## Facts

- Lionel Corporation and two subsidiaries filed Chapter 11 petitions after substantial operating losses and reported a negative net worth.
- Lionel’s most valuable asset was its 82% ownership interest in Dale Electronics, Inc., a profitable, independent company; the stake was valued at roughly $50 million and constituted a major portion of the estate’s value.
- The Official Committee of Unsecured Creditors urged Lionel to sell the Dale stock to Peabody International Corporation for $50 million in cash.
- Lionel, as debtor-in-possession, moved under 11 U.S.C. § 363(b) to sell the Dale shares outside the ordinary course of business before confirmation of any reorganization plan, and proposed a plan conditioned on completing the sale.
- The Committee of Equity Security Holders objected that a sale of the estate’s principal asset before confirmation would functionally dictate any plan and bypass Chapter 11 disclosure and voting protections; the SEC supported the objection.
- The bankruptcy court approved the sale on an expedited basis without formal findings of fact, relying largely on creditor insistence and a general desire to avoid delay; the district court affirmed.

## Issues

1. Under what standard may a Chapter 11 court approve, under 11 U.S.C. § 363(b), a pre-confirmation sale of a significant asset outside the ordinary course of business?
2. Whether the bankruptcy court abused its discretion by authorizing the pre-confirmation sale of Lionel’s controlling interest in Dale Electronics on the record presented.

## Decision

- The Second Circuit reversed the district court’s order affirming the sale authorization and remanded.
- The court held that § 363(b) permits pre-confirmation sales of significant assets only upon an articulated, evidence-based business justification.
- The bankruptcy court abused its discretion by approving the sale without adequate findings and without a sufficient business justification beyond creditor pressure and general speed concerns.

## Legal Principles

- A bankruptcy court may authorize a § 363(b) sale outside the ordinary course before plan confirmation only if the court finds a “good business reason” (sound business purpose) supported by evidence.
- Chapter 11’s plan-confirmation framework (including disclosure, solicitation, and voting) cannot be effectively bypassed through § 363(b) absent a justified need; creditor preference alone is insufficient.
- In evaluating “good business reason,” relevant considerations may include: the asset’s proportionate value to the estate; time elapsed since filing; likelihood of proposing and confirming a plan soon; effect of the sale on reorganization options; fairness of the price and proceeds; and whether the asset is increasing or decreasing in value.
- Approval of a major pre-confirmation sale requires explicit findings grounded in the record, particularly where the transaction would materially shape reorganization outcomes and affect constituency rights.

## Conclusion

The Second Circuit held that significant pre-confirmation asset sales under § 363(b) are permissible only when the bankruptcy court makes explicit, evidence-based findings of a good business reason, and it reversed and remanded because the sale of Lionel’s principal asset was authorized without adequate justification or findings.


In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983)