Recurrent and Developing Issues Encountered in Sales Pursuant to Section 363 of the Bankruptcy Code

By: Joseph J. Wielebinski (Co-speaker) and Timothy (Tim) A. Million (Co-speaker)
State Bar of Texas 26th Annual Advanced Business Bankruptcy Course
May 2008

I. INTRODUCTION
Due to a variety of factors including, inter alia, the amendments to the Bankruptcy Code in 2005, the utilization of section 363 sales to liquidate some or substantially all of the assets of a company has become more prevalent. Irrespective of the stated reasons prompting their increased use, such sales routinely occur within the first few weeks or months of a debtor's chapter 11 filing and may dramatically impact the recovery for the estate and its creditors, if any. As a result, section 363 sales are often a source of substantial legal disputes and increasing creativity and sophistication in successfully "managing" the process.

While a plethora of reasons may exist for the increased utilization of section 363 sales, many believe the most common motivations for their use include: 1) the ability to offer a prospective buyer certain protections with regard to successor liability; 2) the ability to provide a distressed company with the protections of the Bankruptcy Code, thereby enabling it to effectively market its assets to ensure a maximum recovery (going concern value as opposed to liquidation value); 3) the speed in which the sale can be finalized; and 4) the reduced administrative costs as compared to a sale pursuant to a chapter 11 plan.

II. SUB ROSA PLANS
One of the critical issues bankruptcy courts are often required to address in a section 363 sale of all or substantially all of the debtor's assets is whether the proposed sale constitutes a sub rosa plan. The concept of a sub rosa plan has its origin in common law, and has been the subject of many different interpretations since the establishment of this doctrine by the Fifth Circuit Court of Appeals in Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d. 935 (5th Cir. 1983). It is clear from an examination of the Braniff progeny that sub rosa plan issues have stratified into three sub-issues: 1) sales of property of the estate outside the ordinary course of business; 2) leases; and 3) settlement agreements.

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