On January 17, 2013, the US Bankruptcy Appellate Panel of the First Circuit (BAP) held in Massachusetts Department of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.) that:

This decision adopts the more expansive definition of "interest" already adopted by the Second, Third, Fourth and Seventh Circuits.

The debtor, PBBPC, Inc., simultaneously filed its Chapter 11 petition and a motion seeking approval of bid procedures and the sale of substantially all of its operating assets to OPK Biotech, LLC, under section 363(f) of the Bankruptcy Code. The US Bankruptcy Court for the District of Massachusetts entered an order approving the sale free and clear of all encumbrances, including successor liabilities for unemployment related claims. Right before closing, PBBPC laid off four of its five employees, resulting in a high experience rating and an unemployment contribution rate of 12.27% under Massachusetts unemployment insurance law.

After the sale closed, OPK informed the Massachusetts Division of Unemployment Assistance (DUA) of its acquisition of the debtor's assets. The DUA responded by notifying OPK that as a "successor employer" under state law, its unemployment contribution rate would therefore be the debtor's rate of 12.27%. OPK filed an administrative appeal but the DUA did not change its determination.

OPK responded by filing a motion to enforce the sale order, seeking an order from the Bankruptcy Court:

The DUA challenged the motion, arguing in part that the debtor's experience rating was not an interest within the meaning of section 363(f), and therefore the Bankruptcy Court lacked authority to protect OPK from taxation on this basis. Noting that there was no binding First Circuit precedent, the Bankruptcy Court concluded that section 363(f) applied to the DUA's interest. The DUA appealed to the BAP.

At issue is whether the debtor's experience rating is an interest within the meaning of section 363(f) of the Bankruptcy Code. The outcome depended on whether the First Circuit adopted the broader definition of "interest" adopted by the Second, Third, Fourth and Seventh Circuits or a narrow definition meaning only in rem interests in property.

Under section 363(f), a trustee may sell property free and clear of any entity's interest in the property only if at least one of the following conditions is met:

The Bankruptcy Code does not define "interest" and courts have addressed the scope of the term on a case-by-case basis.

The BAP upheld the ruling of the Bankruptcy Court that a debtor's experience rate is an interest in property within the meaning of section 363(f), thereby adopting the more expansive definition of "interest."

The DUA argued that an experience rating is a "simple, prognostic tool" used to predict the number of future unemployment claims from a business, rather than a way to recover an unpaid debt. Therefore, it argued that an experience rating is not an interest under section 363(f). OPK countered that the DUA's interest falls within section 363(f) because:

The BAP was persuaded by the trend among other circuit courts to interpret the term "interest" broadly, finding that reading more consistent with the language of the Bankruptcy Code and the policy of section 363. It disagreed with the DUA's argument, finding that the transfer of a debtor's contribution rate to a successor purchaser is actually an attempt to recover money that the debtor would have paid if it had continued in business. The transfer of a debtor's assets alone, not the continuation of its business, triggers the imposition of successor liability on a buyer, because the debtor's experience rating travels with the assets and encumbers their purchaser. Therefore, because the right to tax OPK at the higher rate arose only because it purchased the debtor's assets, section 363(f) permitted the Bankruptcy Court to authorize the sale free and clear of that rate.

This decision follows the trend adopted by several circuit courts towards applying an expansive definition of the term "interest" as used in section 363(f) of the Bankruptcy Code.