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Successor Liability Claims in Bankruptcy
More often than not, bankruptcy filings lead to the sale of a business as a going concern. Such sales are frequently concluded prior to confirmation of a plan of reorganization by resort to Section 363 of the Bankruptcy Code. Section 363 authorizes the sale of a bankrupt company “free and clear of any interest in such property.” 11 U.S.C. '363(f). Product liability claims, though, can occur suddenly and seemingly at random long after the sale of the assets to the successor. The successful purchaser may have thought that the “free and clear” sale order was a legal barrier to successor liability. The prudent product liability practitioner knows otherwise.
What does it mean to buy a business “free and clear of any interest in such property”? In bankruptcy parlance, a Section 363 sale is often referred to as “cleansing” or “washing” the assets through bankruptcy, making it more difficult for third parties to assert claims against the assets or the purchaser. A 2003 appellate court decision reinforces the cleansing powers of Section 363 sales and constructs a barrier to certain successor liability claims.
The Third Circuit recently held that a Section 363 sale order may be effective to protect the purchaser against successor liability claims. In re Trans World Airlines Inc., 322 F.3d 283 (3d Cir. 2003). In May 2002, TWA sold substantially all of its assets to American Airlines, pursuant to Section 363, free and clear of all interests, including all known or unknown employee-related claims. The Section 363 order also enjoined all persons from seeking to enforce successor liability claims against American. A contingent, future claimant objected ' the Equal Employment Opportunity Commission (“EEOC”), which had been investigating dozens of discrimination charges against TWA. A class of flight attendants, who had received travel vouchers in settlement of a discrimination charge, also objected.
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