Unfunded Pension Liabilities Not an 'Interest' That Survives 363 Sales
Reprinted with permission from the July 28, 2022 issue of The Legal Intelligencer. © 2022 ALM Media Properties, LLC.
The "twin goals" of most bankruptcy proceedings involve the "maximization" of return to creditors and the "prompt and efficient administration of the estate." See Hoseman v. Weinschneider, 322 F.3d 468, 475 (7th Cir. 2003). To facilitate these goals, the Bankruptcy Code permits, and arguably encourages, the sale of estate property—under certain conditions—"free and clear of any interest" held by any party other than the estate. The effect of this right, contained in Section 363(f) of the Code, is to facilitate the expeditious transfer of property in exchange for the maximum amount of cash. Ironically, as a result of the nearly continuous expansion of what constitutes a removable "interest," Section 363(f) has transformed bankruptcy courts from a reorganization forum to also being a highly efficient auction house.
So what happens to creditors with unsecured interests relating to the property that a debtor or trustee wishes to sell free and clear? Do their rights survive against the purchaser of the assets? Almost certainly not.
This question of claim extinguishment was most recently tackled in In re Norrenberns Foods, Case No. 21-30825 (Bankr. S.D. Ill. 2022). In Norrenberns, a grocery store operator entered Chapter 11 and subsequently filed a motion to sell its lone remaining retail grocery store, located in Mascoutah, Illinois, "free and clear of any and all liens, claims, interests and encumbrances." The United Food and Commercial Workers Unions and Employers Midwest Pension Fund (hereinafter, the fund) immediately filed an objection.
The fund is a multi-employer pension fund that provides retirement and other benefits to union employees of Midwestern stores. The fund's nearly $5 million claim against Norrenberns arose as the debtor was forced over a period of years to close all of its other stores throughout southern Illinois. Each closure left behind ERISA pension withdrawal liabilities to be assumed by those stores that remained. Finally, only the Mascoutah location was left, and it, unsurprisingly, was unable to service these liabilities. The fund argued in its objection that the bankruptcy court did not possess the power to extinguish its successor liability claims against the buyer in conjunction with the proposed sale under Section 363(f). The bankruptcy court disagreed, however, finding the fund's claim to be an "interest" which would not follow the property once sold.
The relevant language of Section 363(f) of the Bankruptcy Code provides that the trustee or a debtor in possession may sell property "free and clear of any interest in such property of an entity other than the estate" provided that one of five enumerated conditions are met, including that "such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest." The court identified this condition—whether the entity could be compelled to accept a money satisfaction of its interest—as qualifying this sale for Section 363(f) because the fund's claim was essentially one for monetary value. However, the fund argued that its successor liability claim did not constitute an interest in the property being sold within the meaning of that section of the Code, because the fund's claim was not an in rem property interest, but rather an unsecured claim relating to the withdrawal liability of the debtor.
In addressing this argument, the court considered whether a narrow or broad interpretation of "interest" should be applied. Citing Seventh Circuit precedent such as Precision Industries v. Qualitech Steel SBQ, 327 F.3d 537, 545 (7th Cir. 2003) (The Code itself does not suggest that 'interest' should be understood in a special or narrow sense; on the contrary, the use of the term 'any' counsels in favor of a broad interpretation), the bankruptcy court determined that while interpretations of the meaning of "interest" had historically differed from circuit to circuit, the prevailing trend, not only in the Seventh Circuit but nationwide, was to adopt a broad interpretation of that term.
Reviewing relevant district court decisions such as Faulkner v. Bethlehem Steel/International Steel Group, No. 2:04-CV-34 PS, 2005 U.S. Dist. LEXIS 7501 (N.D. Ind. 2005), and In re K & D Industrial Services Holding Co., 602 B.R. 16 (E.D. Mich. 2019), the court determined that the broad interpretation of "interest" applied by the Seventh Circuit had extended the term past purely in rem property interests to include possessory interests, employment related claims, and even withdrawal liability. Taking a look at the national landscape, the court also noted that the Third and Fourth circuits had adopted similarly broad readings as to analogous claims. And per the Norrenberns court, this represents the most natural reading of the relevant language—as "lien" is a defined term under the Code, Congress could have limited Section 363(f)'s application by using that term rather than "any interest." Instead, Section 363(f)(3)'s application "when such an interest is a lien" signals the Code's treatment of liens as a subset of the broader category of "interests."
Applying this interpretation to the facts at hand, the court held that the successor liability claim arising from the sale of the grocery store assets here is in fact an "interest in such property." Without the sale of the store and the operation of the assets by the buyer, no successor claim would arise. The court analogized the fund's claim to the extinguished employment-related claims set forth in Faulkner (employment discrimination), as well as In re Leckie Smokeless Coal, 99 F.3d 573 (4th Cir. 1996) (payment obligations for retirement benefit plans) and In re Trans World Airlines, 322 F.3d 283 (3rd Cir. 2003) (pending employment discrimination claims as well as travel vouchers issued to employees). Without the ownership and operation of the assets sold in those cases, the claims in question would not have existed.
As the Norrenberns court observed, the latest practice guidance suggests that "the trend seems to be in favor of a broader definition that encompasses other obligations that may flow from ownership of the property" (3 Collier on Bankruptcy, paragraph 363.06 (2022)). This approach appears to have taken root in the overwhelming majority of courts. For example, in addition to those already discussed, appellate panels and courts in the First Circuit (e.g., Unemployment Assistance v. OPK Biotech LLC (In re PBBPC Inc.), 484 B.R. 860 (B.A.P 1st Cir. 2013)), the Second Circuit (e.g., Elliott v. General Motors LLC (In re Motors Liquidation), 829 F.3d 135 (2d Cir. 2016)), and the Sixth Circuit (e.g., Al Perry Enterprises v. Appalachian Fuels LLC, 503 F.3d 538 (6th Cir. 2007)), in addition to district courts in several others, have either recognized or expressly adopted the trend toward an expansive reading of "interest" in Section 363(f). Decisions expressly limiting the statute's application are rare and often decades old—for example, Fairchild Aircraft v. Fairchild Aircraft (In re Fairchild Aircraft), 184 B.R. 910, 917–18 (Bankr. W.D. Tex. 1995), vacated on other grounds (The sorts of interests impacted by a sale 'free and clear' are in rem interests which have attached to the property.). And other, older decisions at the district court level have in many instances been effectively negated by more recent appellate decisions in their circuit—for example, In re White Motor Credit, 75 B.R. 944, 948 (Bankr. N.D. Ohio 1987) (General unsecured claimants including tort claimants, have no specific interest in a debtor's property. Therefore, Section 363 is inapplicable for sales free and clear of such claims.).
The Norrenberns decision both affirms and furthers the trend toward the broad application of Section 363. The "interest" sought to be extinguished by the debtor did not represent a claim tied to the physical grocery store itself, but nevertheless a claim relating to and arising from the operation of the business. This trend toward the broad application of Section 363(f), which has been gaining steam over the last few decades, is one of the major reasons bankruptcy courts today are the forum of choice for selling distressed assets.