Section 363 Sale
A sale of property of the bankruptcy estate under 11 U.S.C. § 363, typically conducted under court supervision in Chapter 11 cases. Property is sold "free and clear" of liens, claims, and interests under § 363(f), with liens attaching to sale proceeds. Common in distressed M&A because a sale order can deliver title free of liens on a faster timetable than a plan. Often conducted through stalking-horse bidder establishing minimum bid, followed by auction process. Standard mechanism for selling distressed businesses without full Chapter 11 plan confirmation.
A Section 363 Sale is a sale of property of the bankruptcy estate under 11 U.S.C. § 363, typically conducted under court supervision in Chapter 11 cases. Property is sold "free and clear" of liens, claims, and interests under § 363(f), with liens attaching to sale proceeds. Section 363 sales are foundational to distressed M&A, they provide certainty of clean title and a quick sale process compared to plan confirmation. Proceeds are then distributed through a plan, a conversion, or a dismissal, subject to the priority limits recognized in Jevic.
Free-and-clear authority, § 363(f)
Section 363(f) permits sale free and clear of liens and interests if any of: (1) applicable nonbankruptcy law permits, sale free of interest; (2) consent of interest holder; (3) the interest is a lien and the sale price exceeds the aggregate value of all liens on the property; (4) interest is in bona fide dispute; (5) interest holder could be compelled to accept money satisfaction in legal or equitable proceeding. Consent, including consent implied from a failure to object after notice in some courts, and paragraph (3) are frequently invoked. Whether a free-and-clear order also cuts off successor-liability claims depends on whether the claim is an "interest" and on the notice given, and courts differ.
Stalking-horse process
Standard 363 sale uses stalking-horse process: (1) stalking-horse agreement, initial bidder commits to purchase at specified price subject to higher bids; provides minimum floor; (2) bid procedures motion, court approval of auction process, bidding requirements, qualified bidder criteria, break-up fee, expense reimbursement; (3) marketing period; (4) qualified bid deadline; (5) auction, competing qualified bidders; (6) sale hearing, court approval of winning bid; (7) closing. If outbid, the stalking horse usually receives a court-approved break-up fee and expense reimbursement.
"Sound business reasons" standard
Sales outside the ordinary course, including sales of substantially all assets, require a "good business reason" under In re Lionel (2d Cir. 1983). Lionel lists these non-exclusive factors: (1) proportionate value of the asset to the estate; (2) elapsed time since filing; (3) likelihood that a plan will be proposed and confirmed in the near future; (4) effect on future plans; (5) proceeds compared to any appraisals; (6) whether the proposal is a use, sale or lease; and (7) whether the asset is increasing or decreasing in value. Courts separately consider good faith and the adequacy of the sale process. Courts apply Lionel factors flexibly based on case circumstances.
Section 363(m), sale finality
Section 363(m) provides substantial finality to 363 sales: a reversal or modification on appeal of an authorization to sell does not affect the sale's validity to a good faith purchaser. This means the buyer receives substantial certainty, even if the sale order is later challenged, the buyer's title is typically protected. Sophisticated buyers insist on § 363(m) findings and "good faith" findings to maximize finality. Unless the sale is stayed pending appeal, § 363(m) protects a good-faith purchaser's title even if the sale order is reversed or modified.
Sub rosa plan concerns
363 sales of substantially all assets can constitute a "sub rosa plan", circumventing plan confirmation requirements. Czyzewski v. Jevic (2017) restricted structured dismissals that skip priority requirements. Courts scrutinize 363 sales that: (1) effectively distribute proceeds in violation of priority scheme; (2) bind creditors without plan confirmation procedures; (3) restructure debts outside plan framework. Modern practice typically uses 363 sale + subsequent plan to confirm distribution scheme, addressing sub rosa concerns.
Successor liability
Section 363 sales free and clear of "claims" provide significant protection from successor liability, including products liability, environmental, employment, and tort claims. The Chrysler courts approved broad free-and-clear treatment, but the Second Circuit's judgment was later vacated as moot, and the scope of this protection remains contested. Some claims (particularly environmental) may receive narrower treatment. Buyers in 363 sales typically negotiate broad free-and-clear language and specific findings on successor liability protection. Limitations: future claims (post-sale conduct), federal regulatory enforcement, certain employment obligations.
For Texas distressed sellers and buyers, 363 sales offer significant advantages over out-of-court alternatives. Sellers face questions about pre-filing marketing, DIP financing milestones and stalking-horse protections. Buyers weigh the limits of free-and-clear relief, compressed diligence and regulatory approvals. Creditors may object to the adequacy of the process or the use of proceeds. Courts have refused to approve sales that lacked a good business reason or an adequate market test.
Companion article: Selling Your Business