Insider Section 363 Sales That Survive Scrutiny

Three Key Takeaways

• When the proposed buyer of a debtor’s assets is an insider, the buyer must do more to show that the sale is in good faith and for fair value. However, a family relationship alone is not a reason to deny the sale or a good-faith finding pursuant to section 363(m) of the Bankruptcy Code.
• The most important protection is an independent fiduciary. In Island Gastroenterology, an independent chief restructuring officer negotiated the purchase agreement with the buyer’s counsel, and the father and son never negotiated with each other.
• The lack of a market for a debtor entity does not defeat a sale. A documented marketing process and credible testimony explaining why no other bids came in allowed the sale to survive both section 363(b) and the extra scrutiny applied to insiders, over the objection of a creditor holding a $17.8 million claim.

In a July post we examined In re Nguyen Win Properties LLC, No. 25-11795-T, 2026 WL 1865670 (Bankr. N.D. Okla. June 29, 2026), where a bankruptcy court denied a proposed sale pursuant to section 363(b) of the Bankruptcy Code after finding the buyer was a non-statutory insider and the transaction failed heightened scrutiny. That decision illustrated how an insider sale can collapse when the record shows control, non-arm’s-length dealing, and an absence of independent process.

A recent decision from the Eastern District of New York shows how an insider sale can survive scrutiny when done properly. In In re Island Gastroenterology Consultants, P.C., 2026 WL 2353301 (Bankr. E.D.N.Y. Aug. 13, 2026), the bankruptcy court approved a sale of substantially all assets to a buyer owned by the son of one of the debtor’s principals. The court applied heightened scrutiny, found good faith pursuant to section 363(m) of the Bankruptcy Code, and overruled the objection of a former owner holding a $17.8 million claim. The case offers a practical roadmap for debtors and potential insider purchasers, and a useful reference for creditors evaluating whether to challenge these deals.

Governing Law

Pursuant to section 363(b) of the Bankruptcy Code, a debtor in possession may sell property of the estate outside the ordinary course of business after notice and a hearing. In the Second Circuit, the debtor must show a sound business justification for selling before confirmation of a plan. Committee of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983). Courts weigh multiple factors, including how much time has passed since the filing, the sale price compared to any appraisals, and whether the assets are increasing or decreasing in value. When the proposed purchaser is an insider, the insider bears “a heightened responsibility to demonstrate that the sale is proposed in good faith and for fair value.” Island Gastroenterology, 2026 WL 2353301, at *7. At the same time, “[i]t is not ‘per se bad faith’ for an insider to purchase assets of a debtor, and ‘a sale to him without more would not suffice to show a lack of good faith.’” Id. (quoting In re Bakalis, 220 B.R. 525 (Bankr. E.D.N.Y. 1998)). The question therefore is not the identity of the buyer or his relationship to the debtor, but whether the sales process was sufficient.

The Facts in Island Gastroenterology

Island Gastroenterology was a Long Island medical practice owned fifty percent by Dr. Rajkumar Mariwalla and fifty percent by his daughter. The stalking-horse buyer, Link Medical Services PLLC (“Link”), was ultimately owned by Dr. Nitin Mariwalla, the son of the debtor’s principal. Dr. Rajiv Saxena, a former owner of the practice, objected to the sale and held a disputed claim arising from a 2015 state-court lawsuit against the debtor. He objected on multiple grounds, including that the sale was not proposed in good faith and that Link was not entitled to a good-faith finding pursuant to section 363(m) of the Bankruptcy Code.

Because of the family relationship, the debtor structured the process so that negotiations did not occur between the father (the debtor’s principal) and his son (ultimately, the principal of the purchaser). Instead, an independent chief restructuring officer negotiated the asset purchase agreement with Link’s counsel. The deal consisted of $250,000 in cash, plus ninety-five percent of the accounts receivable outstanding at closing that were less than ninety days old, plus Link’s assumption of certain liabilities, including a real-property lease. Total consideration was approximately $860,000.

The CRO marketed the assets to his prior contacts and an additional eighteen parties, including regional hospitals (Northwell, Good Samaritan, Catholic Hospital, Winthrop, and Stony Brook), other gastroenterology practices, and management service organizations. The larger hospital systems preferred simply hiring physicians directly rather than buying the practice as a going concern. The CRO also sought to market the assets to liquidating companies, but they only expressed interest in the receivables. At the end of the marketing period, only Link submitted a bid for the debtor’s assets.

The Court’s Analysis

The bankruptcy court found a sound business justification under the Lionel factors, given that the case was seven months old, the marketing process established the market value even without appraisals, and the assets were declining in value, as the practice was operating at a loss and struggling to pay employees.

The bankruptcy court further found the testimony of both the debtor’s principal and his son to be credible and it observed that the parties “went to great lengths to avoid even the appearance of impropriety.” Island Gastroenterology, 2026 WL 2353301, at *11. While the court acknowledged concerns about Link’s limited due diligence, including its election not to review raw receivables data or decide in advance which physicians and locations would remain, those concerns did not defeat good faith. Citing Licensing by Paolo v. Sinatra (In re Gucci), 126 F.3d 380, 394 (2d Cir. 1997), the court held that a purchaser’s “intended use of the assets purchased is not relevant to the good faith inquiry,” and that good faith is lost only through “fraud, collusion between the purchaser and other bidders or the trustee, or any attempt to take grossly unfair advantage of other bidders.” There were no other bidders, and there was no evidence of collusion. “A familial relationship, alone, is not a basis to deny this request.” Id. at *11. The court also distinguished In re Flour City Bagels, LLC, 557 B.R. 53 (Bankr. W.D.N.Y. 2016), where the insider buyer also controlled the debtor seller. In this case, the CRO created a buffer between the family members, which the court called “a meaningful difference.”

Lessons on How to Structure an Insider Sale

Put an independent fiduciary in charge of negotiations. The most important fact in the court’s analysis was that the father and son did not negotiate directly with each other. The CRO negotiated on behalf of the debtor and dealt exclusively with Link’s counsel. In Nguyen, by contrast, the principal remained active on both sides of the deal, and the sale was denied. When an insider is the proposed buyer, a CRO or similar independent fiduciary who actually runs the negotiations is often the difference between approval and denial.

Build the record the standard requires. The bankruptcy court walked through the Lionel factors, the district’s sale guidelines for insider sales, and the heightened good-faith standard, and the debtor had evidence on each point: declarations from the CRO and the buyer, three days of testimony subject to cross-examination, and an explanation for the price of each asset category. A deal without that record would likely not have survived the same objection.

Whether you are structuring a sale to an insider, serving as the independent fiduciary running one, or representing a creditor deciding whether to challenge one, the attorneys at FactorLaw can help you evaluate the record, the risks, and the leverage on both sides of the deal.

By: Sean P. Williams