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The Delaware Bankruptcy Insider is a premier blog designed to bring its readers a comprehensive analysis of the latest Delaware corporate bankruptcy news and rulings. Brought to you by Ashby & Geddes, P.A.
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- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
Claims Arising From Purchaser Wrongdoing Following Entry of Sale Order But Prior to Closing Barred and Enjoined by Section 363(f)
In re NE Opco, Inc., No. 13-11483 (CSS), 2014 WL 3884217 (Bankr. D. Del. Aug. 8, 2014)
In the chapter 11 proceedings of NE Opco, Inc. and its affiliated debtors (the “Debtors”), the Honorable Christopher J. Sontchi was presented with a unique set of circumstances leading to the following question—whether pre-closing claims against a purchaser, related to the sale and arising from conduct occurring after the entry of a sale order, should be barred and enjoined by the section 363(f) finding in the sale order. The Court held that they should.
The claimant, Mr. Torres (“Torres”), had been employed with the Debtors for approximately 20 years. Shortly before the petition date, he was injured at the work place and took a temporary medical leave of absence. While Torres was on leave, the Debtors filed a motion seeking Court approval of a sale of substantially all of their assets to Cenveo Corporation and Cenveo, Inc. (“Cenveo”). In anticipation of the sale, Torres was instructed to complete a Cenveo job application. According to Torres, Cenveo did not wish to hire him, and one day after the entry of the sale order, his employment was terminated. The sale to Cenveo closed several days thereafter.
Torres commenced a state court action against the Debtors and Cenveo asserting wrongdoing related to, among other things, the decisions pre-closing to terminate his employment. Cenveo returned to the Bankruptcy Court and sought to use the provisions of the Court’s sale order to bar and enjoin Torres’s claims. The sale order provided that the Cenveo sale was free and clear of every claim and that liabilities with respect to the employment or termination of employment were not purchased or assumed by Cenveo, and would be released, terminated, and discharged as to assets purchased. Moreover, the sale order provided that all persons, including employees and litigation claimants, released all claims “arising under, out of, in connection with, or in any way relating to, the Debtors, the Purchased Assets, the operation of the Debtors’ businesses before the Closing or the transfer of the Debtors’ interests in” the assets sold to Cenveo, and that such persons were prohibited from pursing such claims against Cenveo.
It is not surprising that the Court enjoined Torres, barring his pre-closing claims against Cenveo. While Torres argued that he held direct claims against Cenveo for its decision to terminate him, the Court categorized such claims as pre-closing claims against Cenveo related to its purchase of the Debtors’ assets. Prohibiting the pursuit of such claims was supported not only by the express terms of the sale order, but also Third Circuit case law allowing section 363(f) to prohibit claims directly attributable to a sale, see, e.g., In re Trans World Airlines, 322 F.3d 282 (3d. Cir. 2003). Similar to Judge Walrath’s recent decision in In re Ormet Corp., No.13-10334 (MFW), 2014 WL 3542133 (Bankr. D. Del. July 17, 2014) (see our analysis here), Judge Sontchi emphasized the importance of enforcing section 363(f) not only to the Bankruptcy Code’s priority scheme but also to its goal of maximizing the value of estate assets to benefit all parties-in-interest. Allowing Torres to pursue his pre-closing claims against Cenveo would permit him to jump over other similarly situated creditors awaiting their recovery against the Debtors, and it would ignore bargained-for sale order provisions that, in part, served as the basis for the sale price of the Debtors’ assets.