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In Bankruptcy, Who Is Left Holding the Bag for Latent Damage Claims?

BY David A. Samole
June 01, 2016

Increasingly, true reorganizations under Chapter 11 are the exception, not the rule, as corporate debtors utilize bankruptcy sales to maximize asset value and pay creditors. This trend blurs the line between reorganizations and liquidations, as many Chapter 11 filings repurpose the disposition of assets via going-concern sales to purchasers without associated liabilities and interests, which attach to sale proceeds payable to administrative expenses, lienholders, unsecured creditors and equity.

The Bankruptcy Economy

Asset value is maximized by “free and clear” sale provisions set forth in Section 363(f) of the Bankruptcy Code ' and the finality of such sales. These concepts are paramount to bankruptcy practitioners and the system alike, and drive a certain “bankruptcy economy” for ALL cases and sales, where debtors, creditors and purchasers rely on these concepts to market and close transactions at their highest value with the cleanest title available at law.

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