Buyer Beware: 363 Sale May Not Absolve Successor Liability

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It has long been understood by buyers of assets of distressed companies that once a sale is authorized pursuant to Section 363 of the Bankruptcy Code, the buyer is absolved of any liabilities which may have encumbered the assets of the previous owner, including causes of actions against them. However, a recent decision from the influential United States District Court for the Southern District of New York saddles buyers with the burden of unknown potential future claims.

In Morgan Olson LLC v. Frederico (In re Grumman Olson Industries, Inc.), --- B.R. ----, 2012 WL 1038672 (S.D.N.Y. March 29, 2012), the Court addressed a question never before analyzed by courts in the Second Circuit, and touched upon by few other jurisdictions: “Whether a bankruptcy sale order, pursuant to Section 363 of the Bankruptcy Code … can extinguish the state law claims of third parties based on conduct by the debtor before the bankruptcy, where no injury was caused until after the bankruptcy closed.” Id. at 1. This adversary proceeding stemmed from a suit brought by a FedEx truck driver (“Frederico”) who, having been injured allegedly due to defects in the truck after the debtor’s assets were sold in a 363 sale, brought suit against Morgan Olson (“Morgan”), a purchaser of certain assets of the truck manufacturer.

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