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Buyer Beware – Free and Clear Isn’t Perfectly Clear

A recent decision by the United States District Court for the District of Delaware brings into question whether a “free and clear” sale order under Section 363(f) of the Bankruptcy Code really means what its name suggests.  In the case of United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied Industrial and Service Workers International Union, AFL-CIO, CLC v. Braeburn Alloy Steel LLC, Civ. No. 22-1563 (GBW) (D. Del. Sept. 18, 2023), Braeburn Alloy Steel LLC purchased substantially all the assets of CCX Inc. free and clear of all claims and rights including successor liability claims.  CCX’s workforce was unionized under a collective bargaining agreement with the United Steelworkers Union.  Braeburn did not assume the collective bargaining agreement as part of the sale, and the debtor later rejected that agreement.

Following the sale, Braeburn re-hired the debtor’s employees under new terms and resumed the debtor’s business.  Despite consenting to the “free and clear” sale, the union requested that Braeburn recognize it as the representative of Braeburn’s new employees.  When Braeburn refused, the union filed a complaint with the National Labor Relations Board arguing that Braeburn was the “perfectly clear” successor to the debtor which, under the National Labor Relations Act, compels Braeburn to bargain with the union.

Braeburn went to the bankruptcy court to enforce its “free and clear” order. Faced with competing statutory schemes, the bankruptcy court ruled in favor of Braeburn and held that the assets were sold free and clear of the collective bargaining agreement. Or in other words, Braeburn was free of the union. The union appealed to the Delaware District Court.

The Delaware District Court ruled in favor of the union and held that the union’s claims resulted from post-sale actions, rather than the sale itself.  As a result, Braeburn’s re-hiring of debtor’s employees to operate the same business made it “perfectly clear” that Braeburn was a successor employer to the debtor.  Therefore, the claims arose from the post-sale hiring of employees and did not otherwise implicate the “free and clear” sale order. In reaching its decision, the Delaware District Court held that collective bargaining obligations are not an “interest in property” that can be extinguished under Section 363(f) of the Bankruptcy Code. The court viewed the alternative as a “bankruptcy loophole” that would encourage the strategic use of the bankruptcy process to avoid union obligations.  

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