## Facts

- On-Site Sourcing, Inc., a litigation-support/document-management business, filed for Chapter 11 protection in February 2009 amid liquidity distress and inability to service secured debt.
- Shortly before the filing, approximately $35 million of the debtor’s secured debt was assigned to Integreon Discovery Solutions (DC), Inc.
- On the petition date, the debtor sought (1) approval of Integreon-provided DIP financing (up to $40 million) and (2) approval of a rapid sale of substantially all assets to Integreon as a going concern under 11 U.S.C. § 363(b).
- The asset purchase agreement contemplated a $28 million purchase price for substantially all operating assets.
- An official committee of unsecured creditors negotiated changes and supported the sale if it included a trust funded from sale proceeds for general unsecured creditors.
- The proposed trust and related distribution terms contemplated paying general unsecured creditors even if certain administrative and priority claims were not paid in full.
- The court approved the going-concern sale but refused to approve the trust and any sale-order provisions that would alter statutory distribution priorities outside a confirmed Chapter 11 plan.

## Issues

1. Whether a debtor and purchaser may use a § 363(b) sale order to implement plan-like distribution provisions—such as funding an unsecured-creditors trust—without complying with Chapter 11 plan confirmation requirements.
2. Whether a § 363 sale structure may reorder Bankruptcy Code priorities by providing value to general unsecured creditors while administrative and priority claims may remain unpaid.

## Decision

- The court approved the sale of substantially all assets to Integreon under § 363(b) as a permissible going-concern transaction.
- The court denied approval of the unsecured-creditors trust and related distribution provisions.
- The court held that the proposed priority-skipping distributions were impermissible because they effectively functioned as a sub rosa plan without plan-confirmation safeguards.

## Legal Principles

- Section 363(b) authorizes asset sales outside the ordinary course; it does not authorize reallocating estate value among creditor classes in a manner that substitutes for plan confirmation.
- Distributions that alter statutory priority—particularly paying general unsecured creditors ahead of administrative expenses or other priority claims—generally must be implemented, if at all, through a confirmed Chapter 11 plan.
- A transaction that dictates core plan outcomes (class treatment and distribution mechanics) through a sale order risks constituting an impermissible sub rosa plan because it bypasses disclosure, voting, and confirmation standards.

## Conclusion

The court permitted an expedited § 363 going-concern sale to preserve value, but it refused to allow the sale order to create a trust and distribution scheme that would pay junior unsecured creditors ahead of, or instead of, senior administrative and priority claimants absent compliance with Chapter 11 plan-confirmation requirements.


In re On-Site Sourcing, Inc., 412 B.R. 817 (Bankr. E.D. Va. 2009)