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The Shield of the Bankruptcy Code: Recent Decision Reminds Would-Be Buyers of Important Section 363 Protections

Business Law Today
January 12, 2022 Publications

Originally published at Business Law Today

Recently, a Delaware bankruptcy judge reminded potential buyers or acquirers of assets from a distressed entity they have important protections. The judge was overseeing the restructuring of Ruby Tuesday and its affiliates and highlighted the protection afforded to buyers who purchase assets under Section 363(f) of the Bankruptcy Code.[1]

Before RTI Holding Company, LLC (RTI) filed for bankruptcy in late 2020, it negotiated and accepted a purchase and sale agreement with BNA Associates (BNA) to sell its leasehold interest to the RT Lodge, a historic hotel and event space in Knoxville, Tennessee. Under the agreement, BNA would purchase RTI’s 50-year leasehold interest in the RT Lodge for $5.25 million. However, the agreement was subject to the consent of a specialty lending unit of Goldman Sachs, which was RTI’s secured lender. While the property owner consented to the transaction, BNA could not obtain consent from Goldman Sachs. Before the deal between BNA and RTI could close, RTI and other Ruby Tuesday affiliates filed for bankruptcy.

BNA attempted to purchase the leasehold interest through an auction conducted under the Bankruptcy Code with a $5.3 million bid, but it was unsuccessful when the debtors cancelled the auction after determining that BNA was not a “qualified bidder” under the bidding procedures order. BNA later objected to the debtor’s plan of reorganization, stating, among other things, that Goldman Sachs was interested in acquiring the leasehold interest prior to withholding their consent to the purchase and sale agreement between BNA and RTI. Ultimately, Goldman Sachs acquired the leasehold interest in the RT Lodge under the confirmed plan, which granted Goldman Sachs 100% equity in the affiliate holding the leasehold interest.

In May 2021, BNA filed suit against Goldman Sachs in Tennessee state court, alleging that Goldman Sachs improperly used its position as RTI’s secured lender to withhold its consent to the purchase and sale agreement, and prevented BNA from acquiring the leasehold interest before the bankruptcy filing. Goldman Sachs sought relief from the bankruptcy court by filing a motion that stated the Tennessee suit was an impermissible collateral attack on the confirmation order. In its motion, Goldman Sachs cited cases in which tortious interference suits that were filed against purchasers were dismissed, arguing the same protections should apply here. The bankruptcy court disagreed, pointing out that, while the plan contemplated a sale under Section 363 could occur, the debtor never conducted one. Thus, Goldman Sachs was not protected from lawsuits that arose prepetition related to the asset. This decision highlights the important protections bestowed upon a purchaser in a Section 363 sale, namely the freedom from prepetition claims that comes with purchasing assets “free and clear” under the Section 363 of the Bankruptcy Code.

Under Section 363(f), the trustee or debtor-in-possession may sell property “free and clear” of interests, liens and encumbrances if one of the following conditions is met:

  1. applicable nonbankruptcy law permits sale of such property free and clear of such interest;
  2. such entity [holding the lien or encumbrance] consents;
  3. such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
  4. such interest is in bona fide dispute; or
  5. such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.[2]

A Section 363 sale benefits both a debtor and a buyer. The debtor benefits from the often expedited pace of Section 363 sales, which usually take between 60 and 90 days from commencement to conclusion. This accelerated timeline allows debtors to quickly dispose of assets that may otherwise sit idle, depreciate, or require expensive upkeep. Section 363 sales also benefit debtors by encouraging a higher price for assets that may be potentially less marketable due to unknown or unasserted claims against the assets by allowing the debtor to sell such assets “free and clear.”

It is similarly beneficial to a purchaser to acquire an asset “free and clear” of any interests and the risk of legacy obligations. Bankruptcy courts have held that a wide range of different situations qualify as an “interest” within Section 363(f), including prepetition economic tort claims of a business competitor of the winning bidder, state-assessed unemployment tax rates, and a debtor’s workers’ compensation experience rating.[3] After the sale, if a third party attempts to enforce its lien, encumbrance, or claim against the buyer, the buyer can avail itself of the ‘shield’ of Section 363 and seek relief in the bankruptcy court that issued the sale order, as Goldman Sachs attempted to do with its motion.

However, as noted by Judge Dorsey, a Section 363 sale effectively “puts the entire world on notice, including nonparties,” while a sale or transfer pursuant to a confirmation order “does not give the world the same notice and therefore does not have the same shield.” By transferring its interest in the RT Lodge to Goldman Sachs under the confirmation order instead of conducting a Section 363 sale, Goldman Sachs took the interest subject to liens and encumbrances and, thus, was vulnerable to BNA’s lawsuit.


[1] Judge Dorsey’s opinion can be found at In re: RTI HOLDING COMPANY, LLC, et al., No. 20-12456, 2021 WL 4994414 (Bankr. D. Del. Oct. 27, 2021).

[2] 11 U.S.C. § 363(f).

[3] See Massachusetts Dep’t of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.), 484 B.R. 860 (B.A.P. 1st Cir. 2013); In re ARSN Liquidating Corp. Inc., 2017 WL 279472, at *4-6 (Bankr. D.N.H. Jan. 20, 2017); In re Christ Hospital, 502 B.R. 158, 172 (Bankr. D.N.J. 2013).

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