Secured Creditors in Section 363 Sales Be Aware -Your Proceeds May Be Used to Satisfy the Debtor’s Unpaid State Tax Liabilities

October 12, 2015

It is a basic feature of sales under section 363 of the U.S. Bankruptcy Code, that the purchaser takes free and clear of all claims and interests, such claims and interests attach to the proceeds of the sale in accordance with their priorities. Among the interests that are extinguished by the free and clear sale orders are states’ taxing authorities’ rights to pursue a purchaser under bulk sale statutes for the seller/debtor’s unpaid tax liabilities. Thus, it would appear that secured creditors should feel comfortable that if the sale proceeds are less than their claim, the entirety of the sale proceeds would be used to pay their secured claim. As shown by Illinois Department of Revenue v. Elk Grove Village Petroleum, LLC, however, this may not be the case. As the case shows, states may jump the bankruptcy priority line through an entitlement to adequate protection of their interest; that interest being the right to pursue the purchaser.

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