All Experience is not Good Experience – Experience Ratings
By James P. Roberts April 2017
Recently, the Bankruptcy Court for the Northern District of Alabama joined with a number of courts i n
finding that a debtor’s ability to sell their assets free and clear of any “interests” in property
encompassed the right to purge the assets of a state labor department’s right to transfer a company’s
unemployment experience rating to a purchaser of the company’s assets.1
An overarching purpose of bankruptcy, whether in the context of a reorganization or a liquidation, is
the maximization of value for the benefit of creditors of the Estate. Section 363( b) of the Bank ruptcy
Code permits a debtor or trustee to sell assets outside the ordinary course of business, following
notice and a hearing. When such a sale occurs, 11 U.S .C. § 363(f) provides that this type of sale can
be “free and clear of any interest in such property of an entity other than the es tate” if particular
factors are satisfied. See 11 U.S.C. § 363(f)(1)-(5).
Permitting the sale of a debtor’s assets “free and clear” maximizes the value that can be received for
the assets being sold. Indeed, many courts recognize that “[a]n expansive interpretation of ‘interest
in property’ that can be cut off by a ‘free and clear’ order under Bankruptcy Code § 363(f) [maximizes
the value of the bankruptcy estate] by, inter alia, maximizing the ass ets that are being sold.” I n re Old
Carco LLC, 538 B.R. 674, 683 (Bankr. S.D.N.Y. 2015). This is especially true because, absent the “free
and clear” provisions of the Bankruptcy Code, “purchasers could demand a large discount for
investing in a property that is laden with the risk of endless litigation as to who has rights to estate
property.” In re Gucci, 126 F.3d 380, 387 (2d Cir. 1997).
Despite the broad outlines of this policy purpose of the Bankruptcy Code, there is no singular
definition of the term “interest” in 11 U.S.C. § 363(f). In examining whether the scope of interest was
sufficiently elastic to encompass experience ratings,2 the Sixth Circuit adopted a narrow
interpretation of the term in In re Wolverine Radio, 930 F.2d 1132 (6th Cir. 1991). There the court
held that the meaning of “interest” was inapplicable to the matter as it failed to “[attach] to property
ownership so as to cloud its title.” Id. at 1147. Having held this, the court d etermined that a
1 On April 17, 2017, following the conclusion of oral arguments, the Court verbally grant ed Warrior Met Coal, LLC’s
(“Warrior Met”) Motion to Enforce Order Authorizing and Approving Sale of Substantially all of the Debtors’ Assets and the
Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, March 23, 2017 [Dkt. No. 2942] (the
“Motion to Enforce”). At the date of publishing, the written order granting the Motion to Enforce is still pending.
2 Generally, an “experience rating” is based on the combination of a company’s history of layoffs, discharges, the
number of former employ ees to draw unemployment, and similar factors. A state’s department of la bor will typically
determine the amount owed to the state by the company, in relation to its contribution to fund the unemployment
benefits pool, based on the experience rating and related factors.
