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LJN NewslettersNewsSectionsThe Bankruptcy Strategist

In re Grumman

By Jeff J. Friedman and James N. Truitt
June 26, 2012

A recent decision by the United States District Court for the Southern District of New York explores the tension between the duty to maximize the value of the estate in bankruptcy and the due process rights afforded to future claimants in the context of a sale under ' 363 of the Bankruptcy Code. In Morgan Olson L.L.C. v. Frederico (In re Grumman Olson Indus., Inc.), 2012 WL 1038672 (S.D.N.Y. March 29, 2012), the U.S. District Court affirmed the bankruptcy court's ruling that a ' 363 sale order purporting to extinguish all claims for successor liability could not be enforced to enjoin a state law successor liability claim brought by claimants who, at the time of the sale, had not yet been injured and who had no way of knowing that such claims would arise. By limiting the reach of the ' 363 sale order, the court held the due process rights of future claimants outweighed the benefit to the bankruptcy estate and potential increase in value that a more broadly read ' 363 sale order might confer.

Asset Sales Pursuant to Section 363

Section 363(b) of the Bankruptcy Code provides a debtor-in-possession or trustee with the power to sell property of a debtor's estate outside the ordinary course of business, and in conjunction with ' 363(f), “free and clear of any interest” in property subject to the sale. A ' 363 sale frequently plays a critical role in a liquidation or reorganization, as it provides a debtor-in-possession or trustee with the ability to dispose of property in a manner that may increase the value of such property by extending “free and clear” protections to third party purchasers. Although ' 363 sales are widely used, courts continue to struggle with the applicability of the “free and clear of any interest” language of ' 363(f), especially as it applies against future claims, including future successor liability claims against a purchaser.

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