Inforuptcy Blog Archives May 2015

Three Elements For Foreign Investors

Posted by Leonard P. Goldberger, Esquire on May 30, 2015

Effectively Compete For U.S. Bankruptcy Acquisitions

Leonard P. Goldberger, Esquire[1]
Stevens & Lee, P.C.
www.stevenslee.com

Introduction

This is the third of three articles that deal with acquisitions of financially-distressed U.S. businesses and assets by foreign investors. The first article discussed the strategic bases for why making acquisitions out of U.S. bankruptcy cases makes good sense for foreign investors. The second described how this can be effectively accomplished, and provided three recent examples of successful acquisitions of complex businesses out of U.S. bankruptcy cases by Chinese investors. In that regard, foreign investors face a special set of challenges that make it more difficult to compete, i.e., language barriers, differences in business cultures, domestic (U.S.) political considerations, institutional insensitivities, and old-fashioned xenophobia. This article (which itself is divided into two parts) identifies three elements that are necessary for foreign investors to effectively compete in the U.S. distressed investment marketplace where the playing field is not exactly level.

The Three Elements

There are three basic elements that foreign investors must utilize in order to successfully compete in the U.S. marketplace for distressed investments: Information; Education and Connections. None of this should come as any surprise; however, it is sometimes necessary to focus on the fundamentals.

1. Information 
Information is the mother’s milk of investment. Beyond information about any particular investment target (which can be obtained through, among other things, effective due diligence), information about the distressed marketplace itself is essential for any successful participant. In the first instance, a foreign investor must have access to information about the deal flow of distressed investments. In this marketplace, access to a regular stream of information about new distressed business and investment opportunities -- either in the early stages of distress, during the slide into bankruptcy, or as they become new bankruptcy filings -- is essential for participation. This can be accomplished in any number of ways, from relationships with U.S. insolvency practitioners (see no. 3, below) to access to commercial services (like Inforuptcy) that provides useful data on businesses and assets along the continuum of distress. In this age of instant information, of course news of financial distress or new bankruptcy filings is immediately available from various sources that are either industry-specific or just general business news. The point is that if a foreign investor passively waits -- as opposed to pro-actively seeks information -- he or she is likely to remain on the sidelines. This is especially so because many U.S. sellers (and their agents) do not even consider marketing to foreign investors.

Once an investment target is selected, the foreign investor must pay close attention to any new developments, which will often occur more rapidly than anticipated. By maintaining communication with deal sources, or simply following developments in a bankruptcy case, foreign investors can stay apprised of significant events, like the filing of sale procedure motions, bidding schedules and deadlines, or objection deadlines in order to meaningfully participate in the acquisition process.

2. Education
Foreign investors must educate themselves (along with their professional advisors, and governmental officials who may be required to oversee approvals of cross-border investment transactions) about the nature and process of acquiring financially-distressed assets. Without at least a basic understanding of the U.S. bankruptcy process (both before and after the actual filing of a bankruptcy case, they are more likely to make costly (and, sometimes, embarrassing) mistakes, as well as having business expectations disappointed. Not only is an informed understanding of the process necessary for avoiding problems moving forward in the pursuit of an acquisition or investment, but it will also provide a basis for making important judgments about whether or not to proceed at all in any given situation.

The education process often involves three basic aspects:

  • Understanding how distressed investment opportunities arise, and what is required to successfully exploit such opportunities;

  • Understanding the U.S. bankruptcy process, in general, and the strategies and procedures for acquiring assets out of U.S. bankruptcy cases, in particular; and

  • Understanding which strategies are compatible with a foreign investor’s local business culture.

The education process can also be furthered by observing the notable successes -- and failures -- of other foreign investors in U.S. bankruptcy cases. Moreover, educational information about investing in the U.S. is often readily accessible from public sources. Government agencies that encourage cross-border investment can be an important source of useful educational information. In China, for example, local ministries of commerce and other provincial- and municipal-level governmental agencies provide educational programs for Chinese investors seeking to make cross-border investments or acquisitions. Reciprocally, in the U.S., governments at the federal, state and local levels also provide outreach, incentives and educational programs in foreign countries in order to encourage just such investment activities.

3. Connections
The final element involves connections, both in the foreign investor’s own country, as well as in the U.S. Making the right connections can often mean the difference between success and failure.

In the foreign country (especially in countries like China where government plays such a pervasive role in all aspects of commerce), connections to appropriate governmental agencies and officials are crucial to obtaining the necessary support for any outbound investment project. This involves not only assistance with the various approvals necessary for the project itself, but also with such ministerial aspects like the ability to timely move cash offshore in order to make time-sensitive deposits in the bankruptcy sale process and, ultimately, to consummate the transaction.

On the U.S. side, the right connections are often a bit less formal, but no less important. Having connections to intermediaries who are familiar with the U.S. distressed marketplace and the. bankruptcy process is a threshold requirement. Without a knowledgeable U.S. intermediary, it can be difficult for foreign investors to take advantage of any type of deal flow. Such intermediaries can be investment bankers, business brokers, insolvency accountants, turnaround managers, etc.; indeed, anyone who keeps a finger on the pulse of industries that are experiencing in some form of financial distress, as well as cases for individual businesses that are being filed in U.S. bankruptcy courts.

Perhaps the most important connection is an experienced and knowledgeable U.S. bankruptcy lawyer. Experienced bankruptcy counsel can provide invaluable guidance in navigating the often-arcane U.S. bankruptcy acquisition process. Not only for the legal advice that must necessarily be provided, but bankruptcy counsel can also assist with the strategic judgments necessary to gauge the opportunities and pitfalls of any particular transaction. (As discussed in the second article, those strategic judgments sometimes require sophisticated combinations of financial, political and public relations factors.) Moreover, experienced bankruptcy counsel is likely to have his or her own sets of connections into the insolvency community, thus further providing the foreign investor with additional sources to generate new deal flow and other possible investment opportunities. Working with experienced bankruptcy counsel (or other insolvency-related intermediaries) can reinforce the informational and educational elements of the process, help the foreign investor to be more selective in evaluating potential investment opportunities, and create opportunities for earlier access to financially-distressed situations.

The Circle of Effectiveness

The foregoing elements are represented graphically as follows:

Circle of effectiveness

Effective investing is not necessarily a linear process; indeed, it is quite circular, as each element relates to the others both in real time and as a foundational underpinning of the process. Nor is it likely that any one element will lead to successful outcomes without some combination of the others. The common lesson of the three case studies discussed in the second article (i.e., A123 Systems; Fisker Automotive; and Brookstone) is that, in each case, the foreign investor relied on an interwoven relationship of these elements in successfully navigating the U.S. bankruptcy sale process in competition with U.S. investors on an uneven playing field. It also helps to bring a lot of money.

Conclusion

Money alone, however, will not carry the day if the foreign investor remains unaware of new investment opportunities (i.e., un-informed); does not adequately understand the process for making acquisitions of U.S. financially-distressed assets (either in or out of a bankruptcy case) (i.e., un-educated); and does not use the right advisors to provide legal and strategic guidance (i.e., un-connected). The next and final part of this article will discuss how foreign investors can overcome the various obstacles presented by the uneven playing field of the U.S. bankruptcy acquisition process in order to effectively compete.


[1]Leonard P. Goldberger, Esquire is a cross-border insolvency lawyer, and works with Chinese investors in acquiring financially-distressed businesses and assets out of U.S. bankruptcy cases. He has written and lectured on this topic in the U.S. and China. The opinions expressed herein are solely those of the author and do not represent those of either his law firm or its clients.

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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?
Is Your Bankruptcy Asset Purchase Lien Free? Why?
Buyer Beware! The Battle Between Sections 363(f) and 365(h) of the Bankruptcy Code
Stalking Horse Bidder – To Be or Not To Be
It Can Be Done: Case Studies of Successful Acquisitions Out of Bankruptcy by Foreign Investors
Why Every Buyer Should Always Seek 363(m) Protection in an Asset Purchase
When Purchasing Distressed Assets, Protect Yourself Against Possible Fraudulent Transfer Litigation
Strategies for Secured Creditors
Things to Remember when your Bankruptcy Sale includes Leases and Contracts

Things to Remember when your Bankruptcy Sale includes Leases and Contracts

Posted by Yosina M. Lissebeck, Esq. on May 22, 2015

Yosina M. Lissebeck, Esq.
Lissebeck Law
www.lissebecklaw.com

So you discovered that great real estate bankruptcy case, where the debtor is selling its real property along with its business operations. You were successful in negotiating a deal for the purchase of the assets and as part of the deal, you want the existing leases and contracts to be transferred. As long as those leases and contracts were not rejected or abandoned by the debtor-in-possession or the trustee during the course of the bankruptcy case – this can easily be done with the sale motion.

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 by the bankruptcy court if it is in the best interests of the estate, based on the facts and history of the case.[1] Under 11 U.S.C. § 365(a), “[a] trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease term of the debtor.” Since 11 U.S.C. § 1107(a) gives debtors-in-possession the same rights and powers of a trustee, a debtor-in-possession may also assume an unexpired lease or executory contract.[2]  As long as the leases/contracts are still valid and enforceable – even if they are in default – they can be assumed by the estate and then assigned to the purchaser.  This is usually done in the same motion to approve the sale; however, there are certain conditions that must be met before the bankruptcy court will approve that assumption and assignment.  

In In re Orion Pictures, Corp., the court explained the standard a bankruptcy court should apply on a motion to assume:

[A] bankruptcy court reviewing a trustee’s or debtor-in-possession’s decision to assume or reject an executory contract should examine a contract and the surrounding circumstances and apply its best “business judgment” to determine if it would be beneficial or burdensome to the estate to assume it. [Citation Omitted.] In reviewing a trustee’s or debtor-in-possession’s decision to assume [or reject] an executory contract, then, a bankruptcy court sits as an overseer of the wisdom with which the bankruptcy estate’s property is being managed by the trustee or debtor-in-possession[.][3]

In order for a DIP/Trustee to assume the leases/contracts, the motion must identify the key terms in the leases/contracts including the parties, when made, the use, the term, if there is an option, and of course the monthly rent/payment amount. Further, the motion must state if the leases/contract are current or in default. If there is a default, the DIP/Trustee has to cure it before the bankruptcy court will allow the estate to assume it. As stated above, the bankruptcy court will not approve an assumption if it is burdensome to the estate. Thus, “curing” a default has to be feasible and cannot take away from the benefit the estate will gain from the sale of the assets. Keep this in mind when negotiating your purchase price. There may need to be an “allocation” made toward the cure amounts in the purchaser price to show that this was considered and addressed by the parties.  Finally, once the DIP/Trustee shows that assumption is reasonable, the motion must state that the leases/contracts will be assigned to the purchaser as of the closing date – alleviating any ongoing burden to the estate of any obligations/costs related to those leases/contracts.

Now of course, 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 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] In re Orion Pictures, Corp., 4 F.3d 1095, 1098 (2nd Cir. 1993).
[3] Id. at 1099.

__________________________________

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?
Is Your Bankruptcy Asset Purchase Lien Free? Why?
Buyer Beware! The Battle Between Sections 363(f) and 365(h) of the Bankruptcy Code
Stalking Horse Bidder – To Be or Not To Be
It Can Be Done: Case Studies of Successful Acquisitions Out of Bankruptcy by Foreign Investors
Why Every Buyer Should Always Seek 363(m) Protection in an Asset Purchase
When Purchasing Distressed Assets, Protect Yourself Against Possible Fraudulent Transfer Litigation
Strategies for Secured Creditors

Strategies for Secured Creditors

Posted by Matthew C. Lein, Esq. on May 9, 2015

Matthew C. Lein, Esq.
Lein Law Offices
www.leinlawoffices.com

INTRODUCTION
An investor/company and a debtor can work together to maximize each participant’s return - this is true in both consumer and non-consumer cases. However, because I often perceive a lack of understanding by one or more of the participants, both participants often miss out on an opportunity. In particular, secured claim holders with a basic understanding of the bankruptcy process could maximize their return on investment by working with the company/individual debtor prior to filing.

I hope to give investors examples of how one could work with the debtor to maximize the investors’ return on investment. This article uses variations of a common situation to explain concepts that may be applicable to both consumer and non-consumer situations.

BACKGROUND AND GENERAL FRAMEWORK
Understanding the general framework of the bankruptcy process is mandatory prior to understanding the concepts in this article.

In general terms, bankruptcy cases follow a similar timeline: (1) The debtor files for relief under the bankruptcy code; (2) Except in Ch. 7, the debtor will file a repayment plan; (3) Each creditor with a claim owed by the debtor will file a proof of claim indicating what was owed as of the date the debtor filed for relief under the bankruptcy code; (4) Except in Ch. 7, the debtor will make payments to the creditors who have filed a proof of claim (sometimes through a trustee).

Please note, whether a debtor receives a discharge and when the discharge may be granted are separate issues that are beyond the scope of this article.

SECURED CREDITOR INVESTMENT STRATEGIES
In many instances, secured lenders (e.g. mortgagees, land contract vendors, etc…) could increase their return on investment by helping consumer debtors eliminate the secured creditor’s competition. Examples of how an investor could achieve a higher return on investment include, but are not limited to the following: (1) Eliminating the investor’s competition with other claim holders and satisfying mortgage arrearages; and, (2) Avoiding unnecessary foreclosure costs when judgments have been attached to the property.

Both of the above strategies can be useful if the investor holding the claim works with the debtor.

Assume a situation where Homeowner Hank had a mortgage with Mortgagee Mary. Until six months ago, Homeowner Hank was current on his mortgage with Mortgage Mary. Then Homeowner Hank suffered a traumatic event in his life (e.g. car accident) and could not work.

Now, Homeowner Hank has healed and can return to work. However, during the six months Homeowner Hank was recovering, he incurred a large amount of medical expenses, paid his living expenses using a credit card, and is six months behind with his mortgage.

How can Mortgage Mary work with Homeowner Hank to protect her investment from other creditors (e.g. Mortgage Mary is paid before the medical bill and credit card claim holders)?

Eliminating The Competition And Satisfying Mortgage Arrearages

Assume Homeowner Hank wants to keep his house. Mortgage Mary does not want Homeowner Hank’s home.

If Homeowner Hank qualifies for Ch. 7, Mortgage Mary could pay for Homeowner Hank to file his Ch. 7 petition and Homeowner Hank and Mortgage Mary could come to terms as to how to cure any outstanding mortgage arrearages. In most circumstances, Mortgage Mary will have eliminated her competition by working with the debtor.

If Homeowner Hank must file for relief under a chapter other than Ch. 7, Homeowner Hank and Mortgage Mary could agree on mutually agreeable repayment terms. Mortgage Mary and Homeowner Hank could agree to modify the terms of the loan prior to Homeowner Hank filing his bankruptcy petition in such a way that at the end of the bankruptcy plan, Homeowner Hank would be current and the unsecured creditors would be eliminated.

Avoid Unnecessary Foreclosure Costs When Judgments Have Been Attached To The Property

Assume Homeowner Hank cannot afford his home and Mortgage Mary would like to avoid the time and expense of foreclosing on the property.

If Homeowner Hank qualifies for Ch. 7, Mortgage Mary could agree with Homeowner Hank to pay for him to file his bankruptcy petition and in return Homeowner Hank would give Mortgage Mary a deed in lieu of foreclosure after the discharge is granted. This approach could save Mortgage Mary the time and expense of the foreclosure process to eliminate any judgment attached to the property.

DISCERNING OPPORTUNITIES
Using tools like those provided by Inforuptcy could help an investor looking for situations like those noted above.

For example, an investor could search the case filings for instances where a debtor has filed for Ch. 7, has few secured debts, a good debt-to-income ratio, and many unsecured debts. In this instance, the secured lender may not recognize his position and want to sell his secured debt to the investor. The noted information is available in every case.

This is one possibility amongst many.

CONCLUSION
Opportunities exist for holders of secured claims, but those opportunities are often missed by secured lenders and/or the debtor. Understanding the benefits the bankruptcy code can provide and using tools like those provided by Inforuptcy allows investors to identify market opportunities.

__________________________________

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?
Is Your Bankruptcy Asset Purchase Lien Free? Why?
Buyer Beware! The Battle Between Sections 363(f) and 365(h) of the Bankruptcy Code
Stalking Horse Bidder – To Be or Not To Be
It Can Be Done: Case Studies of Successful Acquisitions Out of Bankruptcy by Foreign Investors
Why Every Buyer Should Always Seek 363(m) Protection in an Asset Purchase
When Purchasing Distressed Assets, Protect Yourself Against Possible Fraudulent Transfer Litigation