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Research Memorandum

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Section 363(f) of the Bankruptcy Code was enacted to empower debtors to maximize the value of their bankruptcy estate for the benefit of creditors. Because the assets sold in a sale under section 363(f) (a “363 Sale”) transfer “free and clear” of “any interest in such property,” a purchaser would be more likely to pay a higher price for the assets. In turn, a higher price paid for the assets results in more available resources to distribute among the debtor’s creditors. If a claim is considered an “interest in such property” and the sale order provides that the sale is free and clear of all interests in the property, then the claimant is barred from bringing the claim under a successor liability theory.

In determining whether a 363 Sale Order precludes a successor liability claim, a court will focus on the text of section 363, particularly the phrase “interest in such property.” A common scenario in which this arises is when a defective product manufactured by a debtor prior to bankruptcy injures someone after the bankruptcy proceedings. Whether the injured party can bring a products liability claim under successor liability against the new owner who bought the debtor’s assets in a 363 Sale depends on how the court construes “interest in such property.” If a court finds that the injured party’s claim is an “interest in such party,” then the injured party will not be able to sue the new owner. On the other hand, if the court determines that the claim is not an “interest in such property,” then the injured party can bring a suit against the new owner under successor liability.

There are three ways to interpret “interest in such property.” The first method is to apply state law. Under this method, if the injured party’s claim is an interest in property under state law, then it will be an “interest in such property” for the purposes of a 363 Sale. The second method is to construes the phrase as applying only to in rem interests in the property. The third method is to interpret the phrase broadly to encompass in personam interests.


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