1. BANKRUPTCY INSIGHT
Merritt, Hagen & Sharf, LLP
5950 Canoga Ave, Suite 400
Woodland Hills, CA 91367
818-992-1940
By Mark M. Sharf
ASSET ACQUISITIONS IN BANKRUPTCY - - YOU COULD
HAVE HAD IT ALL
Buying assets from companies in bankruptcy presents challenges that are not otherwise present.
Section 363 of the Bankruptcy Code allows purchasers to buy assets free and clear or claims, liens and in-
terests. It is generally understood that this includes the liens of secured creditors, as well as unsecured
claims. However, there are cases where a purchaser of assets in bankruptcy has been held liable for pre-
bankruptcy debts of the debtor. For that reason it is standard operating procedure for buyers of assets in
bankruptcy to insist upon a court ruling that they are not successors in interest to the debtor, and that they,
by acquiring the assets, are not assuming any of the debts of the company.
In implementing this type of strategy, however, buyers may inadvertently be denying themselves the
benefit of certain assets and contracts. A recent bankruptcy case highlights this dillema. Cronimet Hold-
ings, Inc. V. Keywell Metals, LLC 2014 WL 5801414 (N.D. Ill 2014)
Keywell, LLC, the Debtor, was a leading supplier of recycled metals. In an attempt to sell itself,
prospective purchasers were given access to key information but were required to sign a non disclosure
agreement. Further, prospective purchasers were required to agree not to hire any officers, directors, or key
employees for a period of 24 months without Keywell’s prior written permission. In addition, the employ-
ees themselves had signed non-compete agreements when they were hired, again agreeing to not work for a
competitor for a period of 24 months after leaving the company.
During Keywell’s Chapter 11 case a prospective buyer named Cronimet signed an asset purchase
agreement. Three days later Keywell filed its bankruptcy petition. A motion to approve the sale, subject to
overbid, was almost immediately filed, and an auction was held less than 3 months later. Cronimet was not
the successful bidder as a different entity with a name confusingly similar to that of the Debtor - -
“Keywell Metals, LLC” prevailed.
The order approving the sale specifically provided “the transactions contemplated under the [asset
purchase agreement] do not amount to a consolidation, merger, or de facto merger ... there is no substantial
continuity between [the two businesses], there is no continuity of enterprise between [Keywell] and
[Keywell Metals], ... .” It further provided that Keywell Metals was not a successor to Keywell or its bank-
ruptcy estate. The bankruptcy court order specifically noted that Keywell Metals did not assume “any em-
ployment or labor agreements, consulting agreements, severance agreements, change-in-control agree-
ments, or other similar agreements to which [Keywell] is or was a party.”
2. After the sale occurred, Cronimet hired two of the Debtor’s employees, and commenced an action
for declaratory relief to determine that its actions were proper. In response, Keywell Metals asserted
that it had standing to enforce both the non-compete agreements and the nondisclosure agreement signed
by Cronimet because 1) it purchased Keywell’s assets including those agreements, 2) it is a successor to
Keywell’s interest in the agreements, 3) it was an intended third-party beneficiary of those agreements and
4) it is the owner of the agreements as a result of the assumption agreements with Keywell.
It is important to note that in August 2014 - - many months after the Chapter 11 sale of assets and
after the commencement of the litigation - - the Debtor and Keywell Metals entered into an agreement by
which the non-compete and non-disclosure agreements at issue were specifically assigned to Keywell Met-
als.
Keywell Metals lost before the bankruptcy court on the argument that it had purchased Keywell’s
non-compete and non-disclosure agreement; Keywell Metals abandoned that argument on appeal by not
raising it. Instead, Keywell relied on its other arguments - - including its subsequent purchase of these very
agreements.
There was a vigorous choice-of-law dispute between Pennsylvania law and Illinois law. The court
ruled that either way the assignments of the nondisclosure agreement and the non-compete agreements
were not effective. Under Pennsylvania law the assignment was effective because the non-compete agree-
ments did not contain an assignability provision in them, and the employees did not consent to their assign-
ment.
The court noted that under Illinois law non-compete agreements likely are assignable. But, under
Illinois law both the assignment of the non-compete agreements and the nondisclosure agreement would
only be enforceable if they protect the Debtor’s legitimate business interests at the time of the assignment
(which, again, occurred many months after the bankruptcy court approved sale).
Cronimet argued that all legitimate business interests that the Debtor had in both the non-compete
agreements and the nondisclosure agreement were extinguished in December 2013 when Keywell stopped
doing business. The purchaser - - Keywell Metals - - responded that the Debtor did have a legitimate busi-
ness interest in the agreements until their assignment in August 2014 because a percentage of the earnings
were to be paid to the Debtor by Keywell Metals as part of the acquisition price.
The court ruled that “this delayed payment arrangement does nothing to change the fact that Key-
well was not to further engage in the business it sold to Keywell Metals.” The court noted that Keywell’s
agreement not to compete with Keywell Metals demonstrated that it removed itself entirely from its previ-
ous line of business. Because Keywell had no further interest in its customers, its confidential information,
or trade secrets, or in retaining a stable workforce, it did not have a legitimate busi-
ness interest in enforcing the non-compete and the non-disclosure agreements once
its assets were sold. For this reason the August 2014 assignments of both the non
-disclosure agreement and the non-competition agreements were ineffective.
As to the non-compete agreements that the employees had signed years ear-
lier, the Court easily disposed of the third-party beneficiary argument. The agree-
ments were entered into in 1979 and 1997 - - well before any contemplated sale of
Keywell’s assets - - thus precluding the concept that there were any intended third
party beneficiaries. The non-compete agreements themselves did not indicate that
their protections flow to the Debtor’s successors or assigns.
Merritt, Hagen & Sharf,
LLP practices in the areas
of bankruptcy law and
Bankruptcy litigation