Bankruptcy – Bulk Sales Provisions

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7^th Circuit Court of Appeals

Case Name: Illinois Department of Revenue v. Hanmi Bank, et al.

Case No.: 17-1575; 17-2004

Officials: BAUER, FLAUM, and ROVNER, Circuit Judges.

Focus: Bankruptcy – Bulk Sales Provisions

The bankrupt businesses in both of these consolidated appeals had debts that far exceeded the value of their assets. The bankruptcy court authorized the sale of the firms’ principal assets (several gasoline service stations and a movie theater and café), and those sales qualified as bulk sales under Illinois statutes we shall refer to as the Bulk Sales Provisions. Among other things, the Bulk Sales Provisions give the Illinois Department of Revenue (“IDOR”) the right to pursue the purchaser in a bulk sale for state taxes owed by the seller. However, in order to facilitate sale of the debtors’ properties, the bankruptcy court, pursuant to section 363(f) of the Bankruptcy Code, allowed the sales to proceed free and clear of the interests in those properties held by any entity other than the bankruptcy estates, including IDOR’s interest under the Bulk Sales Provisions. 11 U.S.C. § 363(f). This meant that IDOR lost its right to impose successor liability on the purchasers for the taxes owed by the sellers. Pursuant to section 363(e) of the Code, a party whose interest has been removed from property in this way is entitled to “adequate protection,” which typically takes the form of a payment from the sale proceeds to compensate the party for the decrease in value of its interest. See id. §§ 361, 363; Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir. 2003). The bankruptcy court in each case below agreed or assumed that IDOR was entitled to adequate protection for its interest under section 363. But the court also went on to conclude that because the sale proceeds were insufficient to satisfy the claims of the senior-most creditors (the banks that held the mortgages on the properties), IDOR was entitled to no portion of the sale proceeds; to grant IDOR any share in those proceeds would be to impermissibly allow it to “jump the queue” of creditors. And because there were no other assets available from which to compensate junior creditors like IDOR, IDOR was left with nothing.

IDOR contends that the bankruptcy court’s disposition fails to account for its authority, which other creditors did not enjoy, to pursue not only the debtor but the purchaser of the debtors’ property—personally—for unpaid taxes. When the bankruptcy court authorized the sale of the debtors’ properties in these cases free and clear of IDOR’s interest, it made the properties much more attractive to prospective purchasers than they otherwise would have been. Consequently, in IDOR’s view, the final sale price for the properties necessarily included consideration for the removal of IDOR’s interest, and it is entitled to a share of the sale proceeds pursuant to sections 361 and 363(e) to compensate it accordingly.

For the reasons that follow, we affirm the bankruptcy court’s judgments. We agree with IDOR that the Bulk Sales Provisions give it a powerful means of securing payment for delinquent taxes that most other creditors lack, and that removal of IDOR’s interest likely increased the price bidders were willing to pay for the debtors’ properties in these cases. But assuming that IDOR’s interest is cognizable under section 363, it has not given us a realistic assessment of the value of its interest. IDOR’s position in these appeals is that it is entitled to a share of the sale proceeds equal to 100 percent of the taxes it was authorized to collect from the purchasers, given that it was forced to give up its right to pursue the purchasers for those taxes. As we explain, however, we are skeptical of the notion that IDOR necessarily would have recovered 100 percent of the tax delinquency from an informed purchaser; and although IDOR might have been able to strike a deal with the purchaser and the seller’s senior creditors giving it some lesser payment on the outstanding taxes, IDOR has offered no evidence to establish what its potential recovery might have been. In short, its claims were properly denied for want of evidence enabling the bankruptcy court to assign a reasonable value to its interest for purposes of section 363(e).

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.