United States: Buyer beware! Not all changes to an asset purchase agreement are equal; Any Material Changes Must Be Meaningfully Disclosed to the Bankruptcy Court and Interested Parties


The United States District Court for the Southern District of New York recently upheld a bankruptcy court ruling that demonstrates the importance of meaningfully disclosing to a bankruptcy court and interested parties any material modification of an agreement. purchase of assets in the event of bankruptcy. Although the district court focused on the main contractual dispute at issue, the underlying bankruptcy court decision highlighted the importance of meaningful disclosure of changes to an asset purchase agreement , as the historical context may be a factor if a dispute arises later between a debtor and a buyer. This is the second installment in a series outlining some of the risks buyers face when acquiring assets that are part of a bankruptcy. In Part I of our series, we discussed a recent Seventh Circuit decision in which a buyer of assets in a bankruptcy had its designation as a “good faith” buyer under Section 363 (m ) of the Bankruptcy Code struck down for failing to disclose to the bankruptcy court that there was a known third party with a competing interest in the purchased assets that was not properly noticed.

On May 6, 2022, Judge Vincent L. Briccetti of the Southern District of New York upheld Bankruptcy Judge Robert D. Drain’s ruling that a purchaser must return approximately $6.3 million in cash formerly held by the unaffiliated subsidiaries. debtors of a bankrupt debtor. . In a case where the purchase agreement at issue was amended and a dispute over whether certain funds were excluded assets or not arose years later, the purchaser was not entitled to rely on an interpretation of the contract that would be inconsistent with the way the terms of the contract were presented to the bankruptcy court at the time it approved the transaction. The bankruptcy court ruling is expected to underscore the importance of seeking bankruptcy court approval for any material modification of a purchase agreement for the purchase of assets in a bankruptcy under section 363 of the Bankruptcy Code.

Importance of asset purchase under Section 363 of the Bankruptcy Code

Section 363 of the Bankruptcy Code permits a trustee or debtor in possession to sell a debtor’s property outside the ordinary course of business, free of all liens, claims or interests, after notice, hearing and court approval . Purchasing assets through a Section 363 bankruptcy sale is a powerful tool that can protect a buyer against claims such as fraudulent conveyance or successor liability claims.


More than two years after the sale of certain assets in a completed Section 363 sale, a dispute arose between debtor and buyer regarding cash held in the accounts of certain non-debtor foreign subsidiaries . During the sale hearing, the parties finalized the terms of an amendment to the original version of the asset purchase agreement previously filed with the bankruptcy court. The amendment was filed on the bankruptcy court docket prior to the conclusion of the sale hearing, however, its substance has not been presented to the bankruptcy court or interested parties in any meaningful way.

Under the original version of the asset purchase agreement, cash and cash equivalents were designated as excluded assets and the purchaser acquired the assets of certain of the debtor’s foreign subsidiaries through an asset acquisition . Under the amendment, the buyer was allowed to choose either: (i) to buy the assets of the foreign subsidiaries, or (ii) to buy all the shares of the foreign subsidiaries. The buyer has elected to buy the shares. At the time of the sale, the debtor did not believe that the foreign subsidiaries held significant cash. The debtor later discovered that the foreign subsidiaries had $6.3 million in cash and demanded that the buyer return those funds to the debtor, as the cash was an excluded asset under the purchase agreement. assets. The buyer refused, arguing that by choosing to buy the equity of the foreign subsidiaries, the buyer had effectively acquired all of the assets and liabilities of these foreign subsidiaries, including the cash in the relevant bank accounts at the time of the fence. Ultimately, accepting the debtor’s interpretation that the cash was an excluded asset, the bankruptcy court held that the debtor was entitled to the return of the cash and the district court upheld.

Interestingly, in interpreting the wording at issue, the bankruptcy court observed that the buyer’s interpretation represented a material change in how the terms of the asset purchase agreement were originally presented to the bankruptcy court and other interested parties and determined that this was an important factor. justifying the interpretation of any ambiguity against the buyer. Further, the bankruptcy court pointed out that even if the buyer’s interpretation of the wording of the first amendment was correct, the changes made would have constituted a material change that would have required the review and approval of the bankruptcy court. , which did not happen in his view.

Key points to remember

  • The bankruptcy court ruling should remind purchasers of bankrupt assets that a purchaser is potentially at risk if its interpretation of a material provision of a purchase agreement or any modification thereof is inconsistent with the how the terms of the contract were originally presented. before the bankruptcy court and other interested parties. A buyer should therefore pay close attention to how the terms of such an agreement are presented to the court and other interested parties and ensure that such disclosure is consistent with the buyer’s interpretation. Additionally, if a purchase contract is subsequently amended or modified in a way that is arguably not consistent with the manner in which the contract was originally presented to the bankruptcy court (even if it was modified before court approval at the sale hearing and filed in the bankruptcy register), the buyer must ensure that such amendment or modification is disclosed to the court and other interested parties in a meaningful and appropriate manner. .
  • Similarly, to the extent that a previously court-approved purchase agreement is materially amended or modified, a buyer should seriously consider ensuring that such amendment or modification is properly disclosed to the court and other interested parties and, if necessary, subject to court approval. – otherwise the buyer takes the risk that the debtor or another interested party may challenge such modification or modification and even successfully argue that it is not effective against the debtor if the court’s approval is n was not obtained. As the bankruptcy court noted in its bench decision, transactions in bankruptcy cases are not transactions between two parties, which makes disclosure so essential.

The content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “lawyer advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar results. For more information, please visit: www.bakermckenzie.com/en/disclaimers.

Comments are closed.