by John A. Polinko, Esq.
The distressed market has always presented fertile ground for business parties – investors, business owners, and start-ups – to explore opportunities that, though they may come with some uncertainty, offer "value" that potentially outweighs the issues present. Sometimes these opportunities come through as shut-downs, liquidations, reorganizations, or otherwise (at times, resulting in auctions) in which owners seek to divest themselves of certain assets. One popular vehicle often seen is in conjunction with a Chapter 11 bankruptcy filing; specifically, a sale pursuant to Section 363 of the United States Bankruptcy Code. The key to a Section 363 sale, and the overwhelming reason such sales are so enticing to buyers, is the undeniable stripping of all existing interests in the assets sold, resulting in a purchase that is truly "free and clear."
Sales Are More Common Than Not
While difficult to apply exact numbers, it is fairly common in today's bankruptcy practice to find a significant number of cases filed traveling down the avenue of "sale" rather than true business reorganization. During the pendency of a Chapter 11 case, such sales can occur either pursuant to a plan filed by the bankruptcy debtor, or through a stand-alone motion. The sale can be for the entirety of the bankruptcy debtor's assets, or only a distinct portion. Regardless of what is being sold, the purpose of the sale is generally of little concern of the buyer; rather, the buyer's concern is the price, the process, and the fact that such assets will be owned "free and clear."
Benefits to Interested Parties
Once the bankruptcy debtor has made known that it intends to sell certain of its assets, a party interested in those assets may act as the "stalking horse." Becoming the stalking horse presents certain benefits including, among other things, the ability to establish the initial purchase price for the assets and any terms and conditions related thereto. This provides the stalking horse with some input into the process. The risks, on the other hand, can be managed somewhat through commonly accepted stalking horse protections, including, but not limited to, a break-up fee if the stalking horse is not ultimately the purchaser of the assets. Generally, the next step involves a marketing and bidding process conducted by the bankruptcy debtor (or its retained professionals), which may, or may not, lead to an auction of the assets. The successful bidder at auction (or, the stalking horse, if there is no auction) becomes the purchaser and, upon closing, takes the bankruptcy debtor's assets free and clear of all liens, claims, interests and encumbrances.
Expectations for Both the Debtor and Stalking Horse
For the most part, and with limited exceptions, a 363 sale through bankruptcy is meant to expose the assets to the "world," thus providing the debtor with the ability to take the position, with secured creditors and otherwise, that the assets have been marketed and sold at the highest value attainable in the market, given the circumstances. For the successful bidder, upon the issuance of an order by the Bankruptcy Court approving the sale, assets that were (most likely) previously encumbered have now been purchased, free and clear of all liens, claims and interests by the successful bidder, with the successful bidder able to utilize the assets with no interference by other parties.
Finding Such Opportunities
How does one find these opportunities? First and foremost, having legal counsel and other professionals that have their respective "ears to the ground" is of great value. Generally speaking, professionals in the distressed markets are a close-knit group and tend to keep one another updated, whether through professional publications or otherwise, on trends they are seeing and what they are hearing "on the street." Professionals in the distressed markets are also keen on keeping abreast of current financial conditions, including the debt markets, and, though not always correct, are usually able to forecast where distress may be encroaching.
