17 Stan. J.L. Bus. & Fin. 258 (2011-2012)
Rethinking 363 Sales

handle is hein.journals/stabf17 and id is 262 raw text is: Rethinking 363 Sales
Jacob A. Kling
Jacob A. Kling is a law clerk to the Honorable Dennis Jacobs, Chief Judge, United States Court of Appeals for the Se-
cond Circuit. Yale Law School, J.D. 2010; Brown University, A.B. 2007. 1 thank the staff of the Stanford Journal of
Law, Business & Finance for its excellent editorial assistance. I am also grateful to Alan Schwartz, Ben Klein, and
Alexandra Briggs for their feedback and support.
Rather than go through the traditional Chapter 11 reorganization process, insolvent compa-
nies increasingly seek to sell all or substantially all of their assets under the authority of sec-
tion 363 of the Bankruptcy Code. Such 363 sales offer certain advantages over reorganiza-
tions; they can be accomplished more quickly and at less cost, and often preserve the firm's
going concern value just as effectively. They also present certain concerns, including the pos-
sibility that, perhaps at the behest of senior creditors who stand to benefit from an immediate
disposition, the sale may be conducted at a time or in a manner that is not revenue maximiz-
ing. This Article argues that although the basic judicial approach to 363 sales reflects these
advantages and concerns as well as the incentives of senior and junior claimants, three specif-
ic aspects of 363 sales are problematic. These are (1) the right of secured creditors to credit bid
their claim at a sale of the underlying collateral, (2) the Code's limitations on the ability of the
debtor to sell assets free and clear of liens, and (3) courts' acceptance of sales that violate the
absolute priority principle. Credit bidding represents an unnecessary protection for secured
creditors (frequently the proponents of 363 sales), may chill outside bids, and, if not properly
limited, can allow a creditor to circumvent absolute priority. The restrictions on sales free
and clear of liens, at least as interpreted by some courts, allow junior lienholders to veto even
value maximizing 363 sales. And permitting 363 sales that violate the absolute priority prin-
ciple encourages strategic and inefficient behavior among senior and junior claimants, and
may enable a purchaser to effectively redistribute sales proceeds from senior creditors to a pre-
ferred junior claimant. The Article suggests that each of these three features of 363 sales be
reconsidered.

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