In times of economic turmoil, when sales of assets are difficult to negotiate and close, it is not unusual for sales of distressed assets to be halted by unresolved or disputed claims asserted by creditors or equity owners of the entities owning the assets.
The sale of a parcel of real estate may be thwarted by disputed mechanics or materialmen’s lien claims of record; the sale of a business by a deadlock among its owners. At such times, crowded dockets in the civil courts are ill equipped to afford a timely resolution to the matters in dispute, resulting in a paralysis of the ability to provide desperately needed liquidity by selling troubled assets.
However, where these obstacles block the ordinary sale process, salvation may lie in the federal bankruptcy court. Section 363 of the Bankruptcy Code provides the authority to sell individual or business property relatively quickly and free and clear of any and all liens, claims or other encumbrances. A title that passes to a purchaser at a Section 363 sale is clean, as attested by a court order, and, in the case of real estate, is also readily insurable.
As for the liens and claims against the assets sold, they do not disappear; instead they are transferred to the proceeds of the sale. Any disputed liens or other claims are adjudicated in the bankruptcy court, but do not hold up or in any way delay or impair the sale and the transfer of clean title to the buyer.
“To get the benefit of Section 363, the owner must become a ‘debtor’ — the subject of a voluntary or involuntary bankruptcy proceeding,” says Francis L. Carter, of Counsel to Katz Barron Squitero Faust. “But, where the asset owner’s financial condition is sufficiently dire, bankruptcy may be the best — perhaps the only — viable option where the paramount need is to sell assets.”
Smart Business spoke to Carter about sales of assets and how Section 363 can make a tough sell a little bit easier.
How do bankruptcy sales work?
To assure that sales are both fairly conducted and seen as being fairly conducted, bankruptcy sales of property outside the ordinary course of business are almost always competitive sales; i.e., sales at public auction. Depending on the type and value of the property, the debtor or bankruptcy trustee may employ brokers, investment bankers or auctioneers to prepare and offer the debtor’s property for sale. The process generally starts with the selection of a ‘stalking horse’ bidder, who contracts to purchase the property, subject to court approval. This approval can only be obtained if the court finds that the purchase and sale contract embodies the highest and best offer. This can only be done after affording other qualified potential buyers the opportunity to bid for the property.