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Bankruptcy Court Allows Sale Free and Clear of Successor Liability Claims

In re Ormet Corp., No. 13-10334 (MFW), 2014 WL 3542133 (Bankr. D. Del. July 17, 2014)

In this Memorandum Opinion, Judge Walrath overruled an objection to a sale of the debtors’ assets free and clear of the objector’s successor liability claim, and granted a stay waiver under Bankruptcy Rules 6004(h) and 6006(d) to allow the sale to close immediately.  In reaching its conclusion, the Court emphasized the integral nature of Bankruptcy Code section 363(f) to the bankruptcy process, enabling debtors to sell assets free and clear of any claims—something not available outside of the bankruptcy context.

Ormet Corporation and its affiliates (the “Debtors”) entered bankruptcy with the intention of selling as a going concern all of their assets, including an aluminum production facility known as the “Hannibal Smelter Facility.”  Due to insufficient relief from the Public Utilities Commission of Ohio, the Debtors’ first sale attempt did not close.  The Debtors then proceeded with a piecemeal sale of their assets.  After a lengthy sale process, the Debtors sought Court approval of a sale of the Hannibal Smelter Facility for $25.25 million ($10 million higher than the stalking horse bid).  The sole objector, the Steelworkers Pension Trust (the “Trust”), holding a $5 million claim for underfunded pension liabilities, argued that a sale free and clear of its alleged successor liability claim arising under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Multiemployer Pension Plan Amendments Act (“MPPAA”) could not be approved.  In support, the Trust asserted that Congress, through the enactment of ERISA and MPPAA, expressed a strong public policy to protect employees’ rights in multi-employer pension plans.

Although the Bankruptcy Court agreed that Congress has expressed a strong policy in favor of protecting multi-employer pension plans, it disagreed with the Trust that such policy trumps the express language of Bankruptcy Code section 363(f), which allows the sale of a debtor’s assets free and clear of any claims, as well as controlling Third Circuit case law that authorizes sales under section 363 free and clear of successor liability claims such as the one alleged by the Trust.  See In re Trans World Airlines, Inc., 322 F.3d 283, 292 (3d Cir. 2003) (affirming a sale under section 363 free and clear of successor liability claims for employment and sex discrimination).  This conclusion, the Court emphasized, is supported by strong public policy.  Specifically, excepting successor liability claims from section 363(f) would insert uncertain liabilities to a sale, which would significantly depress value.  Additionally, it would violate the Code’s priority scheme to allow successor liability claims ahead of general unsecured claims.  Accordingly, for the foregoing reasons, the Court overruled the Trust’s objection and approved the sale.

In addition, Judge Walrath waived the 14-day stay under Bankruptcy Rules 6004(h) and 6006(4) on account of the Debtors’ dwindling cash position and the detrimental effect on all parties if the sale did not close.  As noted by the Court, waiver of a stay is appropriate where an “immediate closing is required to remedy the Debtors’ precarious financial and business situation.”  Here, the Debtors lacked additional interested bidders following extensive marketing efforts, already defaulted on their DIP loan, and were forced to shut down their operations, so the Court held waiver of the stay appropriate.