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Successor Liability Claims in Bankruptcy

By Frances Gecker

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.

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