An Ontario distributor can buy the equipment, customer list, and brand of a Fontana manufacturer that filed Chapter 11. The price is good because the company is broke. The question is whether the buyer also inherits what broke it: warranty claims, a product defect, back sales tax, unpaid payroll contributions.
A sale order under 11 U.S.C. § 363(f) is a buyer’s best protection against California’s broad successor liability rules. It is not a complete shield. California’s tax successor statutes run on their own administrative track, and a notice defect can reopen claims the order was supposed to end.
What protection does a bankruptcy sale under section 363 give a buyer?
Section 363(f) allows a sale “free and clear of any interest in such property of an entity other than the estate” if one of five conditions is met. For claimants, the key one is paragraph (5): the holder “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”
BowFlex filed Chapter 11 in March 2024. Johnson Health Tech bought the business under an order that covered “products liability” claims and enjoined claimants from suing the purchaser. After a June 5, 2025 dumbbell recall, owners of older units filed four putative class actions, one in the Northern District of California. The bankruptcy judge directed dismissal, and Judge Christine P. O’Hearn affirmed in Proposed Class Representatives v. BowFlex Liquidating Trust, No. 25-cv-14953 (D.N.J. July 30, 2026).
Section 363(m) protects a good-faith purchaser if the order is reversed on appeal without a stay; fraud or collusion defeats good faith. In re Filtercorp, Inc., 163 F.3d 570 (9th Cir. 1998). But Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP 2008), held that section 363(m) did not shield the free-and-clear component, read (f)(3) to bar stripping a lien when the price does not exceed the liens, and required an (f)(5) seller to identify a real proceeding that could force the lienholder to take less. Buyers respond with lienholder consent, an evidentiary (f)(5) record, and closing after the 14-day stay in Rule 6004(h).
Can a sale order cut off California’s product-line successor liability?
Under Ray v. Alad Corp., 19 Cal.3d 22 (1977), an asset buyer takes the seller’s debts only through “an express or implied agreement of assumption,” a de facto merger, a “mere continuation of the seller,” or a transfer made “for the fraudulent purpose of escaping liability for the seller’s debts.”
Then Ray went further. A party that “acquires a manufacturing business and continues the output of its line of products” takes strict liability for defects in units its predecessor made, justified first by “the virtual destruction of the plaintiff’s remedies against the original manufacturer.” A bankrupt manufacturer is the textbook case.
In re Catalina Sea Ranch, LLC, No. 2:19-bk-24467-NB (Bankr. C.D. Cal. Apr. 13, 2020), held that “a claim for ‘successor liability’ is an ‘interest’ in the property being sold,” following the Third and Fourth Circuits. The Seventh Circuit, in Zerand-Bernal Group v. Cox, 23 F.3d 159 (7th Cir. 1994), would not let a bankruptcy court enjoin a product suit by someone injured after the case wound up. We have not located a published Ninth Circuit decision resolving the split, and BowFlex did not reach it because the plaintiffs had conceded the point below. The Catalina debtor had first tried an assignment for the benefit of creditors, which offers no such order.
What does a sale order not reliably wipe out for a California buyer?
Sales tax first. Rev. & Tax. Code § 6811 requires a successor to “withhold sufficient of the purchase price” until the seller produces a receipt or no-tax-due certificate, and section 6812 makes a buyer who fails to withhold liable “to the extent of the purchase price.” Regulation 1702(a) exempts “sales by trustees in bankruptcy.” But Annotation 535.0016 (2003) says that exemption does not cover Chapter 11 debtors in possession; that buyer escaped only because the sale order expressly extinguished pre-closing taxes.
Payroll has no bankruptcy carve-out. Unemp. Ins. Code § 1731 requires a buyer of “substantially all the assets” of an employer to withhold unpaid contributions until EDD certifies none are due. EDD has 30 days to answer under section 1732, and section 1733 caps the buyer’s liability at the purchase price.
Bulk-sale law is the clean exemption: Com. Code § 6103(c)(7) excludes sales by a “trustee in bankruptcy, debtor in possession.” Wages are not. Labor Code § 200.3 makes a successor liable on a final wage judgment against the old employer if it uses “substantially the same facilities or substantially the same workforce.” An assigned lease comes with its defaults, which 11 U.S.C. § 365(b)(1) requires to be cured.
Buying assets out of a California bankruptcy and counting on the sale order? The CDTFA and EDD certificate requests, the holdback, and the order language must be settled before closing, and an attorney who is also a CPA can size the exposure from the seller’s own returns.
What should a California customer or employee do after seeing a sale notice in the newspaper?
Due process requires “notice reasonably calculated, under all the circumstances, to apprise interested parties.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). A creditor whose identity is “reasonably ascertainable” gets mailed notice. Tulsa Professional Collection Services, Inc. v. Pope, 485 U.S. 478 (1988). Unknown creditors can be bound by publication.
That line decided BowFlex. The debtor had logged 337 complaints, but the record did not show what they said or who sent them, so the plaintiffs stayed unknown.
If a company that hurt you or owes you wages is selling in bankruptcy, object before the deadline, file a proof of claim before the bar date under Rule 3003(c), and write to debtor’s counsel so no one can later call you unknown.
Where does the CPA work change the size of the deal?
A 363 purchase is an applicable asset acquisition under IRC § 1060, allocated by the residual method and reported on Form 8594. The buyer gets a stepped-up cost basis, though California does not follow federal bonus depreciation. Real property is a change in ownership under Rev. & Tax. Code § 60, and Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008), limits the bankruptcy stamp-tax exemption to confirmed plans, so a 363 sale pays documentary transfer tax.
The holdback comes from the books. I tie the quarterly DE 9 returns to actual deposits and the sales tax returns to general ledger revenue, then read the warranty reserve against the claims log. A $40,000 reserve against $350,000 of claims history tells you what the order is really protecting.
How does this work when an Ontario buyer acquires a Fontana manufacturer?
Assume a Fontana maker of food-service equipment files Chapter 11 in the Central District of California, and an Ontario company bids $6.2 million: $2.4 million for the plant, $2.1 million for equipment, $0.6 million for inventory, and $1.1 million of goodwill. Diligence shows about $265,000 of unpaid sales tax, $92,000 of EDD contributions, and 1,900 units under warranty. All figures are illustrative.
The APA assumes only post-closing liabilities. The sale order names product, warranty, successor, and tax claims, enjoins claimants, and holds $400,000 of proceeds in a segregated account until CDTFA and EDD issue certificates or are paid. The debtor mails notice to 60 customers who already reported weld failures, and the buyer honors warranty repairs as a customer program, not an assumed debt.
After closing, the county tax under section 11911 on $2.4 million is $2,640, plus any city tax, and the Form 8594 numbers should match what the assessor sees.
| Liability | Cut off by a 363 order? | California rule | Buyer’s move |
|---|---|---|---|
| Product and warranty claims on pre-closing units | Usually, if named and notice holds | Ray v. Alad product-line rule | Name them in the order; mail known complainants |
| Sales and use tax | Trustee sales exempt; DIP sales contested | Rev. & Tax. Code §§ 6811, 6812 | Certificate request; holdback |
| EDD contributions | Uncertain | Unemp. Ins. Code §§ 1731 to 1733 | File DE 2220R; holdback |
| Bulk-sale creditors | Not applicable | Com. Code § 6103(c)(7) | None |
| Unpaid wages | Contested | Labor Code § 200.3 | Wage diligence; holdback |
| Assumed leases | No | 11 U.S.C. § 365(b)(1) cure | Price the cure in the APA |
Frequently Asked Questions
Does buying assets in a bankruptcy sale protect me from the seller’s product liability in California?
Usually, if the sale order expressly covers product and successor claims and notice was adequate. Otherwise, the Ray v. Alad Corp. product-line rule can make a buyer who continues the line liable for units the seller made. A Central District bankruptcy court has held that successor liability is an interest a section 363(f) sale can cut off.
Will CDTFA pursue me for the seller’s unpaid sales tax?
It can. Revenue and Taxation Code sections 6811 and 6812 make a buyer who does not withhold liable up to the purchase price. Regulation 1702 exempts sales by bankruptcy trustees, but agency legal staff has said that does not cover Chapter 11 debtors in possession. Request a certificate and hold back part of the price.
Do I need a bulk sale escrow when buying from a bankruptcy estate?
No. California Commercial Code section 6103(c)(7) excludes sales by a trustee in bankruptcy or a debtor in possession from the bulk sale rules. That exemption does not reach the tax successor statutes, so you still deal with CDTFA and with EDD under Unemployment Insurance Code sections 1731 through 1733.
What did the court decide in the BowFlex case?
On July 30, 2026, the federal district court in New Jersey affirmed an order requiring dismissal of four class actions against Johnson Health Tech, which bought BowFlex’s assets. The sale order foreclosed defect suits against the new owner, and the plaintiffs were bound by newspaper or email notice.
Am I bound by a sale order if I only saw a newspaper notice?
Possibly. If the debtor did not know and could not reasonably ascertain your claim, publication can satisfy due process under Mullane v. Central Hanover Bank and Trust Co. If the debtor knew about you, you were entitled to mailed notice. Either way, act before the objection deadline and the bar date.
How is the purchase price allocated in a section 363 sale?
Under Internal Revenue Code section 1060, by the residual method, with goodwill taking what is left, reported on Form 8594. The allocation drives the buyer’s depreciation, and in California it also affects property tax reassessment of any real property and the documentary transfer tax.
How North Star Law Firm Can Help
North Star Law Firm represents buyers across the Inland Empire and the Sacramento area in buying a business out of bankruptcy, from the APA and sale order to purchase price allocation and CDTFA and EDD clearances, and advises customers and employees with claims in a bankruptcy case. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California.
If you are buying assets from a bankrupt California company, or hold a claim against one, contact North Star Law Firm or schedule a consultation.