Concerned about the broad-reaching and complex forms of Section 363 asset orders being submitted for approval, this past week the U.S. Bankruptcy Court for the Northern District of California issued a set of "Guidelines re Sale Orders" as well as a form of "Model Sale Order." (Each document is available by clicking on its respective title in the prior sentence.) The Bankruptcy Court’s opening discussion of the Guidelines expresses its reasons for issuing them now:

The bankruptcy judges of the Northern District of California have become increasingly concerned about the orders they are being asked to sign on motions to approve sales of property of the estate under section 363(b) and 363(f).  Many of the proposed orders submitted:  (a) seek relief beyond the scope of the motion before the court; (b) seek to affect parties not before the court; (c) seek advisory rulings where there is no case or controversy; (d) include findings of fact that should be stated orally or in a separate memorandum; and (e) are so wordy and complex that the court has difficulty determining their meaning. 

The crafting of orders is a judicial function. Accordingly, the judges have approved a model order for motions seeking authority to sell property of the estate and motions to sell such property free and clear of liens.  The following guidelines are intended to explain how to use the model order, and what provisions the court will and will not generally approve as additions to the model order or where the parties draft their own order.  These guidelines do not apply to any separate orders approving bidding procedures, break-up fees or other matters related to the sale of property.  In addition, these guidelines do not apply in Chapter 13 cases.

The model order is not mandatory, but the judges will use the model order on their own motion where parties vary from these guidelines without sufficient cause and explanation. 

In the event that a party submits a sale order that deviates from these guidelines, the party shall, unless otherwise instructed by the court, submit a declaration to the court in which the party identifies the provisions that vary from these guidelines and sets forth the justification therefore.

(Emphasis in original.) Many bankruptcy lawyers who practice regularly in the Northern District of California, with divisions in San Francisco, San Jose, Oakland, and Santa Rosa (and courthouses in Eureka and Salinas), have already understood the prevailing view of the bankruptcy judges on these issues. However, the new guidelines help clarify matters for everyone facing these issues in the Northern District of California. 

The Section 363 Sale. As a reminder, a bankruptcy asset sale often happens in the first few weeks or months of a Chapter 11 case, rather than as part of a plan of reorganization. Frequently this will involve a sale of all or substantially all of a debtor’s business as a going concern. The sale is generally referred to as a "Section 363 sale" because Section 363 is the key Bankruptcy Code section that governs a debtor’s sale of assets in bankruptcy. The debtor must seek bankruptcy court approval of a sale that is not in the ordinary course of business and of any effort to transfer executory contracts, intellectual property licenses, or commercial real estate leases to the buyer.

The Sale Order. For a buyer of assets in a Section 363 bankruptcy sale, a big question is what type of factual findings and legal rulings will the bankruptcy court include — or refuse to include — in the order approving the sale. Buyers typically desire that the sale be ordered "free and clear" of all liens, claims, interests, and encumbrances, rather than only certain ones specifically identified in the notice of the sale motion. They also prefer to have findings added to the order on issues such as fair value paid and no successor liability, and often ask for an injunction against actions affecting the buyer that are inconsistent with the sale order’s findings and provisions.

Big Differences From District To District. As bankruptcy lawyers know, courts in different districts around the country have taken surprisingly divergent views on what is, and is not, appropriate in Section 363 sale orders.

  • It’s hard not to notice the striking differences between the new Model Sale Order from the Northern District of California and examples of sale orders entered over the past few years by bankruptcy courts in the District of Delaware (example here), the Southern District of New York (example here), and the Northern District of Illinois (example here), three courts where a number of large Chapter 11 cases have been filed. 
  • The new Guidelines issued by the Northern District of California appear to be in reaction to the submission of sale orders more in keeping with the accepted practice in Delaware and New York than in Northern California.

Although one wonders if the Northern District of California’s approach will spread to other courts, the more likely scenario is that each district will continue to follow its own path.