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Massachusetts Dept. of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.)
Citation:Massachusetts Department of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.), BAP No. MB-12042 (1st Cir. B.A.P. Jan. 17, 2013)
The First Circuit B.A.P., adopting the expansive definition of “interest” in Section 363(f) of the Bankruptcy Code, held that “interest” in Section 363(f) includes all obligations that may flow from ownership of property, including, the right to tax the purchaser of the debtor’s assets at the same high rate imposed on the debtor. The First Circuit B.A.P. first evaluated its jurisdiction on appeal and found that the Bankruptcy Court order approving the stipulation entered into between the parties effectively terminated the litigation, and therefore was a final judgment from which the parties could appeal to the B.A.P. In affirming the Bankruptcy Court, the First Circuit B.A.P. noted that the term “interest” was not defined in the Bankruptcy Code and that some courts construed “interest” narrowly to mean only “in rem” property interests while other courts took a more expansive view of “interest” to mean all other obligations that may flow from ownership of property. The B.A.P. adopted the more expansive definition of “interest” and noted that the transfer of the contribution rate from the Debtor to the Purchaser is really an attempt to recover the money that the Debtor would have paid if it was still in business. Therefore, the right to tax at the higher rate arose from the sale of the property to the Purchaser and Section 363(f) permitted the Bankruptcy Court to approve the sale free and clear.
The First Circuit B.A.P. affirmed an order of the Bankruptcy Court (Bailey, J.), which enforced the sale of the debtor’s assets free and clear to the purchaser, including the right of the Massachusetts Department of Unemployment Assistance (“DUA”) to tax the purchaser at the debtor’s unemployment contribution rate. On the purchaser’s motion to enforce the sale order transferring the assets “free and clear” to the purchaser, the Bankruptcy Court held that while DUA did not receive proper notice of the sale motion and the entered order would therefore not have a preclusive effect against DUA, the Debtor’s experience rating and contribution rate were “interests” under the meaning of Section 363(f) and the Bankruptcy Court could approve a sale “free and clear” of those “interests.” The Bankruptcy Court recognized that Congress did not intend “interest” to include only “in rem” property interests and noted that in this instance, the experience rating and contribution rate are “interest” as it imposes the Debtor’s rating on the Purchaser only because the Purchaser purchased the assets of the bankruptcy estate. Following the Bankruptcy Court’s decision, the parties entered into a stipulation concerning the overpayment amount and refund amount due to the Purchaser. After the Court entered an order approving the Stipulation, this appeal followed.
The debtor, PBBPC, Inc. (“Debtor”), filed a Chapter 11 petition and on the same day filed a motion seeking approval of bid procedures and the sale of substantially all of its operating assets to OPK Biotech, LLC (“Purchaser”) free and clear of all liens and encumbrances pursuant to Section 363(f). The Bankruptcy Court approved the sale and entered an order which provided, among other things, that (1) the transfer to the Purchaser would be free and clear of all encumbrances; and (2) that the Purchaser would not be deemed a successor of the Debtor. The Bankruptcy Court also noted that the Purchaser would not have purchased these assets unless the transfer was “free and clear.” On the petition date, the Debtor had five employees, but by the time of the closing, the Debtor had one employee resulting in a very high experience rating and an unemployment contribution rate of 12.27% under the Massachusetts unemployment statute. After the closing, the Purchaser DUA that it had purchased the assets of the bankruptcy estate. DUA notified the Purchaser that it considered it a “successor employer” under the Massachusetts unemployment statute that the contribution rate for the Purchaser would be the same for the Debtor prior to the closing. The Purchaser filed an administrative appeal, but the DUA refused to change its ruling. The Purchaser then filed a motion before the Bankruptcy Court seeking to enforce the sale order transferring the assets “free and clear” to the Purchaser. In opposition, DUA argued that it did not receive proper notice of the sale to the Purchaser, and further, that the Debtor’s experience rating was not an “interest” within the meaning of Section 363(f) and therefore, the Bankruptcy Court lacked authority to protect the Purchaser from taxation based upon the Debtor’s experience rating. The Bankruptcy Court ruled in favor of the Purchaser and the DUA appealed to the First Circuit B.A.P.
Judge(s):Haines, Deasy, Tester