Representing Purchasers of Assets from Bankruptcy Estates
| Publication year | 1991 |
| Pages | 2259 |
| Citation | Vol. 11 No. 1991 Pg. 2259 |
1991, November, Pg. 2259. Representing Purchasers of Assets from Bankruptcy Estates
The traditional rule for bankruptcy sales has been caveat emptor. However, the modern trend in bankruptcy law has been to provide purchasers with greater protection in order to maximize the price obtained for creditors of the bankruptcy estate. From a purchaser's perspective, acquiring the assets of a financially distressed concern often can be best accomplished in bankruptcy. The Bankruptcy Code ("Code") and the Federal Rules of Bankruptcy Procedure ("Rules") provide a well-defined procedure for selling property and, in theory, sales can be sanitized through orders of the Bankruptcy Court.
This article begins with a brief overview of provisions of the Code (11 U.S.C. § 101 et seq.) and the Rules pertinent to bankruptcy sales. The article then considers selected problems facing purchasers of property from bankruptcy estates, with a particular focus on the extent to which (1) the finality of an approved sale may be attacked and (2) purchasers may be insulated from the claims of creditors of the bankruptcy debtor.
Sales of property of a bankruptcy estate by a trustee or debtor in possession are governed by Code § 363. Sales out-
In certain circumstances, a trustee or debtor in possession may sell property free and clear of a lien or other interest in the property held by an entity other than the bankruptcy estate. Code § 363(f) sets forth five permitted circumstances, of which the movant must satisfy at least one. Such a sale generally requires the consent of the secured creditor or a showing that the sale price exceeds the aggregate value of all liens on the property, with the liens to attach to the sale proceeds. That showing is less onerous than it may appear initially because the aggregate value of the liens on property is limited by the value of the property itself.(fn6) Thus, any sale for the value of the secured property plus one dollar would appear to satisfy the requirement that the sale price exceed the aggregate value of all liens on the property.
Although Code § 363(f) appears to permit a trustee to sell secured property free and clear of liens so long as "value" is realized, a secured creditor may protect itself against a judicial undervaluation by invoking Code § 363(k). That subsection generally permits a secured creditor to bid on the secured property, offsetting its claim against the purchase price. The language of the subsection
indicates that a secured creditor may bid in the full amount of the creditor's allowed claim, including the secured portion and any unsecured portion thereof in the event the creditor is undersecured----(fn7)
Purchasers of assets from bankruptcy estates typically require that the property be "cleansed" as a sale free and clear of liens pursuant to Code § 363(f). However, counsel for purchasers should note that the cleansing effect of § 363(f) is not universal, but serves only to pass title free and clear of creditors' interests in the property. Section 363(f) does not cleanse the property of other claims that are not in the nature of a lien or other property interest.(fn8) It is interesting to note that sales pursuant to Chapter 11 plans have a broader cleansing effect than sales under Code § 363(b) alone. Code
§ 1141(c) provides that property dealt with by a confirmed Chapter 11 plan is free and clear of all "claims and interests" of creditors, equity security holders and general partners in the debtor.
The doctrine of caveat emptor applies to bankruptcy sales. A bankruptcy estate consists of all legal or equitable interests of the debtor in property at the time the case is commenced.(fn9) Therefore, the trustee or debtor in possession succeeds only to the rights which the debtor had at the time the petition in bankruptcy was filed.(fn10) It follows that the purchaser at a bankruptcy sale is presumed to know that the only title a trustee can sell is the trustee's...
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