Technology Business Asset Sales in Bankruptcy By Kimberly Osenbaugh Marc Barreca David Neu Preston Gates & Ellis LLP Seattle, Washington Thanks to Ayanna Wooten-Days, Preston Gates & Ellis LLP, for assistance with these materials.
I. Introduction Asset sales pursuant to 11 U.S.C. § 363(b) motions and pursuant to Chapter 11 plans have traditionally been important tools for maximizing the value of bankruptcy estates. In recent years, the use of Chapter 11 cases for sale of financially distressed debtors’ business assets has become increasingly common, particularly asset sales approved through § 363(b) motions followed by post-sale plans of liquidation for distribution of the sale assets. This method of asset sales has been used especially frequently by start-up technology businesses long on intellectual property and short on cash. Sales of technology business assets in bankruptcy almost universally involve the transfer of intellectual property, requiring careful attention to the rights of non-debtor licensors to the business and non-debtor licensees of the business. Sales of business assets in the telecom and cable communication industries or in other heavily regulated businesses, as well as sales of assets subject to special legal restrictions such as customer lists, inherently involve the interplay between government regulation and bankruptcy law. Both intellectual property license agreements and governmental regulatory issues are outside the scope of this article. This article will instead focus on the bankruptcy sale process including the use of breakup fees and other “stalking horse” bidder protections, the use of § 363 sales of substantially all of the assets of a debtor outside of a plan of reorganization and other procedural issues affecting technology business asset sales. II. Sales of Assets Under 11 U.S.C. § 363 11 U.S.C. § 363(c) authorizes a trustee or debtor in possession to use, sell, or lease property of the estate in the “ordinary course of business.” For example, a Chapter 11 debtor continuing business operations is free to engage in ordinary sales to its customers. Whether a transaction is in the ordinary course of the business of the debtor is frequently characterized as a two-step inquiry as to whether (1) the transaction is the sort commonly undertaken by companies in the industry (the horizontal test); and (2) whether the transaction subjects a creditor to economic risk of a nature different than creditors would have typically accepted in deciding to extend credit to the debtor. See In re Roth Am., Inc., 975 F.2d 949 (3rd.Cir.1992); Burlington N.R.R.v. Dant & Russell (In re Dant & Russell, Inc.), 853 F.2d 700, 704-06 (9th.Cir.1988). If the asset sale in question is outside of the debtor’s ordinary course of business, the sale may only be consummated with bankruptcy court approval. 11 U.S.C. § 363(b)(1). An out of ordinary course sale transaction occurring without court approval may be avoided under 11 U.S.C. § 549 as an unauthorized post-petition transfer. Section 363(f) of the Bankruptcy Code authorizes sales of assets “free and clear of any interest in such property” 1 , outside of the ordinary course of business, following notice and hearing, under the following circumstances: 1 A recent case has construed this statute to permit a sale of real property “free and clear” of the rights of a lessee that failed to object to the sale. See Precision Industries, Inc. v. Qualitech , 327 F.3d 537 (7 th Cir. 2003), rehearing denied 2003 U.S. App. LEXIS 10626 (2003). In 1998, Debtors entered into a supply
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. Bankruptcy courts are normally deferential to the business judgment of the trustee or debtor in possession when deciding whether to approve a proposed sale. Special scrutiny will be put to bear for transactions involving sale to insiders or sales benefiting insiders. Generally, to approve a sale under 11 U.S.C. § 363(b), the court must find that the proposed sale is reasonable and in the best interests of creditors. Besides requiring independent proof of the reasonableness of the proposed price, most courts require that proposed sales are subject to higher and better offers. This results in the reality that most bankruptcy sales outside of Chapter 11 plans, even if initially framed as private sales to a single party, are in fact potentially auctions if any overbidders appear. Absent objection, bankruptcy courts can authorize sales of assets even where the sale proceeds are insufficient to satisfy claims of all parties secured by the sale assets. However, if a secured party objects, the court must determine under § 363(f)(5) whether agreement with Precision Industries that required Precision to construct a supply warehouse on Debtor’s property and to provide on-site supply services for a period of ten years. The property was leased to Precision for ten years for nominal rent. One year later, Debtor filed a Chapter 11 bankruptcy petition. All of Debtors’ assets, including the property leased to Precision, were sold at auction “free and clear” of all liens, claims, encumbrances, and interests, except for specifically enumerated liens. Although Precision had notice of the sale and of the hearing, it did not object. Thereafter, the purchaser took possession of Precision’s warehouse by changing the locks. Precision sued the purchaser asserting a right to the leased property pursuant to § 356(h), which grants a lessee the right to maintain possession of property after a lease is rejected. The Bankruptcy Court held that § 363(f) allows the sale of property free and clear of any interest so that under the terms of the sale order, the purchaser obtained title free and clear of Precision’s possessory rights under the ground lease. The District Court reversed holding that § 356(h) and § 363(f) conflicted and that the more specific terms of § 356(h) trumped. The Seventh Circuit Court of Appeals reversed the District Court, holding that Precision’s interest was terminated by the sale “free and clear” of other interests. The term “interest” in § 363(f) is sufficiently broad to include a lessee’s possessory interest under a lease. Courts frequently struggle to define what interests may be eliminated under § 363(f), including product liability claims, unexercised options, rights of first refusal, and other rights not clearly covered by the term “interests.” See, e.g., Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV, 209 F.3d 252 (3d.Cir. 2000) (any interest in property that can be reduced to money satisfaction attaches to proceeds of sale); United Mine Workers of Am. 1992 Benefit Plan v. Leckie Smokeless Coal Co. (In re Leckie Smokeless Coal Co.) , 99 F.3d 573 (4th.Cir.1996) (benefit plan).
“such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” Courts have struggled with what this subsection really authorizes, reaching often creative conclusions. See, generally, In re Canonigo, 276 B.R. 257 (Bankr.N.D.Cal. 2002) (discussing cases and concluding that § 363(f)(5) only applies to interests, not liens); see, also, In re Heine, 141 B.R. 185 (Bankr.D.S.D. 1992); In re Terrace Chalet Apts. Ltd., 159 B.R. 821 (N.D.Ill. 1993); In re Healthco Int’l., Inc., 174 B.R. 174 (Bankr.D.Ma. 1994). At a §363 sale, “unless the court orders otherwise”, the holder of a claim secured by a lien on the property may credit bid. §363(k) An appeal from an order authorizing a sale of assets may be moot if the appellant has not obtaining a stay pending appeal provided that the purchaser has acted “in good faith”; knowledge of objections and the appeal do not affect the validity of the sale nor the good faith of the purchaser. §363(m) Potential buyers of assets out of bankruptcy sales should be mindful of restrictions under 11 U.S.C. § 363 prohibiting collusive bidding. 11 U.S.C. § 363(n) provides (n) The trustee may avoid a sale under this section if the sale price was controlled by an agreement among potential bidders at such sale, or may recover from a party to such agreement any amount by which the value of the property sold exceeds the price at which such sale was consummated, and may recover any costs, attorneys’ fees, or expenses incurred in avoiding such sale or recovering such amount. In addition to any recovery under the preceding sentence, the court may grant judgment for punitive damages in favor of the estate and against any such party that entered into such an agreement in willful disregard of this subsection. See, generally, Lone Star Industries, Inc. v. Compania Naviera Perez Companc (In re New York Trap Rock Corp.), 42 F.3d 747 (2nd.Cir. 1994); Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380 (2nd.Cir. 1997); Landscape Properties, Inc. v. Vogel, 46 F.3d 1416 (8th.Cir.), cert. denied , 516 U.S. 823 (1995). Sales of assets pursuant to section 363 of the Bankruptcy Code are often conducted pursuant to sophisticated bidding procedures which may include stalking horse agreements, bidder qualifications, irrevocable bids, minimum bidding increments, deposit requirements, variables on the package of assets to be sold, matching bids and the like. One of the issues of continuing interest and controversy is break-up fees and topping fees.
Recommend
More recommend
