In In re Norrenberns Foods, Case No. 21-30825, (Bankr. S.D. Ill. July 8, 2022), the U.S. Bankruptcy Court for the Southern District of Illinois had occasion to rule on a creditor’s objection to the sale of a debtor’s assets. The debtor had proposed that, under Section 363(f) of the Bankruptcy Code, the sale be free and clear of any third-party interest in the assets. The creditor, a multi-employer pension fund, held successor liability claims against the debtor and asserted that those claims could not be extinguished through a sale of assets under Section 363. After a thorough analysis of the claims asserted by debtor and creditor, the bankruptcy court overruled the creditor’s objections and allowed the sale to be consummated.

Background

The debtor in this case, Norrenberns Foods, Inc., operated a group of grocery stores in southern Illinois. The debtor became increasingly unable to compete with the large corporate grocery stores moving into the area, and over time was ultimately forced to close all of its stores but one, known as “Tom’s Supermarket.” While the debtor operated this group of grocery stores, it was party to certain collective bargaining agreements administered by the United Food and Commercial Workers Unions and Employers Midwest Pension Fund. The fund is a multiemployer pension fund that provides retirement, disability and death benefits to retail food employees affiliated with certain unions, including the unions then representing workers at the debtor’s stores. As these stores began closing, their cumulative union pension withdrawal liabilities were passed through to the debtor’s remaining stores, until only Tom’s Supermarket remained.

In 2019, the debtor sought a buyer for Tom’s Supermarket. At this point, the debtor owed secured debt obligations to its bank lender, and was solely responsible for the withdrawal liabilities due and owing to the fund. Unable to service its debt and pay the union liabilities, the debtor sought bankruptcy protection under Subchapter V of the Bankruptcy Code.

The debtor filed its bankruptcy petition on Dec. 7, 2021. Thereafter, the fund filed an unsecured proof of claim in the amount of $4,774,800.54, based largely on the unpaid prepetition withdrawal liabilities that had amassed as the debtor began closing its stores. In April 2022, the debtor filed a motion seeking the bankruptcy court’s approval of the sale of the debtor’s assets. The sale motion in essence picked up where the debtor had left off in prepetition sale negotiations with Norrenberns Properties LLC and Betty Ann Market Inc., which entities were formed for the purpose of acquiring the debtor’s assets. The debtor sought to sell substantially all of its assets under Section 363(f) of the Bankruptcy Code free and clear of any “interest” in such assets, and in particular any and all claims related to collective bargaining and other labor agreements. In fact, the proposed purchaser testified that he would walk away from the sale unless the fund’s successor liability claims were extinguished in connection therewith.

Initially, the sale motion drew objections from: the debtor’s secured lender; the court-appointed Subchapter V trustee; and the fund. The debtor was able to reach a deal with its lender, and both the lender and the trustee withdrew their respective objections, leaving only the fund contesting the sale. The fund objected to the proposed sale on the grounds that: the bankruptcy court lacked jurisdiction to enjoin prosecution of the fund’s successor liability claims; and a sale under Section 363 of the Bankruptcy Code could not extinguish such claims.

Discussion

The bankruptcy court gave short shrift to the fund’s jurisdictional argument, finding that the proceeding “arose under” the Bankruptcy Code and was a “core proceeding.” Under the Bankruptcy Code, district courts have original jurisdiction over all civil proceedings “arising under” the Bankruptcy Code, and may refer that jurisdiction to the bankruptcy courts, including in “all core proceedings arising under the Code, or arising in a case under the Code.” As a result, the court had no difficulty concluding that the authority to rule on this issue was well within its jurisdiction.

The fund’s remaining argument was that Section 363(f) of the Bankruptcy Code did not permit the debtor to sell its assets free and clear of the fund’s successor liability claims. The fund reasoned that such claims were not an “interest in property” and could not consequently be extinguished by a bankruptcy court’s “free and clear” sale order.

Section 363(f) provides that a trustee or debtor-in-possession may sell estate property “free and clear of any interest in such property” if at least one of five enumerated conditions is met. One such condition is that “such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” The bankruptcy court agreed with the debtor’s contention that the fund’s claim could be satisfied through a payment of money, noting that the fund had filed a proof of claim in the bankruptcy case that “indicated the monetary value” of the fund’s claims.

The bankruptcy court also sided with the debtor in the parties’ dispute over the scope of the term “interest in property” within the meaning of Section 363(f). The bankruptcy court first noted that the term “interest” is not defined under the Bankruptcy Code. However, pertinent case law and commentary indicates a trend in favor of a broad definition of “interest” that encompasses other obligations flowing from the ownership in property. The bankruptcy court noted that other courts have interpreted “interests” broadly to include both possessory interests, employment-related claims and withdrawal liabilities.

The bankruptcy court compared the case at bar to the case of In re Leckie Smokeless Coal, 99 F.3d 573 (4th Cir. 1996). In Leckie, the debtor sought to sell assets to a purchaser who, as successor in interest, would not be liable for the debtor’s future premium payment obligations to certain retirement benefit plans. On appeal from the order approving the sale, the benefit plan argued that the bankruptcy court could not extinguish its successor liability claims because such claims were not “interests in property” within the meaning of Section 363(f). The U.S. Court of Appeals for the Fourth Circuit rejected the benefit plan’s argument and held that Section 363(f) permitted the bankruptcy court to extinguish all successor liability claims against purchasers by entering an order transferring estate assets free and clear of such claims.

Quoting from the Leckie opinion, the court acknowledged that the term “interest in property” might raise a question about whether a multiemployer pension fund’s successor liability claim could be deemed to constitute such an interest, but agreed with the Leckie court that the term should be interpreted in a broad sense:

While the plain meaning of the phrase ‘interest in such property’ suggests that not all general rights to payment are encompassed by the statute, Congress did not expressly indicate that, by employing such language, it intended to limit the scope of Section 363(f) to in rem interests, strictly defined, and we decline to adopt such a restricted reading of the statute here.

Following the rationale of Leckie and other comparable authority, the bankruptcy court concluded that the fund’s claim constituted an “interest in property,” in the sense that such claim only arose from the very grocery assets the debtor was proposing to sell. While not per se an in rem interest, the fund’s claim was an interest in property within the meaning of Section 363(f) in that the claim arose from the property being sold: the debtor operated a grocery store, which led the debtor to hire employees, which in turn ultimately gave rise to the withdrawal liability.

The fund argued that, under applicable law, it was the proposed purchaser’s acquisition of the assets with the intent to operate a grocery store that gave rise to the fund’s successor liability claim. Had the purchaser, for example, bought the assets and engaged in an activity unrelated to the grocery business, it could escape the fund’s withdrawal liability claim. However, the court reasoned that a use of the assets other than in the operation of a grocery store would minimize the value of the assets to the detriment of the debtor’s lender and the debtor’s estate. As a result, the bankruptcy court found very little appeal in the fund’s argument, noting that in response to a question from debtor’s counsel regarding whether he could operate a sporting goods store on the premises, the proposed purchaser replied, “It’s hard to play baseball with peanut butter jars.” Accordingly, the bankruptcy court found that the proposed sale free and clear of the fund’s claims maximized value, was in the best interests of the estate and creditors, and provided the best chance for maintaining both operations and jobs for the debtor’s employees.

Based on the foregoing, the bankruptcy court approved the proposed sale of the debtor’s assets free and clear of the fund’s claims.

Conclusion

The Norrenberns Foods court followed the majority trend by broadly interpreting the term “interest in property” in order to achieve maximum value for the debtor’s creditors. In future cases, creditors holding claims in danger of being extinguished by a proposed sale order should look to whether courts have deemed similar claims to fall within the broad scope of “obligations that may flow from ownership in property.” In following a growing number of bankruptcy courts, the Norrenberns Foods court found that the equities of the case supported a “free and clear” sale, where to hold otherwise would have effectively wiped out value for the debtor’s estate and creditors.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights.

Malcolm M. Bates, an associate with the firm, practices in the area of business reorganization and financial restructuring.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.