State court receiverships have become a popular alternative to federal bankruptcy proceedings for the sale of distressed businesses.[1] In Wisconsin, Wis. Stats. Chapter 128 sets forth a statutory process allowing for the liquidation of a debtor company’s assets and the distribution of the sale proceeds to creditors in a state court-supervised proceeding. There are several benefits associated with initiating a Chapter 128 receivership (which can be voluntary or involuntary) rather than a bankruptcy proceeding. Those benefits include greater flexibility, more expeditious asset sales and lower costs.
Wisconsin receivership law has largely been developed in practice, as the statute is, in its entirety, five pages long. As a result, receivers, subject to the consent of the court and the senior secured creditor, exercise their business judgment when administering the assets of the receivership estate.[2] For example, a Chapter 128 receiver may operate the debtor’s business as a going concern with or without its current management and is not subject to the appointment of a committee of unsecured creditors. In addition, Chapter 128 receiverships do not operate within the constraints of either a chapter 11 or chapter 7 bankruptcy, but rather act as a hybrid of the two proceedings.[3]
Due to the limited scope of the provisions of the Wisconsin receivership statute itself, a Chapter 128 receiver’s ability to sell assets free and clear of successor liability has developed alongside state and federal case law on the issue, as opposed to the statutorily prescribed protections against successor liability found in the Bankruptcy Code.[4] Specifically, under Wisconsin law, the “the general rule of successor liability in the context of asset purchase agreements is that a ‘corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation,’ subject to certain exceptions.”[5]
Exceptions to the general presumption against successor liability include instances where (1) the purchasing corporation expressly or impliedly agrees to assume liabilities, (2) the transaction amounts to a consolidated merger of the purchaser and seller corporations, (3) the purchaser corporation is merely a continuation of the seller corporation, or (4) the transaction is entered into fraudulently as an attempt to escape liability for such obligations.[6] In addition, there are two narrow judicially created exceptions under federal law, including (1) product-liability claims and (2) federal labor or employment laws.[7]
In light of this well-established case law regarding successor liability in the context of asset sales, Chapter 128 sale orders typically include language authorizing asset sales free and clear of liens, claims and encumbrances and without successor liability to the buyer. This practice helps to maximize the value of an insolvent business’s assets for the benefit of creditors in going-concern sales.
[1] This article is meant to discuss Wisconsin receivership only and is not intended to describe or incorporate the law of other states.
[2] Wis. Stat. § 128.01; See also BNP Paribas v. Olsen’s Mill Inc., 2011 WI 61, ¶ 50, 335 Wis. 2d 427, 799 N.W.2d 792 (holding that “secured creditor may withhold its consent to the sale of its collateral in a chapter 128 proceeding. If it does, the court cannot order the sale of the collateral free and clear of the secured creditor’s lien.”).
[3] For example, a Chapter 128 receiver is free to sell the business as a going concern and/or liquidate the business’s assets.
[4] See 11 U.S. Code § 1141(c).
[5] Columbia Propane L.P. v. Wisconsin Gas Co., 2003 WI 38, ¶ 15, 261 Wis. 2d 70, 661 N.W.2d 776.
[6] Id. at ¶ 18.
[7] See Zerand-Bernal Group Inc., 23 F.3d. 159 (7th Cir. 1994) (addressing successor liability in the context of product-liability claims); see also Teed v. Thomas & Betts Power Solutions L.L.C., 711 F.3d at 764 (holding that “when liability is based on a violation of federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look”).