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The Articles and Education section contains short, informative articles discussing business and legal aspects of bankruptcy auctions, Section 363 sales, workouts and restructurings.
Auctions and Section 363 sales must be approved by the Bankruptcy Court, which is part of the federal judicial system. The Bankruptcy Court approves sale procedures and must authorize the hiring of auctioneers to conduct bankruptcy sales under Section 363. Bankruptcy sales must be run fairly, with reasonable requirements that foster competitive bidding. The Bankruptcy Court approves the final bid which is usually the highest offer. In bankruptcy sales it is important to give broad notice so that the sale will be free and clear of liens and other interests.
The United States Trustee is a federal employee that supervises bankruptcy cases, including reviewing applications to hire professionals and auctioneers to conduct bankruptcy sales. The U.S. Trustee reviews fee proposals and also reviews proposed procedures for selling assets. Sale procedures are usually approved by the Bankruptcy Court before a bankruptcy sale is held.
Bankruptcy sales and auctions under Section 363 require notice of the sale, including notice to secured creditors and creditors with claims to the property. Giving proper notice is important for sales free and clear of liens. Notice should also be given to unsecured creditors and to prospective bidders. Auctioneers play an important role in marketing and advertising a bankruptcy sale.
The automatic stay arises automatically when a bankruptcy case is filed and stops all efforts to sell a debtor’s property. This article describes steps that the auctioneer and secured creditors can take to proceed with an auction of collateral, including some of the benefits of holding a sale or auction under Section 363 of the Bankruptcy Code. It also discusses rights of secured creditors to vacate the automatic stay.
Bankruptcy auctions and Section 363 sales are governed by written terms and conditions of sale that are given to registered bidders and announced before the calling of the auction. Bankruptcy auctions present unique problems which must be considered when drafting the terms and conditions of sale. Auctioneers can help formulate the terms and conditions of sale to attract bidders and maximize value. The article discusses when sale procedures can be modified and the role of the Bankruptcy Court.
Buyers and sellers benefit from having accurate due diligence information that can be easily accessed, preferably in an online document room. In some sales strategic purchasers may have an advantage over financial purchasers. Unreliable data hurts the auction process and causes lower recoveries for creditors. Preparing accurate bid packages is an important part of marketing property for sale and getting bidders to cast reasonable bids.
Bankruptcy sale procedures may require bidders to pre-qualify and post deposits and provide financial information that funds are available to pay the anticipated purchase price. Auctions use minimum bids, bid deposits and other techniques so that the auction runs smoothly. Bidders for some types of property like real estate leases may have to establish that they are qualified to assume a lease. The trustee or debtor that is selling property has discretion to require bidders to pre-qualify, subject to review by any creditors or official committees.
Bidding incentives and "bid protections" are commonly used in bankruptcy sales. Sellers encourage bidding by using expense reimbursement, break-up fees and minimum overbid amounts. Contractual provisions that prohibit soliciting other bids are less likely to be approved because they discourage competitive bidding. Bidding incentives must be reasonable and have to be approved by the Bankruptcy Court.
Even though a bankruptcy business has defaulted under its contracts, licenses, permits and other agreements, the rights may be preserved for sale under Sections 363 and 365 of the Bankruptcy Code. Contract clauses that attempt to automatically terminate rights on a bankruptcy filing may not be enforceable. Disputes over the ability of the debtor/trustee to sell contract rights can be consolidated in the federal bankruptcy court for prompt disposition. Auctioneers play an important role in valuing and marketing contract rights for sale under bankruptcy procedures.