The Bankruptcy Code allows a debtor to sell its assets free and clear of any interest in such property, pursuant to section 363(f) of the Bankruptcy Code. Section 363(f) is used to allow the trustee to sell assets not in the ordinary course of business and to allow purchasers to buy assets without the fear of liability. The Bankruptcy Code does not define the term “interest.” Thus, in interpreting section 363(f), a court must view interest in property expansively. Using section 363(f), courts have extinguished several types of claims and interest in property including: possessory interests, employment related claims, and withdrawal liability.
Generally, a majority of courts have interpreted the term “interest” broadly to encompass other obligations that may flow from ownership in property. As courts determine what is considered “interest” under 11 U.S.C. section 363(f), the question of whether a free and clear sale under section 363(f) prevents successor liability arises. Though the general rule is that a purchaser of assets does not acquire the seller’s liabilities, successor liability is an equitable tool that allows the seller’s liabilities to attach to the purchased assets. Creditors use successor liability to maintain their claim through a free and clear sale under 11 U.S.C. section 363(f).
This article will first explore whether successor liability falls under “interest in such property” under 11 U.S.C. section 363(f) and whether a sale of assets can be free and clear of successor liability. Next, this article will evaluate the exceptions to the present rule that courts have used in their analysis of successor liability. The last part reviews several equitable factors that the court considers in making their final ruling of whether successor liability survives a free and clear sale.