Bankruptcy Sales: A “Free and Clear” Sale Does Not Necessarily Mean That the Buyer Goes Scot-Free

In re Gawker Media LLC, 581 B.R. 754 (Bankr. S.D.N.Y. 2017) –

A purchaser of substantially all of the debtors’ assets sought to enforce the “free and clear” language in the bankruptcy court sales order by asking the bankruptcy court to require third parties to dismiss their state court claims against the purchaser.

The debtors were an online publishing company with several media brands and related websites. Prebankruptcy a number of lawsuits were brought against the debtors based on content they produced and posted on the websites.

Within a couple of days after filing bankruptcy, the debtors filed a motion to sell substantially all of their assets “free and clear” of all liens, claims and encumbrances. The bankruptcy court issued a sale order approving a sale to the winning bidder that included several typical provisions intended to protect the purchaser from liability for pre-sale claims. For example:

Except with respect to the Assumed Liabilities, all persons and entities … holding Adverse Interests arising under or out of, in connection with, or in any way relating to, the Debtors, the Acquired Assets, the ownership, sale or operation of the Acquired Assets and the business prior to the closing or the transfer of Acquired Assets to Buyer … are hereby forever barred … from asserting such Adverse Interests… against Buyer, its property or the Acquired Assets.

Similarly:

Effective upon the Closing, all persons and entities are forever prohibited and enjoined from commencing or continuing … any judicial … proceeding against Buyer, or its assets (including the Acquired Assets), or its successors and assigns, with respect to any (i) Adverse Interests… or (ii) Successor or Transferee Liability including the following actions with respect to clauses (i) and (ii): (a) commencing or continuing any action or other proceeding pending or threatened; … (e) commencing or continuing any action in any manner or place, that does not comply with, or is inconsistent with, the provisions of this Order or other orders of this Court, or the agreements or actions contemplated or taken in respect hereof … .

The court retained jurisdiction to enforce the sale order and to resolve any disputes relating to the sale. The court specifically retained jurisdiction to “protect Buyer and its assets, including the Acquired Assets, against any Adverse Interests (other than Permitted Liens and Assumed Liabilities) and Successor or Transferee Liability.”

Prior to the sale closing an article was posted on one of the websites regarding the sports-betting industry, including the activities of certain entities. These entities (plaintiffs) sent a letter to the debtors demanding removal of false statements, and asking for publication of a correction, apology and retraction. In response, the debtors added a rider to their bankruptcy schedules identifying a plaintiff as holding a contingent, unliquidated, disputed unsecured “threatened litigation claim.”

On the day the sale order was signed, the plaintiffs also sent a letter to the purchaser demanding that the article be removed from the website after the closing. The plaintiffs did not dispute that they had notice of the sale and the sale order and did not object.

Almost a year later the plaintiffs sued the purchaser in state court based on publication of the article, asserting defamation, intentional interference with prospective economic advantage, and tortious interference with contractual relations. The plaintiffs contended that their claims arose out of publication of false and defamatory statements on a website owned and operated by the purchaser. The complaint did not mention the bankruptcy sale order and the only post-sale conduct identified was the failure to remove the article from the website.

The purchaser filed a motion with the bankruptcy court asserting that the complaint was based on pre-sale conduct and was barred by the sale order. The plaintiffs responded that either the court did not have jurisdiction or should abstain and that the state court action was based entirely on post-sale conduct – namely the failure to remove the article from the website.

As a preliminary matter, the court determined that bankruptcy courts can interpret and enforce their own orders, including post-confirmation disputes between creditors and purchasers of debtor assets that implicate a sale order. The court noted that it retained jurisdiction and that the jurisdiction was core because the sale itself was a core proceeding.

As for abstention, mandatory abstention was not applicable in connection with a core proceeding, and the court declined to exercise permissive abstention. The court noted that it was not considering the sufficiency of the defamation or other claims. Rather the court had been asked to determine whether the claims as pleaded were barred by the sale order, and the court was in the best position to interpret its own orders.

As for the merits, the court noted that the plaintiffs implicitly conceded that the sale order barred any claims based on pre-sale conduct. Their argument that they only sought relief for post-sale conduct was described as disingenuous. The complaint itself claimed that the action “arises out of the publication of numerous false and defamatory statements,” and most of the allegation in the complaint discussed the publication.

Under applicable state law “the publication of a defamatory statement in a single issue of a newspaper, or a single issue of the magazine, although such publication consists of thousands of copies widely distributed, is in legal effect, one publication which gives rise to one cause of action and… the applicable Statute of Limitation runs from the date of that publication.” The same rule applied to Internet postings. To avoid this rule, the plaintiff must allege that the defendant republished the material, which does not occur “merely by maintaining the information on the website.” So, the only publication of the article identified in the complaint was the initial pre-sale posting.

Accordingly, the court enjoined the plaintiffs from pursuing any claims in state court arising from the pre-sale publication of the article on the Internet. However, the court declined to rule that the complaint did not allege a legally sufficient republication claim (as requested by the debtors). Rather, the court decided that evaluation of the legal sufficiency of post-sale claims was best left to the state court.

This case is a reminder that although a bankruptcy sale can be a very useful tool for isolating a buyer from pre-sale liabilities, that protection is not absolute.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
This entry was posted in Bankruptcy Sales and tagged . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s