## Facts

- Boston Generating, LLC and affiliates owned and operated electric power generation facilities in New England.
- The debtors’ capital structure included a $1.45 billion first-lien secured credit facility and a $350 million second-lien facility secured by junior liens on the same collateral.
- The debtors suffered sustained financial losses, rapidly deteriorating liquidity, and faced imminent covenant defaults under their credit agreements.
- After marketing efforts, the debtors entered an asset purchase agreement to sell substantially all assets to Constellation Holdings, Inc. for approximately $1.1 billion plus assumption of certain liabilities.
- Sale proceeds were expected to pay the first-lien facility substantially in full, leaving little or no value for second-lien and unsecured creditors.
- The debtors moved under 11 U.S.C. § 363 to approve the sale free and clear of liens, claims, and encumbrances and to approve related assumption and assignment of executory contracts and unexpired leases.
- Second-lien creditors/agent and the unsecured creditors’ committee objected, arguing lack of a sufficient business justification, failure to satisfy § 363(f), unfair process, and an improper sub rosa plan that effectively fixed distributions.

## Issues

1. Whether the debtors showed a sound business purpose under § 363(b) to sell substantially all assets before plan confirmation under the standard applied in the Second Circuit.
2. Whether the sale could be approved “free and clear” of lien interests under one or more subsections of § 363(f), despite junior secured creditors being out of the money.
3. Whether the sale process and purchaser qualified for § 363(m) protection as a good-faith purchaser.
4. Whether the transaction improperly altered priority rights or operated as a sub rosa plan by locking in distributions outside plan confirmation.

## Decision

- The court granted the sale motion and approved the sale of substantially all assets to Constellation.
- The court found the debtors established a sound business purpose and that the sale maximized estate value given liquidity deterioration and the absence of a better available alternative.
- The court authorized the sale free and clear of liens, with liens attaching to sale proceeds in the same order and priority as they attached to the assets.
- The court rejected objections that the sale impermissibly reordered priorities or constituted a sub rosa plan.
- The court found Constellation acted in good faith and qualified as a good-faith purchaser under § 363(m).
- The court authorized assumption and assignment of designated executory contracts and unexpired leases and overruled or resolved remaining objections.

## Legal Principles

- A debtor may sell substantially all assets under § 363(b) before plan confirmation upon showing a sound business purpose and that the transaction is in the estate’s best interests.
- A sale may be approved free and clear of lien interests under § 363(f) when a statutory condition is met, including where the lienholder can be compelled in a legal or equitable proceeding to accept monetary satisfaction under § 363(f)(5), even if that satisfaction is less than full payment.
- A § 363 sale does not constitute an impermissible sub rosa plan merely because junior stakeholders are out of the money, where the sale preserves lien priorities by transferring liens to proceeds and leaves ultimate distributions to the plan process and priority rules.
- Extensive marketing, arm’s-length negotiations, and the absence of collusion support a finding that the purchaser acted in good faith under § 363(m), limiting post-approval challenges absent a stay.

## Conclusion

The bankruptcy court approved a preplan sale of substantially all assets under § 363, holding that financial urgency and a robust marketing process supported a sound business purpose, that junior liens could be cut off under § 363(f) while attaching to proceeds in priority order, and that the purchaser was protected as a good-faith buyer under § 363(m).


In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)