employing “the most expansive reading of the term.”
Although he admitted that an experience rating is an “atypical” interest in property, Judge Hardwood pointed to the First Circuit BAP in PBBPC for believing it was “untenable” to “found the imposition of successor liability on the purchaser.”
Although he would not have been bound by PBBPC, Judge Harwood decided that the debtor’s “workers’ compensation experience rating is similar enough to the unemployment tax contribution in PBBPC so that it too constitutes an ‘interest’ within the meaning of Section 363(f).”
At the end of the opinion, Judge Harwood noted that the buyer was “an entirely new and separate entity from the debtor.” In that regard, Judge Harwood was giving benefit of the doubt to the purchaser because she was the daughter of the debtor’s principal and had been an employee of the debtor.
In addition to enforcing a bankruptcy court order, there was jurisdiction because higher insurance premiums lowered the so-called earn-out where half of profits for several years were paid to creditors.