BANKRUPTCY BARGAINS.

AuthorDAVIDOFF, BRIAN

Helping Clients Acquire Assets Through Bankruptcy Court Auctions

AS YOU HELP YOUR CLIENTS grow their businesses, you might want to investigate an often untapped source for asset acquisition that frequently offers bargain-basement prices: bankruptcy court auctions. At bankruptcy auctions your clients can purchase anything from small fixtures and fittings-the hard assets of a restaurant for example-to entire companies and large pieces of real estate.

Bargains are not limited to hard assets. Bankruptcy auctions often include the sale of patent or trademark rights, which can impart significant potential value and often can be purchased for a fraction of their fair value.

Here are some real life examples of how companies have successfully utilized bankruptcy auctions. A small candy company heard that its competitor's business was in bankruptcy. After thorough due diligence, the candy company bought out the failing company at a fraction of the going-concern value, eliminating the competition and then doubling its own asset base. A California automobile parts manufacturer heard through the industry grapevine that its East Coast competitor had gone into bankruptcy. The West Coast company structured a deal to purchase the competitor out of bankruptcy, establishing a new regional presence for a relatively nominal amount.

PREPARING FOR THE PURCHASE

You can buy assets via a bankruptcy in one of two ways. First, assets can be sold through a confirmed Chapter 11 reorganization plan. Typically this is laborious, cumbersome and time-consuming. The approach most buyers favor is the sale procedure under Sec. 363 of the Bankruptcy Code which applies to all sales under Chapter 7 and 11. Chapter 7 is a liquidation either of a company or an individual's assets, and a Chapter 7 trustee is always appointed to liquidate the assets. Chapter 11 is a reorganization of a business or an individual. Typically a trustee is not appointed in a Chapter 11, and the reorganization is controlled by existing management, known as a debtor-in-possession (DIP). In Chapter 11 reorganizations, a trustee is appointed only if a debtor mismanages the business or engages in other prohibited conduct.

Sec. 363 controls sales by corporate, sole proprietor or individual debtors. Sales may be simple or complex and need not be limited to outright transfers of title. A transaction may combine elements of a sale, lease, license or other rights to use property. For example, a buyer may purchase a debtor's manufacturing plant, lease from the DIP specialized equipment, assume the equipment leases and obtain a continuing license of technology and patents needed to operate the plant.

Under Sec. 363(b), a debtor may sell the estate's property, other than in the ordinary course of business, only after notice and a hearing. The concept of "after notice and hearing" is flexible, allowing a court to expedite or dispense with the notice and hearing in appropriate cases. For example, in a simple...

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