Bankrupting Bankruptcy: Circumventing Chapter 11 Protections Through Manipulation of the Business Justification Standard in § 363 Asset Sales, and a Refined Standard to Safeguard Against Abuse

Authors

Kimon Korres

Subject Area

Bankruptcy Law; Corporate and Enterprise Law; Labor and Employment Law; Law: Government Contracts; Law: Tax Law

Abstract

Considering current declining economic conditions, the massive amounts of wealth at stake, and the modern prevalence of § 363 sales in large-scale corporate bankruptcy proceedings, it is prudent to ensure that § 363(b) provides a competent and just medium to protect the diverse interests of all relevant parties and society as a whole. While § 363 sales, on paper, appear to be the ideal way to maximize value for secured creditors, preserve the going concerns of businesses, and keep workers on the job, there is a well-founded fear that quick asset sales run the risk of circumventing the Chapter 11 process. In re Chrysler LLC highlights the concerns of courts and academics that § 363 fails to adequately protect the interests of companies’ smaller debt and equity holders and ignores some of the fundamental bankruptcy principles and protections.

Part II of this Note provides the basic framework of the Chrysler bankruptcy agreement for the purposes of analyzing § 363 and the business justification standard. Part III details the development of § 363(b) and three of the primary dangers that exist with § 363(b) asset sales under business justification analysis. Part III then uses the In re Chrysler LLC case to highlight the issues in practice. The first issue is § 363(b) sales’ vulnerability to construction as “sub rosa” sales, which serve the same purpose of reorganizations but avoid Chapter 11 protection requirements. The second issue is § 363(b) sales’ potential to allow powerful creditors too much influence and control, thereby subordinating and possibly defeating the protected interests of smaller creditors. The third issue is § 363 sales’exceedingly low return values for the assets sold off in spite of their intended purpose of maximizing decreasing values. Part IV addresses the current standard for approving § 363(b) sales, the business justification rule, and how the rule wrongly facilitates the approval of dubious asset sales. Part V discusses academic theories for reform of the current business judgment standard as well as its implementation in other areas of the law. Lastly, Part VI synthesizes the differing approaches to the business justification standard and offers a refined framework for assessing § 363 asset sales.

Recommended Citation

Kimon Korres, Bankrupting Bankruptcy: Circumventing Chapter 11 Protections Through Manipulation of the Business Justification Standard in § 363 Asset Sales, and a Refined Standard to Safeguard Against Abuse, 63 Fla. L. Rev. 959 (2011).
Available at: https://scholarship.law.ufl.edu/flr/vol63/iss4/4