Generally, a good-faith purchaser of assets does not incur liability for the debts of the seller. However, liability for unpaid debts of the seller may be imposed on the purchaser by statute or under the common law doctrine of “successor liability.”
Successor liability, whether imposed by statute or common law, sometimes collides with important goals of bankruptcy policy, including equality of distribution and maximizing the value of an estate.
In a bankruptcy case, assets can be sold in two ways: a sale pursuant to Section 363 of the Bankruptcy Code or a sale pursuant to a confirmed Chapter 11 plan of reorganization. If properly structured, assets can be acquired free and clear of successor liability.
Under Section 363, the trustee or debtor-in-possession may sell all of the debtor’s assets out of the ordinary course of business free and clear of “interests.”
Conveying assets pursuant to a Chapter 11 plan arguably affords greater protection because Section 1141(c) of the Bankruptcy Code provides that property “dealt with” by a confirmed Chapter 11 plan shall be “free and clear of all claims and interests of creditors.”
The efficacy of a bankruptcy sale to cut off pre-existing debts and claims will depend, in part, on the adequacy of the notice of the sale given to interested parties. If a creditor is adequately notified that the assets will be sold free and clear of liens, claims and encumbrances (including successor liability) and does not object, that creditor will be bound under preclusion principles by entry of a valid sale order.
Special problems are presented by so-called “future claims” and certain types of environmental liabilities.
Future products liability claim arises when (1) a person is harmed prior to the sale by a product introduced into commerce by the seller and the health effects will not be manifested until after the sale or (2) a person is harmed after the sale by a product introduced into commerce by the seller prior to the sale.
To insulate the purchaser from successor liability for future claims, the transaction generally will be effectuated under a Chapter 11 plan, a representative of the putative claimants will be appointed and afforded an adequate opportunity to represent their interests in the bankruptcy case.
Courts have held that injunctions obtained under environmental statutes to abate ongoing pollution are not within the ambit of “claims” under the Bankruptcy Code and, accordingly, are not dischargeable under a Chapter 11 plan.