Selling of Assets in Chapter 11 -

      Sometimes during the Chapter 11 process, a determination is made that it makes sense to sell all or substantially all of the debtor's assets, and that time is of the essence in doing so. This may be due to an offer on the assets with a short escrow period, or where the debtor is unable to service secured debt and properties are about to be lost to foreclosure after relief from stay proceedings. There is often not enough time to obtain confirmation of a plan, which often takes 4-6 months. Courts generally will permit these high-speed asset sales to be made, outside of the ordinary course of business, after notice and a hearing under Section 363 of the Bankruptcy Code. A number of courts have developed guidelines for such motions and sales, and local bankruptcy practice and procedure should be carefully reviewed. Recent examples of this procedure ona large scale include the GM and Chrysler bankruptcies, both of which involved Section 363 sales.

High-Speed Asset Sales

      Because the motion in effect takes the place of a plan and disclosure statement, the courts take extra care to see that creditor's rights are not lost in the process. A debtor needs to show that the sale is bona fide and for a proper purpose; that a sound business reason exists for selling the assets prior to a plan being confirmed; reasonable and adequate notice of the sale terms has been given to creditors and interested parties; the sale is made in good faith; and the proposed sales price is fair and adequate. If this showing is made, the court will be inclined to grant the motion and allow the sale. Once completed, the net sales proceeds, if any, will be paid to the debtor estate, to be held in the debtor in possession account pending further court order.

Sales Free & Clear of Liens

      Many Chapter 11 sales motions are made "free and clear of liens". This means that the liens transfer over from the property being sold, to the proceeds of sale. Where a sale is made free and clear of liens, generally the court will require the debtor to submit a stipulation with the disputed secured creditor for distribution of the funds, within a certain time period after the close of escrow, perhaps 30 days. If no agreement has been reached, then the debtor is required to file an adversary proceeding against the disputed creditor to determine the validity, priority, nature and extent of the creditor's lien.

Post-Sale Procedures

      At this juncture, a decision is often made to either propose a liquidating plan where the Chapter 11 DIP disburses the money on hand to the creditors pursuant to the distribution scheme of the Bankruptcy Code, or to convert the case to Chapter 7 and allow the distribution to be made by the Chapter 7 trustee. The latter route has the rather unsalutary effect of layering the administrative expenses and decreasing the net amount paid over to creditors, but in some instances there are valid and legitimate reasons for doing so.

Relevant Attorney Articles -

Bankruptcy and Attorneys - What should you know? Cost of Filing Bankruptcy - Court and attorney Fees Can You Run a Business While In Bankruptcy? - A debtor can operate their business, enter into leases, sell property, and possibly reject collective bargaining agreements under Section 365 of the Bankruptcy Code Chapter 11 Attorneys - Qualifications and cost

Written by Henry Rendler