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Bankruptcy

: Credit Slips

Claim or Interest -- part 2

By Stephen Lubben

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In my prior post on this topic, I examined and rejected the argument that reference to §1141 helps us understand §363(f), inasmuch as the term "interest" is used in different ways in the two sections.

But what about the core argument that the tort claimants have made, namely, that "interests" means "liens" in §363(f), and thus it is impermissible for the bankruptcy courts to allow the sale of automaker assets free of successor liability claims, which are clearly not liens. Recall the objection filed by the "tort claimants and consumer organizations," where it was argued that §1141:

is much broader than that of Section 363(f) by including ?claims?, not just ?interests in property,? i.e. liens.

earlier in the same objection, the argument is even more plain:

the language of Section 363(f), read in conjunction with other provisions of the Bankruptcy Code, is clear. It establishes that ?interests in property? which can be foreclosed under Section 363(f) are liens, mortgages, money judgments, writs of garnishment and attachment, and the like, and cannot encompass unliquidated successor liability claims.

The strongest argument against equating "interests" with liens in §363(f) comes from subpart (f)(3), which applies if "such interest is a lien." If we adopt the tort claimants' argument, this provision nonsensically states if "such lien is a lien." I submit that a more plausible reading of §363(f)(3) would suggest that "interest" as used in §363(f) includes liens, but it is not limited to liens. This reading is also buttressed by §362(d)(4), which speaks of recording "interests or liens" in real property.

But the second quote from the tort claimants does recognize a somewhat broader reading of "interests" in §363(f), while rejecting the inclusion of "unliquidated successor liability claims." Of course, the right to assert a successor liability claim is not an "unliquidated successor liability claim" from the debtor's perspective. Unliquidated or not, it is not even a claim against the estate -- rather, it is only properly termed a claim against the buyer of the debtor's assets. From the perspective of the debtor's bankruptcy estate, a successor liability cause of action is a right that certain creditors hold, but it is not a right or claim against the debtor. Correctly conceptualizing the right to bring a successor liability claim not only further undermines the analogy to §1141, but also properly focuses us on the issue of whether this right could be an "interest in property."

Additionally, while I have thus far acceded to the tort claimants' focus on the specific word "interest," arguably it makes more sense to focus on the fact that 363(f) uses the phrase "interest in such property," especially given that I have previously shown that the phrase "interest" stranding alone is used in a different sense in chapter 11, to mean equity or ownership interest.

The phrase "interest in property" appears elsewhere in the Code, especially in the generally applicable §101(54) definition of "transfer," the Code's fraudulent transfer provision §548 (as ?interest of the debtor in property?), and repeatedly in §541, which defines the property that is in the debtor's estate. In each of these cases, it seems clear that the phrase is used as a kind of synonym for "asset." Thus, when the debtor acquires an "interest in property" under the provisions of a will, within 180 days of the bankruptcy, that interest becomes property of the estate under §541(a)(5). There is little doubt that "interest in property" here is not limited to the kind of real estate or lien interests that the tort creditors have pointed to in connection with §363(f), but rather includes any interest that has value for the estate. Smith v. Moody (In re Moody), 837 F.2d 719 (5th Cir. 1988).

And similarly, it seems beyond doubt that a transfer of an "interest in property" can be a fraudulent transfer under §548, even if the transfer does not involve transferring "liens, mortgages, money judgments, [or] writs of garnishment and attachment." As noted in Collier's on Bankruptcy ś 548.02, "[b]y making the statute apply to any interest of the debtor in property, the avoidance powers of the trustee extend beyond a formal transfer of title or property ownership."

The question is then whether it would be a fraudulent transfer if a debtor transfered its right to assert a successor liability claim for inadequate consideration? Or if a debtor inherited a right to bring a successor liability claim within 180 days of filing its petition, would it be considered part of the estate? If the answer to these questions would be yes, and I suggest both would be answered in the affirmative, then why would the right to assert a successor liability claim against the buyer of the debtor's property not also be an "interest in such property" for purposes of §363(f)?

In short, while I continue to agree that due process limits the power of §363(f) in the instance of future claims, the argument that current tort claims, and successor liability claims based thereon, are not subject to sales "free and clear" seems unconvincing once we move beyond the superficial arguments that have been made to date.

Full post as published by Credit Slips on June 14, 2009 (boomark / email).