Bankruptcy Bargains: Asset Acquisitions for Buyers, Financing Opportunities for Lenders
I was seldom able to see an opportunity until it had ceased to be one.
– Mark Twain
The current economic environment has created opportunities both for those seeking to acquire assets and for those lenders willing to finance distressed-asset acquisitions. These opportunities are arising with greater frequency in the context of bankruptcy court sales made under Section 363 of the Bankruptcy Code.
Buyer Benefits of Bankruptcy Sales
Whether under Chapter 7 or Chapter 11, bankruptcy sales offer the buyer significant benefits and protections that generally do not exist in an otherwise distressed-asset sale. The key benefit is that it makes the resulting sale “free and clear,” meaning that the buyer acquires the assets free and clear of all liens, claims and encumbrances. Caution should be exercised, however, because certain claims-such as environmental and product liability claims-may survive the sale and instead pass to the buyer.
Another buyer benefit associated with bankruptcy sales is that a purchaser who acts in good faith, pays value, and acts without knowledge of adverse claims in the sale transaction is entitled to special protection under the Bankruptcy Code. Specifically, the Bankruptcy provides that a sale to a good faith purchaser cannot be reversed or set aside on appeal. It is therefore important for any sale order to make these very specific findings.
From the lender’s perspective, there are challenges when determining whether to finance an acquisition out of bankruptcy. First, the lender should thoroughly understand the sale procedure, which is most often an auction. That process starts with the Bankruptcy Court’s approval of bidding procedures that establish the rules of the auction including key dates, advertising requirements, bidder pre-qualification, submission of opening bids, and the due diligence period. Also regulated is the auction process, which involves bidding rules such as bid increments, sale approval and closing.
Lenders are typically asked to issue a loan commitment during the due diligence period. Thus, a potential lender will usually need to move quickly to fund the transaction. Financing should be conditional based on the lender’s approval of a proposed sale order determining that the buyer is a good faith purchaser.
Obligations of Buyers and Lenders
Buyers and lenders alike must conduct due diligence in all areas of the sale. This includes:
- Understanding the property’s history and condition.
- Knowing who may assert liens on the assets to be sold and other interested parties such as utility companies, local taxing authorities, landlords, other creditors, etc.
- Paying special attention to the notice given, making sure it’s done properly in order to avoid later efforts to set aside the sale order.
Recognizing the Opportunity
As Mark Twain noted, opportunity is sometimes hard to recognize. If you do recognize a bankruptcy sale opportunity, remember that every opportunity brings risk. Experienced bankruptcy counsel can help you avoid some risk by ensuring there will not be any post-closing challenges or surprises for either the lender or the borrower.
Your legal counsel can help you tackle any bankruptcy sale issues by analyzing the transaction and assisting in preparing the critically important sale order and the acquisition and financing documents.