In a recent case, the Delaware District Court highlighted an often overlooked blind spot in bankruptcy rules. As those already conversant with bankruptcy law will fittingly appreciate, the confusion between the “free and clear” clause and “perfectly clear” successor liability sometimes melts into a grey area.
When it comes to the bankruptcy code, potential traps are abundant for the uninitiated – be they debtors, creditors, or asset buyers. Indeed, the latter group was served a stark reminder of this during the recent court proceedings in Delaware. At the heart of this case was one of the more complex intersections of federal law – the overlap of bankruptcy and labor law.
For asset buyers, a particularly subtle pitfall occurs when a bankruptcy sale order, unstayed and allowing an asset sale “free and clear” of successor liability, clashes with federal labor law, which imposes successor liability on the buyer. The ruling by the Delaware District Court brings this issue to the fore, casting new light on an area often taken for granted by many legal professionals.
The particular case in point centered on an asset buyer who, following the “free and clear” clause, asserted that the acquisition from a bankruptcy proceeding exempts them from any successor liability. However, the court disagreed and emphasized that under federal labor law, the purchaser can be considered a successor to the bankruptcy debtor and therefore may assume some obligations and liabilities of the previous owner.
With this ruling, all parties involved in bankruptcy proceedings, including asset purchasers, must further scrutinize their positions and prepare for potential exposure to successor liability. A shallow interpretation of the “free and clear” clause might lead to significant legal and financial consequences down the road, especially when labor law enters the equation.
More detailed insights into this case, including implications for creditors, debtors, and asset buyers, are fully discussed in the original article provided by Proskauer Rose LLP here.