363 Asset Sales

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With the ongoing shutdown of tens of thousands of businesses causing massive unemployment, bankruptcy filings will inevitably increase substantially. The Bankruptcy Code is designed to facilitate the sale of assets. The Bankruptcy Code provides a method for assets to be sold "free and clear" of liens and claims so long as any creditor with a lien on the asset to be sold is paid in full, the lien is in bona fide dispute or the secured creditor consents to the sale. (Bankruptcy Code section 363(f) provides that the debtor or trustee may sell property free and clear of any interest in such property of an entity other than the estate, only if: 1) applicable non-bankruptcy law permits sale of such property free and clear of such interest; 2) such entity consents; 3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; 4) such interest is in bona fide dispute; or 5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.) There is no efficient market, however, for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. For instance, I often identify bankruptcy asset sales for my investor clients who were otherwise unaware of sale opportunities. This paper identifies ways in which investors may more easily discover bankruptcy asset sales.

Real estate assets are often sold in bankruptcy cases. A real estate debtor often commences a bankruptcy case on the eve of a foreclosure sale or receivership hearing to stay the foreclosure sale or appointment of a receiver. The typical real estate case involves a borrower with a single piece of property, one secured creditor and few unsecured creditors. These bankruptcy cases are called single asset real estate cases. (The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental." 11 U.S.C. §101(51B).) Unlike other business bankruptcy cases, the single asset real estate debtor must file a feasible plan of reorganization or begin making interest payments to the secured creditor within 90 days from the date of the bankruptcy filing or within 30 days of the court's determination that the case is a single asset real estate case. See, 11 U.S.C. §362(d)(3). This compressed time frame often accelerates the debtor's decision to sell the real estate asset, particularly to preserve any equity in the property. Absent a quick sale, a bankruptcy court may authorize the commencement or completion of the creditor's foreclosure of the property.

Assets may be sold in bankruptcy by either a sale to a specific purchaser or by way of a public auction. In either case, the debtor or trustee must demonstrate that it undertook a fulsome marketing process designed to maximize recoveries to creditors. The manner of marketing is a function of the unique circumstances of the asset being sold. Public sales are often subject to a competitive bidding process approved by the Bankruptcy Court. Such sales often contain a stalking horse bidder who sets the purchase-price floor. To the extent that there are multiple bidders, the debtor or trustee may hold an auction after which the Bankruptcy Court will approve the winning bidder. The stalking horse bidder may obtain reimbursement of due diligence costs and a breakup fee in the event that another bidder succeeds in purchasing the asset. The timing and manner of the bidding process varies by the unique circumstances of each case. At the end of the sale process, the Bankruptcy Court typically enters an order declaring that the winning bidder has obtained ownership of the asset free and clear of all liens and claims. .

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