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This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.

The Section 363 sale is the cleanest acquisition method in American commercial law, on the slide-deck version. A Chapter 11 debtor sells assets free and clear of liens, claims, interests, and encumbrances under . The buyer walks away from the seller’s legacy liabilities. The sale order is a federal-court judgment that backstops the title and the lien-stripping. Rep-and-warranty insurance is unnecessary because nobody is relying on reps. It is, on paper, a deal lawyer’s dream.

The slide-deck version is not wrong. It is just incomplete. A typical 2026 fact pattern looks like this. A strategic learns that a competitor in its space — mid-market, regional footprint, decent customer book, terrible balance sheet — has filed in the Southern District of Texas. Debtor’s counsel reaches out informally to ask whether the strategic might serve as the stalking-horse bidder. The strategic, fairly, treats the call as a gift. The actual cost of running a 363 process as the stalking-horse, measured in deal certainty, in cure-amount exposure, in successor-liability tail risk, and in the optionality surrendered at the moment of signing the asset purchase agreement, is considerably higher than the slide-deck version suggests.

The cost has crept up over the last five years in ways the standard pitch does not capture. The auction overbid mechanics are tighter. The cure-cost exposure on assumed contracts is broader. The successor-liability tail in certain regulated industries — environmental, pension, and product liability in particular — has been pushed back into the asset-buyer’s lane by recent decisions that the 2018 form deck does not reflect. For a strategic that has not done one before, three features of the modern 363 process are worth understanding before signing on as stalking-horse.

The auction is a real auction, and the stalking-horse rarely wins

The stalking-horse bidder’s role is to set the floor. The debtor uses the stalking-horse APA, with its negotiated purchase price and terms, as the opening offer, and then markets the asset to qualified competing bidders. The bid procedures order — which the court enters early in the case — sets the minimum bid increment, the qualification criteria for competing bidders, the auction date, and the form of the auction itself. A well-structured stalking-horse position includes a break-up fee (commonly two to four percent of purchase price) and an expense reimbursement to compensate the stalking-horse for the time and money spent setting the floor.

In the 2018–2020 market, stalking-horse bidders won a meaningful share of the auctions they entered. The market today is more competitive. Distressed financial buyers — credit funds, special-situation private equity, secondary-debt funds — have built dedicated teams that scan Chapter 11 filings the day they hit the docket and routinely show up at auctions with overbids. A strategic that enters as stalking-horse, runs sixty days of work on the APA and the bid procedures, gets the bidding floor set, and then loses the auction to a credit fund’s overbid has spent real money to set up someone else’s deal. The break-up fee partially covers the out-of-pocket, but it does not cover the strategic-rationale value of acquiring the target — which was, presumably, why the strategic was at the table in the first place.

The first practical question for a strategic considering a stalking-horse role is therefore not “what should our bid be” but “what is the probability that we win the auction” — and the answer is frequently lower than the strategic assumes. Industries in which financial bidders are scarce (highly regulated verticals, businesses with specialized customer-permission structures, plays where synergy with an existing platform is the real value driver) favor strategics. Industries in which financial bidders are deep (consumer brands, healthcare services, software with recurring revenue) favor an overbid. The strategic should price the stalking-horse role with the win probability as an input, not as an afterthought.

“Free and clear” is narrower than the marketing suggests

The headline appeal of § 363(f) is that the buyer takes the assets free and clear of “any interest in such property of an entity other than the estate.” That clause has carried a lot of weight in the secondary literature, and bankruptcy judges have applied it expansively to lien-stripping and to most contractual claims against the seller. The narrowing has happened at the edges, and the edges are where strategic buyers get hurt.

The Third Circuit’s 2009 decision in In re Trans World Airlines and the line of cases following it have wrestled with whether § 363(f) extinguishes successor-liability claims grounded in tort, employment, or product-liability theories. The cases run in different directions depending on the type of claim and the circuit. Tort claims arising from pre-petition conduct — asbestos, environmental, defective product — are the recurring problem area, and even a well-drafted sale order does not necessarily reach claimants whose claims have not yet accrued at the time of the sale. The much-discussed Old Carco and General Motors 363 sales from the 2009 auto cycle produced a body of post-sale litigation that took more than a decade to fully resolve, and the eventual settlements moved real money from successor entities that had been told they bought the assets free and clear.

For a strategic buyer of distressed operating assets — particularly in industries with product-liability exposure — the second practical question is what the actual scope of the “free and clear” relief will be in the proposed sale order, and what the residual successor-liability tail looks like. The answer is rarely “zero.” A well-prepared strategic asks its bankruptcy counsel for a written analysis of the in-circuit successor-liability case law before the bid, not after the close. The cost of that memo is trivial relative to the eventual cost of being told three years later that the toxic-exposure claim that surfaced last quarter is not, in fact, foreclosed by the sale order.

Executory-contract cure amounts can swallow the bid economics

The 363 sale is normally paired with assumption and assignment of the debtor’s executory contracts under § 365. The buyer chooses which contracts it wants — customer contracts, vendor contracts, real-property leases, IP licenses — and the debtor assumes those contracts and assigns them over to the buyer. The price of the assumption, however, is the cure: the buyer must pay (or the debtor must pay from sale proceeds) all monetary defaults under each assumed contract, restoring the counterparty to current status before the assignment takes effect.

Cure amounts are where the bid math frequently breaks. A strategic that has built a model assuming the target’s existing customer contracts and lease portfolio transfer at the headline purchase price has not necessarily backed out the cure liability. In a distressed seller, the cure liability is rarely small. Three months of unpaid rent on a real-estate portfolio, six months of past-due maintenance fees on a software license stack, accrued shortfalls on a master services agreement — these add up. The bid procedures order should require the debtor to publish a cure schedule with notice to counterparties early in the process, and the strategic should price the cure amounts into its bid the same way it would price any other assumed liability.

A separate problem is the contract counterparty’s right to object to assignment. Some contracts — particularly IP licenses and contracts where the original counterparty’s identity matters — are not freely assignable, and the bankruptcy court’s power to override anti-assignment provisions has its own statutory limits under § 365(c) and § 365(f). A strategic counting on assuming a key software license, or a critical reseller agreement with an anti-assignment clause and a counterparty who would prefer not to deal with the strategic, may discover at the assumption hearing that the contract is not assignable at all. The deal model should not assume universal assumability without verifying the contracts that actually drive the value.

The credit-bid problem when a secured lender is in the cap stack

If the seller’s pre-petition secured debt is in the hands of a sophisticated lender — and in 2026 that lender is more often than not a credit fund — the credit bid is the strategic’s hardest competitor. Under § 363(k), a secured creditor with a lien on the assets being sold has the right to bid up to the full amount of its allowed secured claim, paying with the debt rather than with cash. For a strategic bidding $40 million in cash against a credit fund holding $55 million of secured debt, the credit bid is an immediate overbid that the strategic cannot match without either putting up substantially more cash or partnering with the lender on a hybrid structure.

The third practical question for a strategic considering a 363 sale is therefore whether the debtor’s capital structure leaves room for a cash bid to win, or whether the secured lender’s credit bid is going to swallow the auction. The cap-stack analysis is the first piece of diligence — done before the stalking-horse APA, before the bid procedures, before the strategic commits to any of the out-of-pocket cost. A strategic that finds itself in an auction where the credit-bidder is effectively un-outbiddable can sometimes negotiate a partnership structure (a stalking-horse position with the credit fund, with the strategic buying specific assets out of the broader deal at allocated value), but that conversation needs to happen early, when the parties’ positions are still flexible.

What the strategic should do at the front end

The pre-LOI diligence on a 363 opportunity, for a strategic, is essentially three things. It is a cap-stack analysis to understand who the credit-bid risk is. It is a contract-portfolio analysis to understand what the cure liability looks like and which contracts are at risk for non-assumability. And it is a successor-liability memo to understand what the sale order will and will not foreclose. None of that work is cheap, but it is significantly cheaper than running the auction blind.

The marketing pitch for 363 sales — clean, fast, free and clear, no rep-and-warranty — is true relative to the alternative of a negotiated acquisition outside of bankruptcy. It is not true relative to the strategic’s mental model of what an asset acquisition is supposed to cost. For a strategic that has done one or two 363 sales before, the muscle memory is already there. For a strategic doing its first one, the muscle memory needs to be built before the stalking-horse APA gets signed, not after. The asymmetry between what each side trades in a 363 sale is real, and most of it sits on the buyer’s side of the ledger.

The client I started this post with did the cap-stack work, decided the credit-bid risk was too high, and walked away from the stalking-horse opportunity. The eventual winner was the secured lender’s credit bid, and the assets ended up with a strategic acquirer six months later in a back-end disposition by the credit fund. The seller bought the assets from the credit fund in a negotiated sale outside the bankruptcy process, for less money, and with a fully diligenced asset package. Sometimes the right move in a 363 sale is to not be in the 363 sale. Distressed M&A work requires patience as much as it requires bid discipline, and the strategic that recognizes that gets paid for the wait.

If you are a strategic buyer evaluating a distressed target and trying to figure out whether the 363 path is worth the cost of entry, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.