Bankruptcy Sales

AuthorBy Jason B. Binford and Matthew Gruenberg
Pages175-196
175
The term “bankruptcy” can mean different things to different people,
often depending on the person’s level of experience with actual bank-
ruptcy practice. Those with little experience in this area of law often
associate bankruptcy with a failed business that has closed its doors
and is liquidating its assets. To be sure, such a failed business has the
option to liquidate via Chapter 7 of the Bankruptcy Code.1 In addition,
Chapter 11 is often used to liquidate companies via a plan of liquida-
tion. However, bankruptcy is not synonymous with going out of busi-
ness. Those with some degree of experience with bankruptcy likely
associate a business bankruptcy ling with a reorganization. The title,
after all, of Chapter 11 is “reorganization” and the chapter deals with
the requirements for a debtor to obtain a conrmed plan of reorganiza-
tion and emerge from bankruptcy. As discussed in detail elsewhere in
this book, Chapter 11 is a powerful tool to allow distressed companies
to clean up their balance sheets and emerge from the protective (but
restrictive) connes of bankruptcy as a nancially healthier entity,
poised for future success.
Again, however, bankruptcy is not so limited. Professionals who
make their living dealing with bankruptcy matters understand a fact
that may seem counterintuitive. That is, in the context of bankruptcy
lings, bankruptcy is very frequently used as a tool for selling a busi-
ness rather than for reorganizing a business. In fact, close to 40 percent
of Chapter 11 cases are sales, rather than reorganizations.2 Bankruptcy
sales are commonly referred to as 363 sales, in reference to the gov-
erning section of the Bankruptcy Code, 11 U.S.C. § 363. In bankruptcy
practice, the fact that 363 sales are so common warrants understand-
ing the legal bases and mechanics of such sales. In the context of a
1. 11 U.S.C. §§ 101, et seq.
2. See J. Scott Victor et al., Family Christian: Cautionary Tale of Best Auction Practices,
34
Bankr. Inst. J.
12, 12 n.1 (Oct. 2015) (citing data from Professor Lynn LoPucki’s Bank-
ruptcy Research Database).
Bankruptcy SaleS
By Jason B. Binford and Matthew Gruenberg 8
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176 Chapter 8
franchisor or franchisee bankruptcy ling, understanding 363 sales is important
as well because the sale (or attempted sale) raises important issues affecting
the unique relationship between franchisors and franchisees.
To that end, this chapter discusses 363 sales, beginning with the legal bases
for such sales under the Bankruptcy Code and moving into a discussion of how
such sales are implemented in bankruptcy practice. Following that, the unique
issues raised by the franchisor/franchisee relationship in the context of a bank-
ruptcy sale are discussed and analyzed.
I. BANKRUPTCY SALES—THE LEGAL
UNDERPINNINGS
A. BANKRUPTCY CODE SECTION 363(B)—SALES
OUTSIDE THE ORDINARY COURSE OF BUSINESS
When a bankruptcy case is led, an estate is created (known as the “bankruptcy
estate”) consisting of all property interests of the entity ling bankruptcy
(known as a “debtor”). In a Chapter 11 ling of an operating business, the man-
agement and owners of the debtor will continue to control the company (known
as a debtor-in-possession) and will continue to operate the business during the
pendency of the case. Many aspects of a business Chapter 11 case are unfamiliar
to debtor’s management, and the process can be burdensome and sometimes
overwhelming. Debtors are required to, among many other things, prepare
and le detailed reporting relating to their assets and liabilities, describe their
recent business history and asset transfers, and le monthly nancial state-
ments. Debtors must also deal with creditors and other parties in interest who
may le contentious motions seeking relief in the bankruptcy case or who may
require a debtor representative to appear and be examined under oath. In addi-
tion, the close supervision of the bankruptcy court generally requires a debtor
to le a motion seeking authority to take any action that is considered outside
the ordinary course of the debtor’s business. For example, a restaurant debtor
would not be required to seek court authority to continue selling hamburgers or
to hire and re employees. But, such a debtor would be required to le a motion
seeking authority from the bankruptcy court to reject a real property lease or to
make a signicant capital improvement.
Sales during a bankruptcy case can fall either inside or outside the ordinary
course of business. If it is an ordinary course sale, the debtor may proceed
without the necessity of ling a motion in the bankruptcy court. If it is not an
ordinary course sale, the debtor is required to le a motion (the “Sale Motion”)
and comply with applicable bankruptcy rules related to notice.3 Courts have
3. 11 U.S.C. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease, other
than in the ordinary course of business, property of the estate.”).
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