Restructuring

Contributed by Christopher Hopkins
As this Blog has discussed in a number of recent posts, free and clear sales under section 363(f) of the Bankruptcy Code often lead to disputes over whether section 363(f) can strip assets of particular types of claims and interests. Although section 363(f) plays an important role in maximizing the value of a debtor’s assets in a section 363 sale, adversely affected parties may object to those assets being sold free and clear of their claims. A recent decision out of the United States Bankruptcy Court for the District of Delaware concerned such a dispute: A creditor objected to the debtor’s sale of assets free and clear of its successor liability claim for the underfunding of the debtor’s pension plan pursuant to ERISA and the Multiemployer Pension Plan Amendments Act (MPPAA). Overruling the creditor’s objection, Judge Walrath held that the policy objectives inherent in the successor liability provisions of ERISA and the MPPAA do not trump the plain language of section 363(f) and permitted the debtor to sell its assets free and clear of the creditor’s successor liability claims.
Ormet Corp. and the 363 Sale
Ormet Corp. was a major producer of aluminum whose assets included a smelter in Ohio and a refinery in Louisiana. These facilities were operated by nearly 1100 employees, the majority of whom were represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Union.
In an effort to avoid bankruptcy, Ormet made substantial efforts to sell itself prepetition as a going concern, hiring an investment banker and engaging in an all out marketing effort to attract a buyer. Ormet’s efforts were unavailing, however, and it was forced to file a voluntary chapter 11 petition. Initially, Ormet continued to operate postpetition while it continued its efforts to sell itself as a going concern under section 363 of the Bankruptcy Code, eventually obtaining court approval of bidding procedures and engaging a stalking horse bidder. After an unsuccessful auction, the court entered an order approving the sale of substantially all of Ormet’s assets to the stalking horse bidder. Unfortunately for Ormet, it was unable to obtain necessary concessions from an Ohio utility regulator, a condition precedent to the closing of the sale.
Following the failed sale, Ormet ceased all production at its smelter, placed its refinery on “hot idle,” and renewed its efforts to sell its assets. Although Ormet was able to sell its refinery and raw material inventory in short order (with the proceeds going to repay its DIP loan), its efforts to sell the smelter took much longer. After nearly eight months of marketing efforts, Ormet finally found a stalking horse bidder and conducted a successful auction with the winning buyer offering a price $10 million over the stalking horse bid. At the hearing to approve the sale, however, the Steelworkers Pension Trust objected to the sale free and clear of its $5 million successor liability claim for the underfunding of Ormet’s obligations under a multiemployer pension plan with the Steelworkers Pension Trust.
Section 363(f) vs. ERISA: And the winner is . . .
The Steelworkers Pension Trust argued that the successor liability provisions of ERISA and the MPPAA evince Congress’s intent to protect employees covered by multiemployer pension plans from any withdrawal of employers that creates underfunded pension liabilities. According to the Steelworkers Pension Trust, Congress chose to impose successor liability on the buyer of substantially all of such withdrawing-employer’s assets under certain circumstances to effectuate this policy. The Steelworkers Pension Trust reasoned that permitting withdrawing-employers to sell their assets free and clear of these successor liability claims pursuant to section 363(f) would impermissibly undermine Congress’s intent as expressed in ERISA and the MPPAA.
Judge Walrath rejected this argument, citing to Third and Fourth Circuit decisions in which those courts affirmed sales under section 363(f) free of successor liability claims for employment and sexual discrimination and future medical benefits under the Coal Industry and Retiree Health Benefit Act, respectively. The bankruptcy court refused to frame the question of whether section 363(f) trumps ERISA and the MPPAA in terms of competing policy objectives, holding that “it is the express language of section 363(f) that allows the sale of assets free and clear of the successor liability claim of the Trust, something that is not available outside of bankruptcy.”
In addition, the court emphasized the pernicious effects that would result from creating exceptions to free and clear asset sales under section 363(f). The primary benefit of section 363(f) is that it both maximizes the value of the debtor’s assets and creates certainty for purchasers of the debtor’s assets by minimizing the risks associated with buying assets of a debtor in bankruptcy. This not only fosters a vibrant market for distressed assets, but also ensures that the debtor is able to obtain the highest possible value for its assets, thereby conferring a benefit on the debtor and its creditor body. Ormet’s failed prepetition efforts to sell its assets, as well as the subsequent difficulties it faced during its postpetition sale process underscore this point. The court also rejected the Steelworkers Pension Trust’s argument that Ormet could have simply reduced the purchase price of its assets by the amount of the pension plan underfunding, reasoning that such amount was merely an estimate and the resulting uncertainty of a prospective buyer’s exposure likely would have resulted in a discount exceeding the $5 million estimate.
Judge Walrath concluded her decision by noting that permitting the successor liability claim to survive the free and clear sale would violate the Bankruptcy Code’s priority scheme. Because Ormet’s other general unsecured creditors would be precluded from asserting their claims against the purchaser, allowing the Steelworkers Pension Trust to do so (especially with any resulting decrease in the purchase price) would give the Steelworkers Pension Trust a full recovery while reducing the recovery of similarly situated creditors.
Conclusion
Judge Walrath’s holding that the express provisions of section 363(f) are not trumped by the policy considerations embodied in ERISA and the MPPAA should give comfort to debtors and purchasers of assets in a free and clear sale pursuant to section 363(f). By refusing to create an exception to the scope of section 363(f)’s “free and clear” provision, the court’s decision in In re Ormet should help debtors maximize the value of their assets and create certainty for participants in the market for distressed assets.