What is the general process to start a 363 Sale?

Section 363 of the Bankruptcy Code which authorizes the sale of assets out of the ordinary course of business in advance of a plan, subject to certain conditions. A debtor or trustee seeks to sell assets out of the ordinary course of business by making an application to the bankruptcy court describing (i) the assets it intends to sell; (ii) the terms of the proposed sale; (iii) what efforts have been made to market the assets; (iv) the reason the proposed purchaser is a qualified purchaser and is offering a fair price; and (v) the reason the asset needs to be sold in advance of a plan.


What does the application to the court typically contain?

The debtor files an application (i) requesting a date for a hearing to consider the sale to the proposed purchaser or to another person or entity wishing to make a competing bid; (ii) fixing the terms and conditions under which competing bids may be made; (iii) approving a "break-up fee" to be paid to the prospective purchaser, often referred to as the "stalking horse," in the event the prospective purchaser is ultimately outbid; and (iv) establishing the form of notice for the sale hearing and bid terms which typically requires publication in approved newspapers and related industry and trade publications.


What happens at the court hearing?

A hearing to consider a 363 Sale is normally heard on not less than 20 days notice. As a practical matter, prospective purchasers should expect that the entire process will take at least 30 days and sometimes much longer, particularly in the event of scheduling difficulties and possible objections by creditors or other interested parties who believe that the sale is not fair or justified. At the conclusion of the sale process, presuming that all of the requirements of Section 363 are satisfied, the bankruptcy court will enter an order finding that the sale was necessary, fair and reasonable. The order should also provide that the sale is to a "good faith purchaser."


What is a "good faith purchaser"?

Section 363 protects a good faith purchaser from any reversal or modification of a sale unless the closing of the sale is stayed pending the outcome of an appeal. There is no precise definition for good faith purchaser. Generally, however, it means that the purchaser was not involved in collusive bidding and dealt with the debtor on an arm's-length basis and was not the beneficiary of any undisclosed connections to the debtor or inside information giving it an unfair advantage over other potential purchasers. A purchaser should always demand that the sale order have a specific good faith finding. With such a finding and a prompt sale closing before any appeal is filed, the purchaser can avoid the consequence of a reversal or modification of the sale order and any delay in closing caused by an intervening appeal.


What is a "stalking horse" bidder"?

The party that initially contracts to purchase assets from a debtor in a bankruptcy case is commonly referred to as the stalking horse. Being the stalking horse has significant advantages. First, the stalking horse generally has a greater opportunity to perform due diligence than a prospective purchaser who only bids at the bankruptcy court sale hearing. Second, the stalking horse is able to negotiate deal terms that suit its exact needs as opposed to other prospective purchasers who generally must accept the stalking horse contract with few, if any, modifications. Third, other prospective purchasers are required to make bids that exceed the stalking horse's bid by at least a specified minimum increment, plus the amount of any break-up fee to which the stalking horse is entitled. This provides the stalking horse with an obvious economic advantage by making any deal more expensive for competitive bidders.


What is a "break-up fee"?

A break-up fee is an amount due the stalking horse from the sale proceeds if the stalking horse is ultimately not the successful bidder for the debtor's assets. There is no fixed formula or percentage for break-up fees. Whether a break-up fee is warranted is determined on a case-by-case basis. Nevertheless, bankruptcy courts generally limit break-up fees to about 3% of the proposed purchase price. The idea is that the break-up fee should be large enough to fairly compensate the failed stalking horse bidder for its actual expense in negotiating the initial sale contract but not so large so as to unduly favor the stalking horse or provide it with a windfall. A problem with limiting break-up fees to just 3% in smaller deals is that often it is not large enough to cover the stalking horse's actual expenses. Bankruptcy courts are understandably reluctant to approve an amount that represents too high a percentage of the purchase price even if it is otherwise a reasonable sum.


What is meant by a "higher or better" offer?

When faced with competing bids for a debtor's assets a bankruptcy court must determine which bid to recognize as the winning bid. That determination is not necessarily based solely on which bid is higher. The court has the discretion to approve a lower bid if it regards it as a "better" bid. When bids are identical except with respect to amount the court's job is easy; it simply designates the higher bid. However, bids sometimes are not identical in structure and comparing them to determine which is better sometimes is not a simple task. A lower dollar bid may save the estate from substantial damage claims which would otherwise dilute the money available for the creditors and thus be a better bid. There are no fixed rules for determining when a lower or different bid is better. Each case is fact specific and must be evaluated on it's own merits.


What are the benefits for buyer at a Bankruptcy 363 Sale?

There are two basic benefits enjoyed by a purchaser of assets in a 363 Sale. First, the purchaser is often able to acquire the assets at a lower price than might otherwise be possible. In theory, the fact that asset sales are subject to notice and advertising should ensure that the assets realize the highest possible price. In reality, experience shows that the bankruptcy process tends to depress prices, particularly when the debtor is liquidating and going out of business rather than reorganizing. Second, a bankruptcy court-approved asset sale is generally free and clear of any liens, claims or encumbrances with any such liens, claims or encumbrances attaching solely to the proceeds of the sale. This means that the purchaser is essentially getting the same benefit it would get as buyer at a foreclosure sale and, therefore, should not be concerned with anyone appearing at a later date and claiming an interest in the purchased assets.