Key Provisions in § 363 Sale Orders

Orders approving the sale of assets in bankruptcy provide the required authorization for the disposition of estate property outside of the ordinary course of the debtor’s business. Such orders may, among other things, allow for the sale of assets free and clear of interests held by third parties and offer good-faith purchasers protections from subsequent efforts to affect the validity of such sales, even in the event of reversal or modification on appeal.

The purpose of this article is to provide a brief summary of significant issues and provisions that should be considered in drafting any sale order. Although sale orders are often lengthy and vary on a case-by-case basis depending on the property that is being sold, the purpose of the summary below is not to address those nuanced issues, but to provide a brief checklist of concepts that are the mainstays of most sale orders, whether such orders merely seek the authority to effectuate a sale outside of the ordinary course of business, or more enhanced protections such as allowing the sale of assets free and clear of any claims or interests.

Notice of the Sale Motion

Given that asset sales covered under § 363 are, by definition, outside of the debtor’s ordinary course of business, the Bankruptcy Code requires that such sales be approved only after “notice and a hearing.”[1] As such, any sale order should include a finding that notice of the motion and hearing seeking authority for the sale was proper. While the inclusion of this finding is necessary, it is obviously not sufficient. The primary work required to include any such provision in a sale order will occur on the front end of the approval process. At the time that the sale motion is filed, both the debtor and, perhaps more importantly, the buyer seeking to acquire assets free and clear of liens should work to ensure that all parties required to receive notice of the sale are properly served with the sale motion and notified of any hearing scheduled to consider approval of the same.

Rule 6004 of the Federal Rules of Bankruptcy Procedure identifies the notice provisions that must be satisfied in connection with asset sales, including Bankruptcy Rule 2002(a)(2), which requires 21 days’ notice to, at minimum, the debtor, the trustee, all creditors and indenture trustees, unless the court approves a shorter notice period for cause. Practitioners should also refer to Bankruptcy Rules 9014 and 7004 with respect to the manner of service required. In addition to the parties required to be served pursuant to the foregoing rules, and any orders entered in the case, notice should be provided to any known secured creditors, government and/or taxing authorities that may have claims against the debtor or the assets being sold, and any parties with contractual rights or interests relating to the property to be sold, whether or not such parties have made appearances or filed claims in the debtor’s case. Additionally, as is the case with all of the matters discussed below, the local rules should be consulted with respect to any specific requirements that may apply in the district where the case is pending. Proper notice having been accomplished, the sale order should include a finding that the notice was sufficient and waive further notice of the sale.

Highest and Best Offer and Back-Up Bidder

Any order approving a § 363 sale should contain a finding that the buyer’s offer for the acquisition of the property being sold was the highest and best offer received. To the extent that the sale at issue was effectuated pursuant to approved bidding procedures and an auction, and to the extent that an otherwise qualified back-up bidder exists, the order should also include provisions identifying the back-up bidder, and authorizing the debtor to proceed with a sale to the back-up bidder in the event that the primary sale fails to close in accordance with the terms of the applicable purchase and sale agreement. To the extent that an overbid could be viewed as an objection to the sale, the order should find that any objections have been resolved, withdrawn or overruled by the court.

Authorizations to Proceed with Sale

Although the sale order should obviously contain provisions authorizing the debtor or the trustee, as applicable, to enter into the sale agreement in question, such provisions should be supplemented with clauses that authorize the seller to take any and all actions necessary to close the approved sale (or back-up sale, as applicable), including to make any payments required to effectuate the closing, including, but not limited to, making required payments to existing secured creditors, and paying closing costs, broker’s fees and commissions, all of which should be discussed in the motion for approval. In addition to any authorization to pay existing liens, a provision should also be included authorizing the seller to file or record any releases of liens or instruments reflecting satisfaction of any applicable liens without having to seek further court approval. Consider adding a provision that expressly transfers the assets in question to the buyer and, in turn, vests the buyer with all right, title and interest in the acquired assets.

Good-Faith Purchase

Section 363(m) of the Bankruptcy Code provides that “[t]he reversal or modification on appeal of an authorization under [section 363(b) or (c)] . . . does not affect the validity of a sale . . . to an entity that purchased . . . such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.”[2] Section 363(m) and the case law interpreting it provide substantial safeguards to buyers in bankruptcy, which ultimately serve to incentivize competitive bidding and recoveries to creditors. It is crucial that any sale order contain a finding that the purchaser acted in good faith and is entitled to the protections of § 363(m). In this regard, however, parties should be prepared to make an evidentiary showing in connection with the approval of the sale motion, either through the filing of declarations or proffers made in connection at the sale hearing, in order to establish the bidder’s good faith, as well as a lack of collusion between the buyer and the debtor (or any of its representatives and/or employees) and/or between the buyer and any other parties bidding for the acquisition of the property. In making this showing, parties should consult any applicable local guidelines or form orders that may set forth the evidentiary showing that may be required for a finding of good faith under § 363(m).

Sale Free and Clear of Liens, Claims and Interests

Like § 363(m), § 363(f) of the Bankruptcy Code strongly incentivizes competitive bidding in bankruptcy sales by providing buyers with assurance that the assets they are acquiring are being sold free and clear of any interests in such property. To accomplish that result, sale orders should contain findings identifying all known parties asserting interests in the property being sold, including all creditors that may be asserting interests that are subject to dispute, and provide that the property is being sold free and clear of all interests, including those held by such parties. The order should also include findings sufficient to support a recognized basis for the free-and-clear sale under § 363(f)(1)-(5), including, for example, in the event that the interest is in bona fide dispute and the creditor’s rights are being protected through transferred rights in the proceeds of the sale. Again, parties should consult applicable local rules and guidelines that may address the approval of free-and-clear sales, any showings that must be made in connection therewith, and any applicable limitations on the language that may be submitted to the court in any proposed order. Buyers should be aware that courts may be reluctant to enter orders that purport to impact interests that are not known or justiciable at a particular point in time.

Assumption and Assignment of Leases

Given that a debtor’s rights in unexpired lease agreements may be among the estate’s most valuable assets, § 363 sales may often (together with requests to assume and assign such contracts under § 365) provide for the debtor’s assumption and assignment of lease rights in connection with the sale of a separate asset, such as a shopping center or office building. In the event that a requested sale under § 363 is combined with the assumption and assignment of contracts under § 365, parties must ensure that any request for relief (and subsequent order) relating to such contracts comply (and reflect compliance) with the notice requirements for assumption and assignment set forth in Bankruptcy Rules 6006 and 9014, and any applicable local rules relating to the same. Any sale order addressing the assignment of contractual rights should, at minimum, contain provisions identifying the contracts or leases to be assigned, confirming that notice of the debtor’s intent to assume and assign was proper, stating the cure amount required to be paid in connection with assumption (or establishing the procedure for reaching such determination), and finding that the buyer has the ability to comply with the contract on a going-forward basis, all as required under § 365. Any sale order addressing the assignment of leases should also contain a statement that, upon assignment, the estate is relieved from any liability for any breach of such contract or lease occurring after such assignment, as contemplated under § 365(k).

As Is, Where Is

Orders under § 363 should make plain that the sale in question is not subject to any warranties but rather is on an “as is, where is” and “with all faults” basis. Unlike sales made by going-concern enterprises, representations and warranties should not survive sales in bankruptcy insofar as they are effectuated by entities that are either dissolving or reorganizing. The inclusion of an “as is, where is” clause (much like the inclusion of language under § 365(k)) will make plain that neither the estate nor the debtor will need to respond to future administrative claims or challenges to the sale price after the closing.

Stay Waiver

Bankruptcy Rule 6004(h) provides that “[a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after the entry of the order, unless the court orders otherwise.”[3] Although certainly not required, parties should consider whether the exigency of the sale in question (including ongoing costs relating to the estate’s continued ownership) requires a provision waiving the stay that applies under Bankruptcy Rule 6004(h), and if so, be prepared to establish cause for the requested shortening of the stay period in the motion and at the hearing to approve the sale.[4]

Retention of Bankruptcy Court Jurisdiction

Sale orders should include a provision wherein the bankruptcy court retains jurisdiction to take any action required to implement or enforce the terms of the sale order and/or resolve any disputes that may arise in connection with the sale.