Section 363 of the Bankruptcy Code (the Code) provides a mechanism whereby distressed debt investors can purchase unencumbered assets out of bankruptcy.  Specifically, Code Section 363(b)(1) authorizes a “trustee” (in a Chapter 11 cases, this usually refers to the debtor itself) to sell “property of the estate” other than in the ordinary course of business after notice and a hearing.  Section 363(f) provides that, subject to satisfying certain conditions, the trustee may sell property under Section 363(b) “free and clear of any interest in such property” that a third party may claim.  The ability to purchase assets “free and clear” can be a tremendous benefit to distressed debt investors.  Among other things, it permits greater certainty of ownership and valuation of assets, and easier resale, versus a purchase outside of bankruptcy.  On the downside, however, 363 sales can take a significant amount of time.  Moreover, 363 sales generally proceed as auctions, meaning that the first bidder – known colloquially as the “stalking horse” – can be outbid.  To address this possibility, the stalking horse can provide in the purchase agreement relating to its bid for expense reimbursement, and/or a break-up fee and/or so-called “overbid protection”  Yet the inclusion of such protections in purchase agreements typically provoke challenges from trustees or creditors’ committees, and the law governing such challenges remains unsettled.  The core principle emerging from the relevant cases is that the bankruptcy court (or any appellate court) will only uphold the validity of a break-up fee to the extent the fee benefits the bankruptcy estate.  This article examines the potential pitfalls of participating in 363 sales – an important topic for hedge funds, especially those with a strategy that involves investing in and around bankruptcies, as more and more interesting assets wind up on the bankruptcy auction block.