Recent ruling provides guidance on 363 asset sales

This ruling underscores the importance of clear and precise language in sale orders and asset purchase agreements in bankruptcy cases and the principle that rejection of executory contracts does not unwind completed transfers of property. 

Clients involved in bankruptcy asset sales should ensure that sale orders and related agreements are drafted with clarity to avoid disputes over the scope of transferred assets. Indeed, this case serves as a reminder that the precise wording of sale orders and asset purchase agreements can have significant legal and financial implications, and careful attention to detail is essential in these transactions.

Below we explore the decision in more detail. 

HE, Inc. v. Avadim Holdings Inc. (In re AH Liquidation, Inc.), No. 21-10883 (CTG), 2025 US Dist. LEXIS 25217, at *1 (D. Del. Feb. 12, 2025) ¹

The Debtors, prior to their bankruptcy, acquired US Patent No. 6,358,516 (Patent) and associated intellectual property (Patent IP) from HE, Inc. (HE). The acquisition was formalized through a Settlement Agreement and a Confidentiality Agreement between the Debtors and HE. The Settlement Agreement resolved certain disputes between the parties and included provisions for the transfer of the Patent IP to the Debtors. The Confidentiality Agreement outlined the terms under which proprietary information related to the Patent IP would be shared and protected. Due to financial difficulties, the Debtors filed for relief under chapter 11 of the Bankruptcy Code in May 2021 in an effort to restructure its debts and facilitate the sale of its assets.

Following the bankruptcy filing, the Bankruptcy Court approved the sale of the Debtors’ assets, including the Patent IP, to Avadim Holdings Inc. and Relion Holdings LLC (Buyers). The sale process was conducted under Section 363 of the Bankruptcy Code, which allows for the sale of a debtor’s assets free and clear of any liens, claims, or encumbrances. This provision is designed to maximize the value of the assets being sold and provide a fresh start for the debtor.

The Asset Purchase Agreement (APA) between the Debtors and the Buyers explicitly listed the Patent IP as part of the Purchased Assets. The APA outlined the terms and conditions of the sale, including the transfer of the Patent IP to the Buyers. The Bankruptcy Court’s Sale Order approved the APA and authorized the sale of the Purchased Assets to the Buyers free and clear of any claims, including those of HE.

HE challenged the sale, arguing that the Sale Order’s paragraph 44, which stated that the Settlement Agreement and Confidentiality Agreement were not assumed or assigned to the Buyers, meant that the Buyers did not acquire the Patent IP. HE contended that the language “none of the Debtors’ rights or obligations under the [Settlement Agreement] and the [Confidentiality Agreement] shall transfer to the Buyer” should be interpreted to exclude the Patent IP from the sale. HE’s position was that the exclusion of these agreements from the sale meant that any intellectual property rights associated with them, including the Patent IP, were also excluded.

HE filed a lawsuit against the Buyers in the District Court for the Southern District of Georgia, asserting that the Buyers’ use and ownership of the Patent IP were unauthorized and violated the terms of the Settlement Agreement and Confidentiality Agreement. HE sought to reclaim the Patent IP or, alternatively, to obtain compensation for its alleged unauthorized use. The lawsuit centered on the interpretation of the Sale Order and whether the Patent IP was rightfully included in the assets transferred to the Buyers.

The Buyers, on the other hand, argued that the Patent IP was included in the Purchased Assets as defined in the APA and that the Sale Order approved the transfer of these assets free and clear of any claims. They maintained that paragraph 44 of the Sale Order did not affect the transfer of the Patent IP, as it was not a “right” under the Settlement Agreement or Confidentiality Agreement but rather property owned outright by the Debtors. The Buyers emphasized that the Patent IP was explicitly listed as part of the Purchased Assets in the APA, and the Sale Order’s intent was to transfer all such assets free and clear of any encumbrances.

The Buyers filed an Enforcement Motion in the Bankruptcy Court, seeking a ruling that HE’s lawsuit was in violation of the Sale Order’s free and clear provisions and that the Buyers owned the Patent IP free and clear of all claims and encumbrances, including those of HE. After considering the arguments of both parties, the Bankruptcy Court granted the Buyers’ request, finding that the Patent IP was owned by the Debtor at the time of the bankruptcy filing and was transferred to the Buyers free and clear as a result of the APA. HE requested that the Bankruptcy Court reconsider its decision, but the Bankruptcy Court denied HE’s request. HE then appealed the Bankruptcy Court’s Enforcement Order.

The District Court affirmed the Bankruptcy Court’s Enforcement Order, ruling in favor of the Buyers. The District Court’s decision was based on several key considerations. First, the unambiguous language of the Sale Order supported its ruling. The District Court found that paragraph 44 of the Sale Order was unambiguous and did not exclude the Patent IP from the sale. The language clarified that the Buyers did not assume any future performance obligations under the Settlement Agreement and Confidentiality Agreement but did not revoke the transfer of already conveyed assets. The court emphasized that the plain language of the Sale Order and the APA clearly included the Patent IP in the assets being sold to the Buyers. Second, the District Court considered the ownership of the Patent IP. In doing so, the District Court confirmed that the Debtors owned the Patent IP at the time of the bankruptcy filing and that it was included in the Purchased Assets sold to the Buyers. The Sale Order approved this transfer free and clear of any claims, including those of HE. The District Court noted that the APA explicitly listed the Patent IP as part of the Purchased Assets, and the Sale Order’s intent was to transfer all such assets free and clear of any encumbrances. Third, the District Court considered the concept of contract rejection, explaining that the rejection of the Settlement Agreement and Confidentiality Agreement in the bankruptcy proceeding did not affect the transfer of the Patent IP, as these agreements were not executory with respect to the ownership of the Patent IP. The District Court focused on the distinction between executory contracts, which involve ongoing obligations, and completed transfers of property, which are not affected by the rejection of related agreements. Fourth, the District Court considered the intent of the Sale Order, which was to facilitate the sale of the Debtors’ assets free and clear of any claims to maximize the value of the estate for the benefit of creditors. The District Court found that interpreting paragraph 44 to exclude the Patent IP from the sale would be inconsistent with this intent and would undermine the purpose of the Section 363 sale process. Finally, the District Court took into account equitable considerations, noting that the Buyers had relied on the Sale Order and the APA in good faith and had invested resources in acquiring and utilizing the Patent IP. The District Court found that it would be inequitable to disrupt the sale and the Buyers’ ownership of the Patent IP based on HE’s strained interpretation of paragraph 44.

This case sets several important precedents that could impact future cases, such as:

1. Clarification of Sale Orders: The District Court’s interpretation of paragraph 44 in the Sale Order clarifies that specific language in sale orders must be carefully drafted to avoid ambiguity. Future cases will likely reference this decision to argue the scope and effect of similar provisions in sale orders.
2. Ownership of Intellectual Property: The ruling reinforces that intellectual property owned outright by a debtor is not merely a contractual right but a property right. 
3. Effect of Contract Rejection: The District Court’s decision highlights that the rejection of executory contracts in bankruptcy does not rescind completed transfers of property.
4. Free and Clear Sales: The affirmation that assets sold in bankruptcy are transferred free and clear of claims and encumbrances provides a strong precedent for buyers in bankruptcy sales, ensuring they receive clean title to purchased assets.