Learn about a recent bankruptcy case involving a struggling popsicle business and the legal challenges faced by the buyer. Discover how the court’s ruling highlights the importance of using Bankruptcy Code Section 363 to acquire distressed businesses and avoid successor liability. Case reference: In Re Steel City Pops Holding, LLC.
May 27, 2020
Introduction:
When purchasing a struggling business, there’s a higher chance of facing legal challenges, particularly regarding claims from the previous owner’s creditors after the deal is done. This risk can be significantly reduced if the buyer acquires the business assets through a Bankruptcy Code 363 sale.
The Background:
The seller was a popsicle business that operated across Alabama, Texas, and Kentucky. A poorly executed expansion plan, combined with slow seasonal sales, led the business to financial trouble. With debts nearing $7 million, the seller filed for chapter 11 bankruptcy.
The Sale:
The seller’s aim was to sell its assets as ongoing operations to recover. The business was sold under Bankruptcy Code Section 363 on February 18, 2020, after court approval. Despite objections from certain creditors holding claims totaling around $650,000, the sale proceeded and closed four days later.
Legal Challenge:
Following the sale’s closure, the creditors sought to reverse the court’s approval of the sale, arguing against the exemption of successor liability in the sale order. However, the court rejected this challenge, emphasizing the importance of finality in bankruptcy sales.
The Court’s Ruling:
The court underlined that bankruptcy sales should rarely be overturned, especially when the business was heavily indebted and facing challenges due to its seasonal product. The sale might not have been the best deal, but it was the only option. The court explained that bankruptcy laws aim to ensure the highest sale price by preventing potential disputes over property claims.
Takeaway:
This case underscores the significance of using Bankruptcy Code Section 363 to acquire a distressed business, as it safeguards against successor liability. The court-approved sales orders typically include clauses freeing the buyer from claims related to the business’s previous owners. This practice, termed “commonplace” by the court, protects the buyer from assuming various liabilities associated with the previous owner’s financial situation.
Case Reference:
This case is referred to as In Re Steel City Pops Holding, LLC, Case No. 19-04687-DSC11 (Jointly Administered), United States Bankruptcy Court, N.D. Alabama, Southern Division, (May 20, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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