The United States District Court for the Southern District of New York recently upheld a bankruptcy court decision that demonstrates the importance of meaningfully disclosing to a bankruptcy court and parties in interest any material modifications to an agreement for the purchase of assets in a bankruptcy.  Though the district court focused on the core contractual dispute at issue, the underlying bankruptcy court’s bench ruling shined a light on the importance of meaningful disclosure of amendments to an asset purchase agreement because the historical setting can be a factor if any dispute arises later between a debtor and a buyer.  This is the second installment in a series describing certain risks facing buyers acquiring assets that are part of a bankruptcy estate.  In part I of our series, we discussed a recent Seventh Circuit decision where a buyer of assets in a bankruptcy had its “good faith” purchaser designation under section 363(m) of the Bankruptcy Code reversed 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 affirmed Bankruptcy Judge Robert D. Drain’s determination that a purchaser had to return approximately $6.3 million in cash formerly held by the non-debtor subsidiaries of a debtor in bankruptcy.  In a case where the purchase agreement at issue was modified 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 agreement that would be inconsistent with how the agreement’s terms were presented to the bankruptcy court at the time it approved the transaction.  The bankruptcy court’s decision should highlight the importance of seeking bankruptcy court approval with respect to any material modifications to a purchase agreement for the purchase of assets in a bankruptcy under section 363 of the Bankruptcy Code.

Significance of Purchasing Assets Under Section 363 of the Bankruptcy Code

Section 363 of the Bankruptcy Code allows a trustee or debtor-in-possession the opportunity to sell a debtor’s assets outside the ordinary course of business free of all liens, claims or interests after notice, a hearing and court approval.  Purchasing assets through a bankruptcy sale under section 363 is a powerful tool that can shield a buyer from claims such as fraudulent transfer or successor liability claims.


More than two years after the sale of certain assets through a section 363 sale closed, a dispute arose between the debtor and the 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’s docket prior to the conclusion of the sale hearing, however, its substance was not meaningfully presented to the bankruptcy court or parties in interest.

Under the original version of the asset purchase agreement, cash and cash equivalents were designated as excluded assets and the buyer would acquire the assets of certain of the debtor’s foreign subsidiaries by means of an asset acquisition.  Under the amendment, the buyer was permitted to elect to either: (i) purchase the assets of the foreign subsidiaries or (ii) purchase all of the equity of the foreign subsidiaries.  The buyer elected to purchase the equity.  At the time of the sale, the debtor did not believe that the foreign subsidiaries held significant cash.  Later, the debtor discovered that the foreign subsidiaries had $6.3 million in cash and demanded that the buyer return those funds to the debtor because cash was an excluded asset under the asset purchase agreement.  The buyer refused, arguing that by electing to purchase the foreign subsidiaries’ equity, the buyer had effectively acquired all of the assets and all the liabilities of these foreign subsidiaries, including the cash in the relevant bank accounts at the time of closing.  Ultimately agreeing with the debtor’s interpretation that cash was an excluded asset, the bankruptcy court held that the debtor was entitled to the return of the cash and the district court affirmed.

Interestingly, in interpreting the language in dispute, the bankruptcy court observed that the buyer’s interpretation represented a material change to how the terms of the asset purchase agreement were originally presented to the bankruptcy court and other parties in interest and determined that this was a significant factor that warranted construing any ambiguity against the buyer.  Moreover, the bankruptcy court pointed out that even if the buyer’s interpretation of the language in the first amendment were correct, the modifications made would have constituted a material change that would have required the review and approval of the bankruptcy court, which did not occur in its view.

Key Takeaways

  • The bankruptcy court’s ruling is one that should serve as a reminder to purchasers of assets in bankruptcy that a buyer is potentially at risk if its interpretation of a material provision of a purchase agreement or any modifications thereof is inconsistent with how the agreement’s terms were originally presented to the bankruptcy court and other parties in interest.  A buyer, therefore, should take a keen interest in how such an agreement’s terms are presented to the court and other parties in interest and ensure such disclosure is consistent with the buyer’s interpretation.  In addition, if a purchase agreement is subsequently amended or modified in a way that arguably is not consistent with how the agreement was originally presented to the bankruptcy court (even if modified prior to court’s approval at the sale hearing and filed on the bankruptcy docket), the buyer should ensure that such amendment or modification is disclosed to the court and other parties in interest in a way that is meaningful and proper. 
  • Similarly, to the extent a purchase agreement previously approved by the court is materially amended or modified, a buyer should strongly consider ensuring that such amendment or modification be properly disclosed to the court and other parties in interest and, if necessary, submitted for court approval – otherwise the buyer is taking a risk that the debtor or another party in interest may challenge such an amendment or modification and even successfully argue that it is not effective with respect to the debtor if court approval was not obtained.  As the bankruptcy court noted in its bench ruling, deals in bankruptcy cases are not two party transactions, which makes disclosure so critical.

Partner, New York
Email: Frank Grese


Associate, Miami
Email: Reginald Sainvil