A recent decision out of the Bankruptcy Court for the Northern District of New York has brought greater certainty to the interpretation of what qualifies as an “interest” when determining the scope of a Section 363(f) “free and clear” sale in bankruptcy. The decision in In re Tougher Industries, Inc. became the latest in a recent trend in the Second Circuit and elsewhere towards an expansive interpretation of what constitutes an “interest”, which should help bankruptcy estates (and creditors!) maximize the purchase price in asset sales.

As a bit of background, the sale of substantially all of the assets of two debtors was authorized by the Bankruptcy Court, which also expressly provided that the assets were being sold free and clear of all liens, claims, encumbrances, and interests as allowed under Section 363(f) of the Bankruptcy Code. The sale order specified that this included interests “relating to taxes arising under or out of, in connection with, or in any way relating to the operation of the Assets prior to the Closing….” The purchasers of the assets then continued to operate the business of the debtors after the sale.

Subsequently, the New York Department of Labor asserted that the debtors’ experience ratings (based on the time before the sale) would be used to calculate unemployment insurance tax premiums due from the purchasers. In response to a motion by the purchasers, the Bankruptcy Court adopted an expansive definition of “interest” to include the debtors’ experience rating as calculated by the DOL. The Bankruptcy Court specifically noted that its interpretation of “interest” was appropriate because it was consistent with the policy of maximizing the value of the asset and the return to creditors.

To read more about this recent decision, as well as the implications it will have on the price of assets sold in bankruptcy sales, check out this Dechert OnPoint by Dechert’s Business Restructuring and Reorganization group.