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Beware when shopping at bankruptcies

By: DOLAN MEDIA NEWSWIRES//April 11, 2014//

Beware when shopping at bankruptcies

By: DOLAN MEDIA NEWSWIRES//April 11, 2014//

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Bankruptcy cases can provide valuable opportunities for bargain shopping.

Because the Bankruptcy Code includes an array of tools that encourage distressed-asset sales, vigilant buyers can obtain property more quickly and at lower prices. But deals that appear too good to be true often are, and parties seeking to buy assets in bankruptcy sales need to be as careful to identify pitfalls as they are to identify opportunities.

One of the most powerful tools in the bankruptcy arsenal, and among the most beneficial for potential asset purchasers, is Section 363 of the federal Bankruptcy Code. Section 363 lets a debtor sell estate assets “free and clear” of the liens and interests of secured creditors and other parties.

bankruptcy-picSuch sales, at least in theory, benefit everyone in a bankruptcy case. Buyers take title to assets free and clear of liens, encumbrances and claims and receive the extra comfort of a bankruptcy court order blessing the sale. Unsecured creditors benefit because a public sale may encourage active bidding that could result in sufficient money to make a distribution to unsecured creditors after payment of secured claims. Secured creditors benefit from a robust bidding process, and their risk is mitigated by their ability to credit the bid if cash bids are not sufficient to pay secured claims in full.

Despite the benefits of free and clear sales, secured creditors and others can suffer substantial harm if their collateral is sold out from under them without recourse. For that reason, Section 363 sets conditions for sales. Most commonly, those are: the entity holding an interest in the property consents; the property is sold at a price greater than the aggregate value of all liens; or the entity holding an interest in the property could be compelled to accept a money satisfaction of such interest.

Bankruptcy courts often take a liberal approach to finding the above conditions met. For example, many courts have found that a secured creditor “consents” to a free and clear sale based on its failure to file a formal objection.

Recently, the pendulum has swung in the other direction, at least in Oregon. In “In re Smith,” an unpublished opinion recently issued by the Oregon bankruptcy court, the court explicitly held that a lienholder’s failure to object to a proposed sale is insufficient to satisfy the “consent” condition, and that the lienholder’s actual assent is required.

If a lienholder does not consent to the sale, or if one of the other sale conditions is not met, the purchaser may devote significant resources to a potential sale transaction and take steps in reliance on the closing of such sale and then find that the bankruptcy court refuses to approve it. Even worse, if a bankruptcy court improvidently approves a sale and the transaction closes, the purchaser may find itself in limbo in the event of an appeal by a nonconsenting creditor.

Someone buying assets in a Section 363 sale should carefully monitor the bankruptcy case, and should confirm that any parties holding liens in the assets to be purchased have received notice of the proposed sale and, preferably, have participated in the case.

Timothy Solomon is an attorney in Portland, Ore.-based Sussman Shank LLP’s bankruptcy and creditors’ rights practice group.


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