Inforuptcy Blog Archives February 2015

Becoming a Bankruptcy Auctioneer or Appraiser

Part (1/2)

INTRODUCTION
We often get asked by auctioneers if they can use our site to help them get hired to sell assets in bankruptcy. The answer is a resounding -- yes

The biggest hurdle for most auctioneers is complying with the legal process required to be an "agent" of the court. Since bankruptcy is a legal process all professionals must follow the laws / rules of conduct. The biggest hurdles for auctioneers are usually bonding and reporting requirements. To learn more about what it takes to become an auctioneer, I have provided the description prepared by the US Department of Justice below and a link to their trustee handbook (just search for auctioneer):

Handbook for Chapter 7 Trustees

In part two, I'll discuss how you can use our site, Inforuptcy.com, to find cases where you could be hired.

AUCTIONEERS
General Standards
The trustee may employ auctioneers as professional persons pursuant to §§ 327(a) and 328(a) to sell property of the estate. All auction sales must be noticed pursuant to FRBP 6004(a).

The trustee must actively supervise the activities of the auctioneers to ensure that estate property is protected against loss, that property is sold for reasonable prices to independent buyers, that auction proceeds are promptly and fully remitted, that auctioneers timely submit accurate sale reports, and that auctioneer expenses are actual and necessary and paid in accordance with legal requirements. Methods by which a trustee can supervise auctioneers include personally attending auction sales, thoroughly reviewing auctioneer reports, and independently verifying reported information. The trustee should advise the United States Trustee of concerns with respect to auctioneers and must report situations which could result in a loss to the estate. Failure to appropriately supervise auctioneers may result in claims against the trustee individually.

A representative of the United States Trustee may attend auctions.

Compensation
An auctioneer’s compensation must be approved by order of the court. § 328, FRBP 6005. Any buyer’s premium [1] must be fully disclosed in the employment application and considered in determining the reasonableness of the total compensation.

Although auctioneers, outside of a bankruptcy context, usually deduct their commissions and expenses from the sales proceeds and remit a net amount to the seller, this practice may not be employed with regard to bankruptcy estate funds, unless it is specifically authorized by order of the court. However, the order authorizing the employment may specify the percentage fee to be charged by the auctioneer and authorize the deduction of the commission and the costs of sale from the sales proceeds, with the effect of the auctioneer remitting the net sales proceeds to the trustee. In those cases, the auctioneer must present an affidavit or declaration listing all costs and expenses incurred with the report of sale.

Bonding and Insurance
The trustee must ensure that auctioneers are adequately bonded, prior to taking possession of estate property, in an amount that is sufficient to cover all receipts from the sale. The bond should be in favor of the United States of America and is distinct from any other auctioneer’s bond required under state law. The amount of the bond will be established by local bankruptcy rule or the United States Trustee. The trustee should confirm that the auctioneer is bonded in an appropriate amount to cover all estates in which the particular auctioneer has been employed. All original bonds should be forwarded to the United States Trustee.

The United States Trustee monitors the adequacy of the bond. The trustee also should determine if the auctioneer maintains insurance for lost or stolen property, since the trustee may wish to make a claim against the insurer for any such losses.

When the auctioneer assumes control over estate property for a period of time prior to sale, the trustee should keep an inventory of the items stored and periodically verify that the assets still exist and are in good condition. Insurance claims for lost or stolen property should be made promptly, and the trustee should inform the United States Trustee of such claims.  

Turnover of Proceeds
The auctioneer must not commingle auction proceeds with business, personal or other accounts.

Whenever possible, the auctioneer should immediately turnover auction proceeds to the trustee. In any event, all proceeds must be turned over within thirty (30) days of the auction. The United States Trustee may have additional requirements in this area.

If an auctioneer fails to account for or to turnover auction proceeds within thirty (30) days, the trustee should promptly notify the United States Trustee and take immediate action to recover the funds, including initiating a proceeding against the auctioneer’s bond.

Auctioneer’s Report
The auctioneer must submit an itemized statement of the property sold, the name of each purchaser, and the price received for each item, lot, or for the property as a whole if sold in bulk. FRBP 6004(f). The trustee must ensure that the auctioneer’s report is promptly submitted upon completion of the auction. If the report has not been provided within thirty (30) days after the auction, the trustee should request a copy and ensure that it has been filed with the court and United States Trustee, or as otherwise provided by local rules and practices.

The trustee must compare the auctioneer’s report to the initial inventory and obtain an explanation for any discrepancies. The trustee also should scrutinize items marked ‘stolen’ or ‘missing.’ As noted earlier, the trustee should attempt to recover the value of lost or stolen items by filing a claim with the auctioneer’s insurer or by initiating a proceeding against the auctioneer’s bond, as appropriate.

APPRAISERS
A trustee may require the services of an appraiser to ascertain the value of property of an estate. For economy of administration, trustees may use alternative means of valuation if feasible, but the basis for the valuation must be documented. Alternative valuation means include the NADA book for automobiles; information acquired from real estate agents, as well as county records regarding recent sales of comparable real property; or advertisements for the sale of like goods.

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If you prefer, you can also schedule a 15 minute web demo so you can see for yourself how to get started.

Schedule a Demo

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You May Also Be Interested In:
The 363 Bankruptcy Sale Procedure – Broken Down and Simplified
Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
In Which District/Venue Should You Purchase the Asset?
Why U.S. Bankruptcy Acquisitions Make Good Sense For Foreign Investors
Overbid? What is that?
Is Your Bankruptcy Asset Purchase Lien Free? Why?

Is Your Bankruptcy Asset Purchase Lien Free? Why?

Posted by Matthew C. Lein, Esq. on February 18, 2015

Guest Post By Matthew C. Lein, Esq.
Lein Law Offices
www.leinlawoffices.com

INTRODUCTION
The purpose of this article is to help investors (from beginner to advanced) understand what it means to buy an asset lien free through the bankruptcy court.  To do so, I will explain what a lien is, and how a lien can be satisfied both outside of and through the bankruptcy court.  To help explain the above, I will use a simple example where Ivan Investor would like to purchase a home owned by Harry Homeowner.  I will then end with a real world example where an investor was able to purchase an asset lien free from a seller through the bankruptcy court.  My hope is that potential investors will then understand how value can be created in some instances by buying assets through the bankruptcy court.  

WHAT IS A LIEN?
A lien is a “legal right or interest that a creditor has in another's property, lasting usually until a debt or duty that it secures is satisfied.”  Black's Law Dictionary (9th ed. 2009).  The person whom owns or has control of said lien against property is the Lien Creditor or Lienholder.  

Liens can come in a variety of forms.  Such forms include, but are not limited to: Mortgages, IRS Liens, Judgment Liens, Mechanic’s Liens, and Child Support Liens.

The above types of liens can be further classified into two distinct categories: secured and unsecured. A secured lienholder is often given an interest in an asset used as collateral in return for borrowing money to a buyer (E.g. when a debtor buys a home or car using funds given by a bank).  An unsecured creditor extends credit to a debtor without collateral (E.g. Credit Cards).  

HOW IS A LIEN SATISFIED IN A NORMAL SALE?
In most non-bankruptcy sales, liens are satisfied depending on their unsecured or secured status, and when the lien filed.  

Consider the following situation: Harry Homeowner wants to sell his home to Ivan Investor for the assumed fair market value of $100,000 and Ivan Investor will not be financing the purchase – Ivan Investor will pay cash. The following liens are against Harry Homeowner’s home: (1) first mortgage owed to “Alpha Bank” in the amount of $43,000; (2) line of credit owed to “Butternut Bank” in the amount of $17,000; and, a judgment in the amount of $10,000 is owed to Christopher Creditor.  

When the property is sold, the proceeds from the sale will be used to satisfy the creditors in the following order: (1) Alpha Bank; (2) Butternut Bank; and, (3) Cristopher Creditor.  Harry Homeowner will receive $30,000.  Most importantly, however, Ivan Investor will receive the property lien free because the liens to Alpha Bank, Butternut Bank, and Christopher Creditor have been satisfied.  

Fair Market Value              $100,000
Alpha Bank                          ($43,000)
Butternut Bank                   ($17,000)
Christopher Creditor         ($10,000)
Harry Homeowner             $30,000

CAN BUYING AN ASSET THROUGH THE BANKRUPTCY COURT CREATE VALUE FOR THE INVESTOR?
The short answer is yes.  Now let’s assume the same hypothetical as above except now the fair market value of the home is $60,000 and Harry Homeowner has now filed for bankruptcy relief.  Ivan Investor wants Harry Homeowner’s home, but as a shrewd investor, will not pay $70,000 for a home that is worth only $60,000.  The question becomes: Can Ivan Investor buy Harry Homeowner’s home for its fair market value of $60,000?  

Ivan Investor can contact the bankruptcy trustee who is responsible for administrating the bankruptcy estate with an offer.  The bankruptcy trustee will file a notice of motion and motion with the court disclosing the terms of the sale with the court and all interested parties.  If no interested party objects (including Christopher Creditor), the court will likely approve of the sale.  Assuming no transaction costs are involved (which are almost always involved), Ivan Investor’s $60,000 will be disbursed to Alpha Bank and Butternut Bank.  No proceeds will be given to Christopher Creditor or Harry Homeowner.  

Fair Market Value                 $60,000
Alpha Bank                            ($43,000)
Butternut Bank                     ($17,000)
Christopher Creditor                          -
Harry Homeowner                           $0

Applying the above principle in other instances.

The example above is simple, but the principle above is powerful and can be applied in other instances.   For example, not long ago Hostess Brands (the previous owner of the Twinkies pastry), could not “stay current on its $700 million in outstanding loans and keep contributing to the unions’ pension plans.”  http://nypost.com/2011/12/22/hostess-filing-in-mix/.  The above principle was applied (but in a far more complex situation), and Hostess Brands sold many of its businesses’ assets to various investors with the consent of the bankruptcy court to overcome the concerns facing the company.   Today the company that owns what were the assets of Hostess Brands are owned by a new company, but without the concerns that once faced Hostess Brands.

CONCLUSION
Purchasing assets through the bankruptcy courts can create value for investors like Ivan Investor purchasing a single asset or a group of investors purchasing assets from a larger distressed company.  The value created for an investor is having the ability to purchase an asset free of any liens and encumbrances via court approval in instances when potential lienholders, like Christopher Creditor, may claim otherwise.

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To use the only search tool to find bankruptcy asset sales across the country, you can sign up to our Maverick plan for $99 / month (cancel any time).

If you are a real estate investor interested in short sale leads from dismissed chapter 13 cases, you can sign up to our new reports plan for $49 / month (cancel any time).

If you prefer, you can also schedule a 15 minute web demo so you can see for yourself how to get started.

Schedule a Demo

__________________________________

You May Also Be Interested In:
The 363 Bankruptcy Sale Procedure – Broken Down and Simplified
Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
In Which District/Venue Should You Purchase the Asset?
Why U.S. Bankruptcy Acquisitions Make Good Sense For Foreign Investors
Overbid? What is that?

Overbid? What is that?

Posted by Yosina M. Lissebeck, Esq. on February 4, 2015

Guest Post By Yosina M. Lissebeck, Esq.
Lissebeck Law
www.lissebecklaw.com

Overbid? What is that? The short and easy answer is that an overbid is an auction conducted during a hearing to approve a bankruptcy sale. You see Bankruptcy Code § 363 authorizes a debtor-in-possession or Trustee, to sell property of the estate other than in the ordinary course of business. A proposed sale of estate property will be approved if it is in the best interests of the estate, based on the facts and history of the case.[1] Before the Court can approve such a proposed sale, the Court must find that there is a valid business justification for the sale.[2] In addition to a sufficient business reason for the sale, the Court must find (1) the sale is in the best interest of the estate; (2) is fair and reasonable; (3) the assets to be sold were adequately marketed; and (4) was negotiated in good faith; and (5) that the buyer is proceeding in good faith; and (6) the sale is an “arms-length” transaction.[3] Lastly, the Court must find that the debtor-in-possession gave adequate and reasonable notice of the sale.[4]

There are various types of sales that can take place, but the two most typical are a private sale, and a sale subject to overbid. A private sale is a sale between just the Estate and the purchaser. A sale subject to overbid is a sale between the Estate and the purchaser; but a third party can come into the process and state that it is willing to purchase the asset for more than the sale price, and then there will be bidding between the parties, like at an auction.

The reason why bankruptcy sales are most often subject to overbid is because of the Estate’s duty to maximize the value of the asset for the benefit of creditors. A sales price achieved at auction (or presumably subjecting the sale to overbid) is ordinarily assumed to approximate market value when there is competition by an appropriate number of bidders.[5]

So how does it work? Let’s say the Estate is selling a commercial office building. The Trustee/DIP has marketed the building and has had a lot of interest from potential purchasers. It has entered into a purchase agreement with a buyer for a price of $1,500,000, subject to overbid. The Trustee/DIP will then file a motion with the bankruptcy court to approve overbid procedures. The overbid procedures will vary, but basically they will state that the purchase agreement is the controlling document, that the price is $1,500,000, that the initial overbid will be $1,525,000, and that the bidding increments will be $10,000. The Trustee/DIP will set a deadline for all interested overbidders to participate, usually 7 days before the hearing, and require a deposit and a writing stating the intent to overbid. The Trustee/DIP may also require proof of the ability to close, and will usually also require that the overbidders do their own due diligence prior to the hearing.  While the deposit for the successful overbidder is non-refundable, as it will be applied to the purchase price, the non-successful bidders will receive the deposit back. The Trustee/DIP will file the documents with the bankruptcy court and notice the sale with overbid procedures to all creditors, other parties who showed an interest in the property, and whomever else may want to overbid.  That sale motion is also now picked up by Inforuptcy, which is a great new marketing tool for the Estates.

Now What? If you are interested in participating as an overbidder you follow the directions in the notice. You provide your deposit, you state your intent, and you do your due diligence. You also show up at the hearing and get prepared to participate in a live auction. The attorney for the Trustee/DIP or the court will generally hold that auction, the rules and procedures will be stated in open court, the overbidders will be asked to identify themselves, and the auction will start. Once the bidding has stopped, the court will confirm the sale to the highest overbidder, and ask the next highest overbidder to be the “back up” just in case the sale doesn’t close to the highest overbidder.

What if it is a private sale and you are interested in purchasing the asset? The best thing to do is to contact the Trustee/ DIP and find out if you can purchase the asset for a higher amount. If there is another party who is interested, the Trustee/DIP may then decide to set it for an overbid hearing. If the Trustee/DIP doesn’t respond to you and you really want to purchase the asset for a higher amount, then you can always hire an attorney to object to the sale and tell the Court you want to purchase the asset for a higher amount. The Motion will set forth what the deadline is to file an objection with the Court. As stated above, the Trustee/DIP and Court has to make sure that the sale is in the best interest of the Estate, and a higher price for the asset is usually better. Now I say usually because it could be a complicated sale with a lot of moving parts – then price might not be the only factor the Trustee/DIP is looking at. For example, let’s say the Trustee is selling residential real property, which is owned by the Debtor and a tenant in common, and the Trustee is selling the property back to the tenant in common. In this case, it would most likely be a private sale, not subject to overbid, because of the title issues.

That’s it. Easy right! Now of course, this is just a quick overview of a typical overbid sale. That means there may be factual circumstances, local bankruptcy court preferences, and procedural requirements that may differ. Thus, it is always best to contact a bankruptcy practitioner to answer any questions or assist you with the sale and overbid process.

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[1] In re American West Airlines, 166 B.R. 908, 912 (Bankr. D. Ariz. 1994), citing In re Lionel Corp., 722 F.2d 1063, 1071 (2nd Cir. 1983).

[2] See, e.g., In re 240 North Brand Partners, Ltd., 200 B.R. 653, 659 (9th Cir. BAP 1996).

[3] In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 842 (Bankr. C.D. Cal. 1991).

[4] Ibid.

[5] In re Fitzgerald, 428 B.R. 872, 883 (B.A.P. 9th Cir. 16 2010) (citing In re Lahijani, 325 B.R. 282, 289 (B.A.P. 9th Cir. 2005).

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To use the only search tool to find bankruptcy asset sales across the country, you can sign up to our Maverick plan for $99 / month (cancel any time).

If you are a real estate investor interested in short sale leads from dismissed chapter 13 cases, you can sign up to our new reports plan for $49 / month (cancel any time).

If you prefer, you can also schedule a 15 minute web demo so you can see for yourself how to get started.

Schedule a Demo

__________________________________

You May Also Be Interested In:
The 363 Bankruptcy Sale Procedure – Broken Down and Simplified
Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
In Which District/Venue Should You Purchase the Asset?
Why U.S. Bankruptcy Acquisitions Make Good Sense For Foreign Investors

P.S. If you are a trustee, please download our brochure to learn how to find stalking horse bidders for free.