On July 17, 2014, the US Bankruptcy Court for the District of Delaware, in In re Ormet Corp., approved the sale of a debtor's assets under section 363(f) of the Bankruptcy Code free and clear of any successor liability claims for underfunding of the debtor's pension plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) (No. 13–10334, (Bankr. D. Del. July 17, 2014)).

Ormet Corp. and its affiliates (Debtors) produced aluminium and owned a refinery and a smelter. In February 2013, the Debtors filed a Chapter 11 bankruptcy petition. Before and after the filing, the Debtors unsucessfully attempted to sell all of their assets as a going concern. The Debtors then decided to sell their assets on a piecemeal basis and soon after sold the refinery and its inventory.

The sale process for the smelter facility took much longer. In June 2013, the Debtors obtained a stalking horse bid of $15,250,000, which was defeated at the auction by a cash bid of $25,250,000. Only the Steelworkers Pension Trust (Trust), which held a claim of about $5 million for underfunding of the Debtors' pension plan under ERISA and the MPPAA, objected to the sale. The Trust argued that the sale should not be approved free and clear of its potential successor liability claim.

The Debtors asserted that section 363(f) of the Bankruptcy Code allowed them to sell the assets free and clear of the Trust's successor liability claims and cited cases in which the US Courts of Appeals for the Third and Fourth Circuits approved these sales. The Trust argued that these cases were distinguishable because neither considered successor liability claims under ERISA or MPPAA. The Trust also argued that it was Congress's intent to protect the rights of employees in multi-employer pension plans. According to the Trust, ERISA and MPPAA effectuate this intent by imposing successor liability on any buyer of substantially all of an entity's assets if the buyer had notice of an underfunding claim. Therefore, the Trust reasoned, allowing a sale free and clear of these claims in bankruptcy would undermine Congress's intent.

The Court disagreed with the Trust and held that the assets could be sold free and clear of the Trust's potential successor liability claims under section 363(f) of the Bankruptcy Code.

First, the Court discussed the Third and Fourth Circuit cases cited by the Debtors, in which assets were sold free and clear of successor liability claims for employment and sex discrimination (In re Trans World Airlines, Inc. 322 F.3d 283 (3d. Cir. 2003)) and for future medical benefits under the Coal Industry and Retiree Health Benefit Act (In re Leckie Smokeless Coal Co. 99 F.3d 573 (4th Cir. 1996)). The Court explained that while strong policy interests were also at stake in the cases, the Third and Fourth Circuits held that these claims could be extinguished by a sale of assets under section 363.

The Trust argued that the TWA and Leckie cases are not controlling and pointed to other cases which emphasized the importance of ERISA and MPPAA. The Court dismissed these cases as inapplicable because none of them involved a sale of assets free and clear of all claims under section 363(f) of the Bankruptcy Code. The Court explained that it is the express language of section 363(f) that allows the sale of the assets free and clear of the Trust's potential successor liability claims.

In addition, the Court expressed concern that making an exception to free and clear asset sales under section 363(f) for successor liability claims may depress the prices that parties bid for a debtor's assets. In this case, the Debtors were unable to obtain any bids for their assets that did not include the protections of section 363(f). The Court also rejected the Trust's argument that the bidders could have bid less if the successor liability claim was retained. While the successor liability claim was estimated at $5 million, the exact amount was not determined, and that uncertainty could result in substantially discounted bids.

Finally, the Court noted that permitting the successor liability claim would result in the Trust's claim receiving more than other general unsecured claims and would violate the Bankruptcy Code's priority scheme.

This case confirms the broad scope of section 363(f) and demonstrates its precedence over certain policy considerations reflected in other federal statutes. By enforcing the express language of section 363(f), the Court's decision should help debtors maximize the value of their assets and create more certainty for purchasers by minimizing the risks associated with buying distressed assets.

For more information on section 363 sales, see: