Bankruptcy Sales: What You Need To Know
Chapter 11 of the United States Bankruptcy Code (11 U.S.C. § 363) allows an individual or corporate debtor to reorganize their debts for the benefit of creditors. As part of a reorganization process, a Debtor may need to liquidate assets as permitted by Section 363. A bankruptcy asset sale may concern a home, jewelry, commercial property, or even a Major League Baseball team (i.e., the Los Angeles Dodgers). Purchasing such property through a liquidation sale may allow one to find an asset at a bargain price, but it requires a careful understanding of the processes and procedures.
The Bankruptcy Sale Process
Initially, the Debtor will need to market the asset for sale. This is often done by the Debtor or through a retained professional, such as a business broker, or, in the case of a home, a real estate agent. After receiving bids, and assuming there is more than one potential purchaser, the Debtor will often select the highest bid, and that bid will become known as the “Stalking Horse”. The Debtor and the Stalking Horse bidder negotiate an interim Asset Purchase Agreement that will include the terms of sale. Once this document is agreed to and executed, the Debtor files a motion with the Bankruptcy Court seeking approval of a sale of the Debtor’s asset(s). The Bankruptcy Court will conduct an auction once the bid procedures and third-party bidders are approved.
The bid procedures are designed to encourage bidding to drive up the price of the asset for the benefit of creditors. Though the Debtor may want to liquidate an asset expeditiously in an effort to exit Bankruptcy Court sooner rather than later, sufficient time should be provided to prospective purchasers to submit qualifying offers so they, too, can bid at the sale hearing. Bidding procedures should set forth, at a minimum: what exactly is being sold, that the sale is free and clear of all liens and encumbrances, the initial amount a third-party bidder will need to make to bid, the amount of the deposit of funds to qualify as an overbidder, and the minimum amount of bidding increments.
The bidding procedures will also address any “breakup fees” or expense reimbursement the Stalking Horse bidder might receive if it is not ultimately the successful bidder. The Bankruptcy Code does not set out the exact formula for a breakup fee, but it is usually a set number or a percentage of the final sale price.
When the Debtor’s sale motion is filed, notice is provided to creditors and potential bidders. At the sale hearing, each bidding party will make their appearances, and a designated representative of each party will make the bids. If there are no bidders at a sale hearing, the auction is cancelled, and the assets are sold to the Stalking Horse bidder. For the sale to be approved, the Debtor must show it is based on a sound business decision, over any objections that creditors are free to bring forth to the Bankruptcy Court.