With arguably ambiguous Seventh Circuit authority, Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., sided with the Third and Fourth Circuits by holding that a sale “free and clear” under Section 363(f) cleanses the assets of liability for withdrawal from a multi-employer pension fund.
The debtor had operated a half dozen supermarkets. All closed but one, leaving the remaining store with almost $5 million in withdrawal liability owing to a multi-employer pension fund. In chapter 11, the remaining store proposed to sell the assets free and clear under Section 363(f).
The pension fund objected to the sale, contending that a claim for withdrawal liability against the purchaser was not an interest in the debtor’s property from which the sale could be free and clear. Judge Grandy approved the sale free of withdrawal liability in an opinion on July 8.
The outcome was governed by Section 363(f), which allows the court to sell property “free and clear of any interest in such property” if one of five conditions is met. In the case at hand, the debtor posited that the fifth condition was met because the pension fund could be compelled to accept a money satisfaction. The pension fund, by the way, had filed a proof of claim.
The pension fund contended that the claim against the purchaser for successor liability was not an “interest in” the debtor’s property, thus precluding a sale free and clear.
Judge Grandy said that the Fourth and Third Circuits, in 1998 and 2003, respectively, adopted “expansive” readings of the word “interests” in the context of sales free and clear. The Fourth Circuit allowed a sale free and clear of withdrawal liability under the Coal Act, while the Third Circuit allowed the invocation of Section 363(f) if the debtor’s assets gave rise to a claim. Neither circuit constrained the cleansing to in rem interests in the debtor’s property.
The closest authority in the Seventh Circuit is Zerand-Bernal Group v. Cox, 23 F.3d 159 (7th Cir. 1994), where the bankruptcy court had approved a sale free and clear and reserved jurisdiction. After the case had been closed four years later, a plaintiff filed a product-liability suit against the purchaser.
Judge Grandy pointed out how the Seventh Circuit mentioned that Section 363(f) was not relevant, because the case dealt with a future product-liability claim held by an unknown creditor. She said that the Chicago-based appeals court held that the bankruptcy court had no jurisdiction to enjoin the product-liability case based on a claim that arose after bankruptcy.
Unlike Zerand, Judge Grandy noted how the pension fund held a claim at the time of the sale. Furthermore, she quoted Zerand for saying that “cleansing” assets is a valid power of the bankruptcy court.
Judge Grandy followed “the majority trend” by giving a broad interpretation to the word “interests.” She allowed the sale free and clear of the successor-liability claim, saying that “successor liability claims are an ‘interest’ for purposes of Section 363(f) of the Bankruptcy Code.”
With arguably ambiguous Seventh Circuit authority, Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., sided with the Third and Fourth Circuits by holding that a sale “free and clear” under Section 363(f) cleanses the assets of liability for withdrawal from a multi-employer pension fund.
The debtor had operated a half dozen supermarkets. All closed but one, leaving the remaining store with almost $5 million in withdrawal liability owing to a multi-employer pension fund. In chapter 11, the remaining store proposed to sell the assets free and clear under Section 363(f).
The pension fund objected to the sale, contending that a claim for withdrawal liability against the purchaser was not an interest in the debtor’s property from which the sale could be free and clear. Judge Grandy approved the sale free of withdrawal liability in an opinion on July 8.