In re NE Opco, Inc: Section 363(f) Bars Pre-closing Claims Arising from Purchaser's Alleged Wrongdoing Occurring After Entry of Sale Order | Practical Law

In re NE Opco, Inc: Section 363(f) Bars Pre-closing Claims Arising from Purchaser's Alleged Wrongdoing Occurring After Entry of Sale Order | Practical Law

The US Bankruptcy Court for the District of Delaware, in In re NE Opco, Inc., held that section 363(f) of the Bankruptcy Code barred a former employee from pursuing an employment discrimination claim arising after entry of the sale order but before the sale closing, against a buyer of the debtors' assets based on the buyer's alleged wrongdoing in connection with the employee's dismissal.

In re NE Opco, Inc: Section 363(f) Bars Pre-closing Claims Arising from Purchaser's Alleged Wrongdoing Occurring After Entry of Sale Order

by Practical Law Bankruptcy & Restructuring and Practical Law Finance
Published on 16 Oct 2014 • USA (National/Federal)
The US Bankruptcy Court for the District of Delaware, in In re NE Opco, Inc., held that section 363(f) of the Bankruptcy Code barred a former employee from pursuing an employment discrimination claim arising after entry of the sale order but before the sale closing, against a buyer of the debtors' assets based on the buyer's alleged wrongdoing in connection with the employee's dismissal.
On August 8, 2014, the US Bankruptcy Court for the District of Delaware, in In re NE Opco, Inc., held that section 363(f) of the Bankruptcy Code barred a former employee from pursuing an employment discrimination claim arising after entry of the sale order but before the sale closing, against a buyer of the debtors' assets, based on the buyer's alleged wrongdoing in connection with the employee's dismissal (513 B.R. 871 (Bankr. D. Del. 2014)).

Background

Paul Torres (Torres) worked for NE Opco, Inc. as a machine adjuster beginning in 1993. In May 2013, Torres was injured at work. Although still injured, Torres soon after returned to work and performed modified duties. In June 2013, Torres underwent surgery to repair his injury and took a medical leave of absence through September 16, 2013.
NE Opco, Inc. and certain of its affiliates (Debtors) filed for Chapter 11 protection on June 10, 2013. In August 2013, the Debtors filed a motion seeking approval to sell substantially all of their assets under three asset purchase agreements with three different buyers, including Cenveo Corporation and Cenveo, Inc. (collectively, Cenveo).
The Court entered the Sale Order on September 12, 2013, which, among other things:
  • Approved the sale of the Debtors' assets free and clear of all interests under section 363(f) of the Bankruptcy Code.
  • Released all liens and claims "arising under or out of, in connection with, or in any way related to, the Debtors, the Purchased Assets, the operation of the Debtors' businesses before the Closing or the transfer of the Debtors' interests in the Purchased Assets" to Cenveo.
  • Enjoined all persons and entities from asserting, prosecuting or otherwise pursuing claims relating to the sale against Cenveo.
  • Expressly reserved the Court's jurisdiction to enforce the Sale Order.
In addition, the Asset Purchase Agreement (APA) provided that Cenveo would assume certain identified liabilities, while the Debtors would retain all other liabilities. Specifically, the APA stated that all liabilities "with respect to the employment . . . or termination of employment . . . of any Employee" were "Excluded Liabilities" that Cenveo did not purchase or assume and for which the Debtors, as seller, would remain "solely and exclusively liable."
In early September 2013, Torres contacted his supervisor and informed her that he would be released to work with restrictions on September 13, 2013. Although Torres was an employee of the Debtors at this time, his supervisor responded by asking him to fill out a Cenveo job application. However, Cenveo's human resources representative refused to take Torres's application because he "was not on the [employee] list." On September 13, 2013, Torres received his "return to work release with restrictions" paperwork, and provided it to the Debtors' plant manager, who told him that he would provide it to human resources. Later that day, Torres received a letter notifying him that his employment was terminated effective September 13, 2013.
The sale closed on September 16, 2013. Torres asserted both pre-closing and post-closing claims against Cenveo related to the termination of his employment.

Outcome

The Court held that, under section 363(f) of the Bankruptcy Code:
  • The Sale Order enjoined Torres from pursuing pre-closing claims against Cenveo for Cenveo's alleged wrongdoing in connection with Torres's dismissal.
  • The Sale Order did not prevent Torres from pursuing post-closing claims against Cenveo for Cenveo's alleged failure to hire him after the sale had closed. Further, the Court held that it did not have jurisdiction to decide post-closing claims between Torres and Cenveo, because both are non-debtors.

Pre-closing Claims

Citing cases from multiple jurisdictions, the Court held that, even though Cenveo may have committed a wrongdoing after the Court approved and entered the Sale Order but before the sale closing, the Sale Order barred Torres from asserting pre-closing claims against Cenveo related to the sale of the Debtors' assets.
The Court first cited In re Trans World Airlines (TWA), where the US Court of Appeals for the Third Circuit held that section 363(f) cut off successor liability to the buyer of an airline for a series of employee and other claims filed pre-sale (see 322 F.3d 283 (3d Cir. 2003)). In TWA, the Third Circuit reasoned that allowing successor liability claims as an exception to the "free and clear" termination of liability under section 363(f) would prioritize one class of general unsecured claimants over others in violation of the Bankruptcy Code's distribution scheme.
The Court also relied on In re Christ Hospital I, in which a court allowed successor liability claims to be cut off as against a purchaser for the purchaser's pre-closing alleged wrongdoing (see 502 B.R. 158 (Bankr. D.N.J. 2013)). Furthermore, in In re Christ Hospital II, the same court, relying on TWA, held that a section 363(f) finding cut off successor liability to the buyer for claims and interests arising from the property being sold, which included an employee's wrongful termination claim (see No. 12-12906, (Bankr. D.N.J. May 22, 2014)).
Finally, the Court found that the express terms of the Sale Order barred Torres from pursuing his pre-closing claims. The Court reasoned that the sale price reflected negotiations concerning the assumed and excluded assets and liabilities and the provisions of the Sale Order. Further, the Sale Order served the policies of section 363(f)'s "free and clear" provisions by:
  • Preventing Torres from circumventing the priority scheme of the Bankruptcy Code by asserting successor liability claims against Cenveo while other creditors satisfied their claims against the Debtors.
  • Maximizing the price for the assets. Selling the assets "free and clear" gave Cenveo "some comfort" and therefore made the assets more valuable than if they were encumbered by potential claims.

Post-closing Claims

The Court then held that Torres could assert claims against Cenveo to the extent they related to alleged wrongdoing committed post-closing. The Court reasoned that claims arising post-closing were not claims against the Debtors' bankruptcy estate and therefore could not be barred by the Sale Order. The Court stated that the Sale Order did not give Cenveo a "free pass on future conduct."
The Court also concluded that, because there were no post-closing claims against the Debtors, it did not have jurisdiction to decide the post-closing claims between Torres and Cenveo, because both are non-debtors.

Practical Implications

In re NE Opco, Inc. confirms the broad scope of section 363(f) by demonstrating that this provision not only protects debtors, but can also extinguish sale-related claims against buyers of a debtor's assets that arise after entry of the sale order but before the sale closing. This decision continues the recent trend of broadly construing section 363(f), as reported in the following Legal Updates:
This decision also serves as a reminder that the underlying policies of section 363(f) are preserving the Bankruptcy Code's priority scheme and maximizing the value of a debtor's estate.
For more information on section 363 sales, see: