Bankruptcy Law: Section 363 Sales

By: Joseph J. Wielebinski

Dec 21, 2009

Looking back on the economic train wreck of 2009, one can only think, "My, how the mighty have fallen." Banks failed, numerous well-known retailers shut their doors, and all forms and sizes of real estate and energy companies faltered or failed. Companies in almost every sector of the economy came crashing down after years of unbridled prosperity.

These falls from economic grace precipitated a rash of bankruptcy filings that continue while the economy attempts to recover from its near-death experience. As a result, this past year has generated a multitude of important bankruptcy cases and rulings. In Re: General Growth Properties Inc., et al. produced what the American Bankruptcy Institute labeled "the most significant real estate bankruptcy ruling in the past decade" and is pending in the United States Bankruptcy Court for the Southern District of New York. In Re: Circuit City Stores Inc., et al. demonstrated the impact of recently enacted United States Bankruptcy Code §503(b)(9) on a retailer's ability to reorganize and is pending in the United States Bankruptcy Court for the Eastern District of Virginia. Most notably, the bankruptcy cases of two of Detroit's once-untouchable automotive powerhouses are pending in the United States Bankruptcy Court for the Southern District of New York: In Re: Old Carco LLC (f/k/a Chrysler LLC), et al. and In Re: Motors Liquidation Co., et al., f/k/a General Motors Corp., et al.

Chrysler's and GM's woes could fill volumes of "how-not-to" business textbooks, but their preservation from total ruin is a testament to the power, utility and flexibility of bankruptcy as a financial restructuring tool. The Chrysler bankruptcy, in particular, demonstrates the importance of a pre-planned bankruptcy and the power of a Bankruptcy Code §363 sale. The Chrysler bankruptcy also demonstrates the implications of significant government involvement. Regardless, bankruptcy in general and a §363 sale in particular were the perfect vehicles to scrape the rust off of Detroit's faltering automaker.

Unlike traditional Chapter 11 cases, the Chrysler case did not labor for years in bankruptcy until a reorganization plan was prepared, negotiated, amended, voted on and crammed down on creditors. Instead, the salvageable parts of Chrysler were plucked from bankruptcy within 42 days of filing through a §363 sale.

A §363 sale to sell promptly a distressed company's assets without the burden of its liabilities has become a useful financial restructuring tool under appropriate circumstances. Admittedly, Chrysler's size and importance and the government's significant involvement as a creditor created a unique situation that may not be replicated. Nevertheless, Chrysler's §363 sale demonstrated bankruptcy's ability to maximize the recovery for creditors and/or to preserve a company's going concern value, which are fundamental goals underlying the United States Bankruptcy Code.

While not an exhaustive list, recent examples of Texas cases or companies using §363 to sell assets as part of a reorganization or liquidation include In Re: Asarco LLC, et al. (sale of mining operations) and In Re: Edge Petroleum Corp., et al. (sale of substantially all of the debtors' property) pending in the United States Bankruptcy Court for the Southern District of Texas; In Re: Pilgrim's Pride Corp., et al. (sale of various assets) and In Re: Crusader Energy Group Inc., et al. (sale of leases and stock) pending in the United States Bankruptcy Court for the Northern District of Texas; and In Re: Nortel Networks Corp., et al. (sale of "new generation" network components) pending in the United States Bankruptcy Court for the District of Delaware. The foregoing examples demonstrate that the use of §363 sales will continue to play an important role in Texas and other bankruptcy cases in 2010 and beyond.