Articles Posted in 363 Sales

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Editor’s note: this post originally appeared in Law360.

Buying distressed assets is big business.  Many distressed assets are acquired through the seller’s Chapter 11 bankruptcy case.   In those instances, a buyer will enter into a purchase and sale agreement with the seller/debtor and the agreement is generally subject to notice and opportunity for overbids by third parties and ultimate bankruptcy court approval.

The somewhat problematic issue is determining what rights or obligations, if any, do the parties have under the agreement between the date of execution and the date the Court enters an order approving the sale?   This is precisely the issue the parties encountered in the chapter 11 bankruptcy case of Hot Dog on a Stick, which is pending before the U.S. Bankruptcy Court for the Central District of California.

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Filings are Down

Commercial bankruptcy filings were down by 28% in 2013 over the prior period in 2012, and overall bankruptcy filings dropped 15%, putting the country on the lowest level of petitions since 2007 according to figures released by the American Bankruptcy Institute.  The data, compiled by Epiq Systems, Inc. and released by the American Bankruptcy Institute shows there were 3,055 commercial filings in November 2013 down from 4,252 filings in November 2012.

So What’s Up?

With the continued improvement in the economy, this trend undoubtedly will continue.  So what does that bode for the world of restructuring professionals?  Well, obviously, with the reduced number of filings there is a reduced case load for restructuring professionals to sink their teeth into.  However, what is also evident is that with the passing years it seems that the nature of bankruptcy filings have also changed.

While this is somewhat anecdotal, it also appears to be backed up by the data.  Over the last several years, the nature and way that chapter 11 bankruptcy filings are being handled has changed.  Gone seem to be the days of traditional restructurings where a company filed a chapter 11, worked its way through the issues that caused it to file in the first place, and ultimately filed a plan of reorganization some 9 months to 2 years later, all the while being funded either by the company’s existing lender or by a new debtor-in-possession (“DIP”) lender.  More and more cases these days are being disposed of by way of a relatively quick section 363 sale.

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The biggest trend in Chapter 11 bankruptcies over the past 10 years is to sell assets through a “Section 363 sale,” named for Section 363 of the Bankruptcy Code, which describes the standards for sales in bankruptcy court.   Previously, in most Chapter 11 cases, the debtor would propose a Chapter 11 plan.   In successful cases, the Chapter 11 plan would be approved by creditors and by the court.   If a debtor was selling substantially all of its assets, the sale would be part of the Chapter 11 plan.

With greater and greater frequency, debtors and their buyers have eschewed the more laborious Chapter 11 Plan process, opting to consummate the sale transaction by way of a simple motion under Section 363 of the Bankruptcy Code.   In order to obtain court approval of a Chapter 11 Plan, a debtor must first obtain approval of a disclosure statement, must then obtain sufficient votes from creditors, and finally, must meet other stringent Bankruptcy Code requirements.   This takes time, generally at least 3 months.  It is also expensive, and the outcome is uncertain.

In contrast, a motion to sell assets free and clear of liens under Section 363 can be accomplished upon regular notice—21 days in Southern California—and sometimes on even shorter notice if the Court allows it.   In addition, the paperwork is much less onerous and thus less expensive for the bankruptcy estate.

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