All of these factors, mixed together, result in an inexorable downward pressure on the value of the company (or any of its assets). Thus, a multi-family residential complex, or commercial project, may now be purchased out of bankruptcy for significantly less than it would have cost to purchase the same assets only a month or so prior to its bankruptcy, even though the project itself is likely little changed in that period of time.

GlobeSt.com: What unique protections does a buyer receive when purchasing an asset out of bankruptcy?

Tuggle: There are a number of benefits afforded a purchaser of assets in bankruptcy. These protections include stalking horse break-up fees, purchaser in good faith, speed, and finality.

Stalking Horse Break-up Fees: Often when a debtor seeks to sell its assets in a bankruptcy context, the debtor is already aware of other parties which may be interested in purchasing the asset. These parties may be competitors, operators of complimentary industries (for example a battery manufacturer selling its assets to an electric car manufacturer) or another entity along the “supply chain” of a certain industry. Whatever the case, a bankruptcy debtor may approach another entity about purchasing the debtor's assets.

If interested, this first bidder is often referred to as a “stalking horse” in bankruptcy. The stalking horse will often invest considerable time and resources in performing due diligence prior to the sale. The stalking horse bidder may condition its offer on the reimbursement of its expenses and payment of a “break-up fee” if the proposed sale does not occur. Such break-up fees must be approved by the court prior to the proposed sale. If approved, the stalking horse bidder may receive reimbursement for its due diligence expenses and will not be out of pocket anything if the proposed sale is not completed.

Speed: Bankruptcy sales can happen in a relatively short timeframe. Thus the value of being the stalking horse bidder cannot be overstated. It is the stalking horse bidder who will have the most time to evaluate the debtor's assets and liabilities. However, once the debtor seeks to hold a sale, it can often be accomplished in as little as 30-60 days.

Purchaser in Good Faith: If the Bankruptcy Court finds that the sale has been conducted in good faith (i.e. there was no fraudulent or collusive conduct, no attempt to take unfair advantage of other bidders or a grossly inadequate sales price) the purchaser of the assets will be deemed as a “good-faith” purchaser. The good faith purchaser takes the assets “free and clear” of other liens claims and encumbrances, the good faith purchaser has “clean title” to the assets—free of any competing claim or lien. As discussed below, the good faith purchaser gets near immediate finality of the purchase, free from any collateral attack on the sale or the sale procedures.

Finality: A good faith purchaser of the asset is afforded finality in the sale. 11 U.S.C. § 363(m) provides that the sale of an asset to a good faith purchaser is not affected by the “reversal or modification” of the sale order on appeal unless the party seeking to reverse or modify the sale order has obtained a stay pending appeal (which as a practical matter the objecting party is unlikely to obtain from the court which just approved the sale of the asset in the first instance). Thus, once the time-frame for appeal of the order approving the sale has passed, or no stay pending the appeal has been granted, then the sale to the good faith purchaser will only be set aside in highly unusual circumstances.

GlobeSt.com: Can you overcome a dissenting minority (i.e. a minority of shareholders/members who don't want to sell) and have the sale anyway?

Tuggle: If the bankruptcy court allows the sale of an asset to be conducted, such sale will generally be “free of any liens, claims or encumbrances.” This means that the purchaser of the asset, provided it is a good faith purchaser as discussed, takes title to the property free of even claims of minority shareholders, secured lienholders, tax liens, etc., unless the buyer specifically takes title subject to enumerated claims. For example the buyer may be willing to have a secured lien remain on the property rather than paying off this lien.

GlobeSt.com: Are buyers protected from successor liability?

Tuggle: Generally, yes. Outside of bankruptcy an asset sale generally does not impose successor liability on the purchaser of the assets. Similarly, bankruptcy courts follow this general rule and will not impose successor liability on the purchaser of the asset absent some indication that: (a) the purchaser intended to assume some liabilities (for example taking subject to a senior secured lien as noted above); (b) the transaction amounted to a de facto merger (i.e. the purchaser continues the normal operations of the seller, uses the same management, personnel, and physical location, or the shareholders of the debtor become the shareholders of the new entity)p; or (c) if the purchased assets are simply a reorganized structure of the existing debtor (i.e. the rug store that holds a “going out of business” sale every 6 weeks, followed by a “grand re-opening”, and subsequent “going out of business” sale). Provided there is no indicia of any of the three criteria discussed above, the purchaser of the debtor's assets will not be subject to successor liability.

GlobeSt.com: If the debtor is the lessee under certain contracts, you can have the debtor reject the “bad” leases and the buyer will only take the business with the “good” leases.

Tuggle: If the debtor is the lessee on numerous leases of property (either real or personal) or other contracts, a potential buyer of the debtor's assets can structure the purchase of the debtor's assets to include the contracts or leases the buyer wants to assume and leave the less desirable leases/contracts with the debtor. The contracts left behind are often rejected by the debtor resulting in a claim against the debtor's estate (but not the buyer).

Conversely, the better contracts/leases can be “assumed” by the purchaser. To assume the contract the buyer must “cure” the contract/lease, meaning any monetary or other defaults must be brought current. However in the context of such an assumption, the buyer may be able to re-negotiate contractual terms with the counter party (i.e. “if I don't assume your contract you will simply have an unsecured rejection damage claim against the debtor, and we both know you will get pennies on the dollar for that claim. So if you want me to assume your contract, I need you to lower the monthly payment”). However, if the contract or lease is below market, the purchaser may be happy to assume the contract or lease as it stands. Finally, the bankruptcy code renders unenforceable most “anti-assignment” provisions so that contracts which might otherwise be un-assignable outside of bankruptcy are freely assignable within bankruptcy. This ability to “cherry pick” which of the debtor's contracts/leases the buyer wishes to assume is a big advantage of a bankruptcy purchase of assets as opposed to a non-bankruptcy purchase.