Explore the recent M&A development where a pension plan’s attempt to block a company’s business sale in bankruptcy failed. Discover how section 363(f)(3) of the Bankruptcy Code played a pivotal role in allowing the sale to proceed without the burden of the seller’s pension fund liability.
June 19, 2019
M&A Stories
Introduction:
In a recent M&A development, a pension plan’s attempt to block the sale of a company’s business in bankruptcy has been unsuccessful. This sale, conducted under section 363(f)(3) of the Bankruptcy Code, allows the business to change hands free and clear of the seller’s pension fund liability.
The Seller and the Business:
The selling company operated in the environmental and industrial services sector, offering services such as industrial cleaning, environmental remediation, and hazardous waste transport. With a history dating back to the 1970s, the company had a presence in Michigan, Ohio, Wisconsin, and Illinois.
Notably, the seller was bound by a long-standing collective agreement that mandated contributions to a multiemployer union pension fund.
Financial Challenges and Bankruptcy:
In early 2018, after over four decades in operation, the seller faced a critical need for refinancing or substantial external capital injection to sustain its business. However, securing these funds proved challenging due to the looming liability of pension fund withdrawal. Efforts to obtain financing or capital infusion were unsuccessful, leading the seller to file for bankruptcy.
The Legal Battle:
In the bankruptcy proceedings, the seller sought court approval for the sale of its business assets under section 363(f)(3) of the Bankruptcy Code. This would enable the sale to proceed without the burden of the seller’s $3.4 million pension fund claim.
The pension fund contested the sale, arguing that the seller had not yet withdrawn from the plan, and therefore, the assets could not be sold under section 363(f)(3) while the liability remained contingent.
Court’s Ruling:
The bankruptcy court, however, ruled in favor of the sale, rejecting the union fund’s objections. It held that section 363(f)(3) permits the sale of the seller’s assets free of union claims, even when they are contingent.
Closing Thoughts:
The pension fund’s attempt to challenge the buyer’s right to purchase the assets without pension liability and preserve the right to sue for the pension claim post-closing was unsuccessful. The court emphasized that section 363(f) serves the purpose of allowing purchasers to buy assets from a bankruptcy estate without the risk of future legal battles.
Case Reference:
In re: K & D Industrial Services Holding Co., Inc., et al., Chapter 11, Jointly Administered Case No. 19-43823, United States Bankruptcy Court, E.D. Michigan, Southern Division, (May 16, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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