Section 363 of Title 11 of the United States Code (“Bankruptcy Code”) authorizes trustees (and Chapter 11 debtors-in-possession) to use, sell, or lease property of a debtor’s bankruptcy estate outside of the ordinary course of business upon bankruptcy court approval. Some of the key benefits for purchasers are the ability to purchase assets free and clear of liens under Section 363(f) and obtain protections from adverse consequences of any appeal under Section 363(m).
Under 363(f), the trustee or debtor-in-possession may sell property of the debtor’s bankruptcy estate free and clear of all liens, claim and encumbrances as long as: (1) applicable non-bankruptcy law permits it; (2) the interested party consents; (3) such interest is a lien and the sale price of the property is greater than the value of all liens; (4) the interest of the interested party is in bona fide dispute; or (5) the interested party could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of its interest.
Once the Court finds that property of the Debtor’s estate can be sold to you pursuant to Section 363(f), you should ensure that the Order includes findings under Section 363(m) of the Bankruptcy Code that you purchased the property in “good faith”. The practical implication of securing a 363(m) finding is that once you, as a the good faith purchaser, close on the sale (assuming the court does not grant a stay pending any appeal), the sale cannot be undone by reversal or modification of the sale order. No one can “un-ring bell” (except in very rare situations…for instance, a bad faith involuntary case).
However, you cannot just assume that a 363(m) finding will occur. Ensuring that you such a valuable finding requires some planning and work on your part. If possible, you should take an active role in the trustee’s/debtor’s motion to approve the sale. Remember, although the debtor or trustee generally makes a good faith presentation to the court, it is the purchaser’s burden to make sure the evidentiary burden has been met to establish good faith.
Some questions to consider:
Does the motion seek a good faith finding under Section 363(m) and at least an initial analysis of the factual basis for a good faith finding?
What are the relationships between the debtor and the proposed purchasers?
Is this an arms length transaction?
Is there any risk that potential bidders and/or the debtor could be accused of price controlling, anti-bid rigging, fraud or collusion during the auction process?
Does the motion seek waiver of the 14 day stay of the sale order under Bankruptcy Rule 6004(h) – so that you can close immediately? The ability to close sooner prevents delay and relieves that debtor/trustee from overhead and burden of securing the assets for 2 more weeks.
The bankruptcy sale process has its challenges, obstacles and traps for the unwary. However, with proper planning, it can yield optimal results for the seller, purchaser and creditors.