Why Section 363 Sales Matter
Section 363 of the Bankruptcy Code provides the legal foundation for a debtor to sell assets outside the ordinary course of business, often as part of a Chapter 11 case. With court approval, the debtor can transfer property ‘free and clear’ of most liens and claims. This court-supervised process ensures transparency, fairness, and value maximization while protecting buyers from many of the risks typically associated with distressed transactions.
As Matt Christensen of Johnson May notes, “A 363 sale can often preserve value that would otherwise evaporate in liquidation.”
Many companies entering Chapter 11 rely on 363 sales to shed liabilities and keep operating under new ownership. These sales are often the preferred path when reorganization is not feasible. For many debtors, the 363 motion is the bridge between insolvency and a viable fresh start.
What Statutes Govern 363 Sales
The key to understanding a 363 sale is knowing the statutory framework. According to Eric Fromme of ArentFox Schiff, “The process is the key; courts will scrutinize not only the price but the fairness of how you got there.”
- Section 363(b) of the Bankruptcy Code authorizes a debtor, with notice and court approval, to sell property outside the ordinary course of business.
- Section 363(f) allows the court to approve a sale ‘free and clear’ of interests if one of five specific conditions is met, such as creditor consent or when liens are in bona fide dispute.
- Section 363(k) gives secured creditors the right to credit bid their debt, and
- Section 363(m) protects good-faith buyers from post-sale challenges.
- Federal Rule of Bankruptcy Procedure 6004, along with local court rules, governs procedural aspects like notice, timing, and objections.
Together, these rules balance two competing interests: maximizing the estate’s value for creditors and giving buyers confidence that their purchase won’t be undone later. Ultimately, statutory safeguards encourage competition while ensuring due process for all parties.
Structuring and Executing a 363 Sale
A 363 sale follows a defined, court-approved structure designed to balance speed and fairness. While each case differs, the process typically involves the following stages.
Diligence and Preparation
The debtor, often with financial advisors, prepares marketing materials, creates a data room, and identifies potential bidders. Buyers begin reviewing the debtor’s financials, contracts, and liabilities. This stage also involves negotiating the form of the Asset Purchase Agreement (APA), which sets the baseline terms of the deal.
The Stalking Horse Bid
The stalking horse bidder is the first qualified buyer who sets the ‘floor’ price for the auction. The debtor often grants breakup fees or expense reimbursements to this bidder as compensation if outbid. “The stalking horse bidder is often both a partner and a rival; it sets the tone for the auction but rarely walks away unchallenged,” explains Ashley Jericho of McDonald Hopkins.
From the seller’s perspective, the stalking horse establishes credibility and momentum. For the buyer, it provides an early advantage and limited downside protection. Both sides must balance the need for speed with adequate diligence to avoid later disputes.
Bid Procedures and Notice
Next, the debtor files a motion seeking approval of the bid procedures and sale notice. This includes deadlines for competing bids, qualification standards, such as deposits or proof of funds, and the proposed auction date. Notice must be given to all interested parties, i.e., creditors, landlords, and other stakeholders, ensuring due process. Courts require transparency; inadequate notice can invalidate a sale.
The Auction Process
If qualified competing bids emerge, an auction takes place, either in an ‘open cry’ or sealed-bid format. Bidders increase their offers according to pre-set increments. The debtor evaluates not just price but also certainty of closing, financing, and assumed liabilities. The Bankruptcy Code discourages collusion through Section 363(n), which allows a court to unwind sales influenced by bidder agreements that depress value.
Court Approval and Closing
After the auction, the debtor seeks court approval of the winning bid. The judge determines whether the sale was conducted in good faith and in the best interest of the estate. Once the order is entered, the transaction closes. “Once the sale closes, it’s almost impossible to unwind, which is why getting it right upfront is critical,” underscores Matt Grimshaw of Grimshaw Law Group, P.C.
Why Buyers Love 363 Deals
One of the biggest attractions of a 363 sale is the ‘free and clear’ feature. Under Section 363(f), the buyer can acquire assets stripped of most liens, claims, and encumbrances. That means fewer legal headaches post-closing and often a cleaner path to integration.
However, not every claim can be eliminated. Certain obligations, such as environmental liabilities, pension responsibilities, or specific intellectual property rights, may survive if not explicitly addressed in the sale order. That’s why buyers conduct thorough due diligence and negotiate comprehensive protections.
Courts can interpret ‘interest’ broadly to include more than liens, potentially encompassing successor liability and restrictive covenants. However, because this area is evolving, practitioners should draft sale orders carefully to avoid post-closing disputes.
Credit Bidding
Section 363(k) empowers secured creditors to ‘credit bid,’ allowing them to use their debt as currency in the auction. This ensures that collateral is not sold for less than its fair value. Credit bidding protects the lender’s right to the collateral while also forcing transparency in pricing.
Credit bidding is a tactical tool. Lenders may bid their entire claim or combine a partial credit bid with cash. Courts may limit the right ‘for cause,’ such as when there’s evidence of bad faith or disputes about the validity of the lien.
Credit bidding also raises strategic considerations. A lender must decide whether it truly wants to own the assets or simply protect its position by deterring low bidders. Credit bidding can be a double-edged sword: useful for control but risky if the assets are difficult to monetize post-acquisition.
Finality, Appeals, and Section 363(m)
A critical protection for buyers in bankruptcy sales is finality. Section 363(m) provides that once a sale to a good-faith purchaser closes, it generally cannot be reversed on appeal unless a stay was granted beforehand. This rule encourages participation by assuring buyers that their investments are safe from protracted litigation.
In 2023, the Supreme Court in MOAC Mall Holdings v. Transform Holdco clarified that Section 363(m) is not jurisdictional but remains a powerful safeguard. Appellate courts still often decline to unwind sales under doctrines of equitable mootness, reasoning that too much has changed to restore the status quo.
These protections provide the certainty needed for distressed M&A markets to function. Without them, few buyers would risk investing in bankruptcy assets.
Why 363 Sales Work
Section 363 sales are the workhorses of modern bankruptcy practice. They blend the efficiency of a private transaction with the fairness of judicial oversight. For debtors, they offer speed and value maximization; for buyers, they provide certainty and clean title. When executed correctly, a 363 sale can transform a failing business into a fresh opportunity by preserving jobs, stabilizing markets, and delivering fair recoveries to creditors.
This article was originally published on October 20, 2025 here.
