A new decision from a New York federal district court highlights certain risks faced by persons buying assets out of bankruptcy. Buyers may be subject to successor liability based on the seller's conduct before the bankruptcy if no injury was caused until after the bankruptcy sale. Buyers of bankruptcy assets will need to do additional diligence to ensure that they are not unwittingly acquiring hidden liabilities.

It has long been understood by buyers of assets of distressed companies that once a sale is authorized pursuant to Section 363 of the Bankruptcy Code, the buyer is absolved of any liabilities which may have encumbered the assets of the previous owner, including causes of actions against them. However, a recent decision from the influential United States District Court for the Southern District of New York saddles buyers with the burden of unknown potential future claims.

The United States District Court for the Southern District of New York (the "District Court") on March 29, 2012 held that a bankruptcy court sale order issued under Section 363 of the Bankruptcy Code ("Section 363") could not extinguish state law successor liability personal injury claims brought against the purchaser by third parties injured after the close of the bankruptcy case, but whose injuries arose out of conduct of the debtor prior to its bankruptcy. Morgan Olson LLC v. Frederico (In re Grumman Olson Industries, Inc.), 2012 WL 1038672 (S.D.N.Y. 2012).

Introduction

On March 13, 2012, Judge Richard J.

In a lawsuit filed in the U.S. Bankruptcy Court for the Southern District of New York against Koch Industries, Inc., Madoff trustee Irving Picard is seeking $21.5 million, representing a return of the profits Koch Industries earned through Madoff's Ponzi scheme.  Specifically, the trustee alleges that a subsidiary of Koch Industries funneled a substantial amount of its clients' funds into Bernard L.

Bankruptcy Courts may be courts of equity, but a recent decision by the United States District Court for the Southern District of New York holds that even equity can’t trump the plain words of a settlement agreement.

LEHMAN BANKRUPTCY

In re: Lehman Brothers Holdings, Inc., et al., No. 08-13555

On March 6, 2012, Lehman Brothers Holdings Inc. and its affiliated debtors announced that their Modified Third Amended Joint Chapter 11 Plan, which had been confirmed by the United States Bankruptcy Court for the Southern District of New York on December 6, 2011, had become effective. Distributions under the Plan will begin on April 17, 2012.

A New York trial court recently held that affiliates and subsidiaries of a bankrupt Mexican holding company were liable as guarantors on indentures issued by the corporation, despite ongoing Mexican bankruptcy proceedings that could potentially discharge their liability under Mexican law. Wilmington Trust, National Assoc. v. Vitro Automotriz, S.A. De C.V., et al., No. 652303/11 (N.Y. Sup. Ct. 2011).

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