Distress & Turnarounds

Buying Assets Out of Bankruptcy

A court order is a better indemnity than any seller can write. Here is how a section 363 sale is actually run, what the order does and does not protect you from, and where sophisticated buyers still get hurt.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: Whether to buy through a bankruptcy sale rather than a private transaction, and how to position so the process works for you rather than against you.

What this topic is

A sale of a debtor's assets under section 363 of the Bankruptcy Code, approved by the court after a marketed process, delivering the assets free and clear of liens, claims, encumbrances, and interests, which attach to the sale proceeds instead. It is the dominant mechanism for distressed M&A in the United States.

Why it matters

In a private deal you rely on the seller's representations, an escrow, and eventually a lawsuit. In a 363 sale you rely on a federal court order that binds the world, obtained through a process designed to be unimpeachable. The trade is speed, price competition, and a very different set of risks, all of which are knowable in advance.

Who should learn it

Buyers of distressed businesses, credit funds pursuing loan-to-own, corporate development teams evaluating a bankrupt competitor, and advisors running or defending against a sale process.

What you will understand

  • The full sale timeline: bid procedures, stalking horse, auction, sale hearing, closing
  • What "free and clear" covers under the five statutory conditions, and where it fails
  • Credit bidding, bid protections, and how a stalking horse actually gets paid
  • The traps: cure costs, sub rosa objections, transfer taxes, and non-assignable contracts

Prerequisites

Common misconception

"Buying out of bankruptcy means buying it clean." Mostly, and the exceptions are exactly where money is lost. The sale order will strip liens and, in most courts, most successor-liability claims. It will not strip the cure costs on every contract you want to assume; it will not force a counterparty to accept assignment of a contract that nonbankruptcy law makes non-assignable; it will not exempt you from state transfer taxes in a 363 sale; and its protection against certain environmental and statutory obligations is far weaker than the sale order's language implies.