Inforuptcy Blog Archives June 2015

Dark Horse Bidding? Process. Valuation. Costs. Risks.

Posted by Matthew C. Lein, Esq., on June 20, 2015

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

INTRODUCTION
In the series of articles published Inforuptcy's blog, readers have learned investment opportunities exist within the bankruptcy court. For example, the bankruptcy court can provide a venue for distressed securities investors to purchase and work with debtors to provide mutually beneficial outcomes.

Building on the above, how does an investor, who would like to purchase a distressed asset through the bankruptcy court, make a sound investment and potentially recover the costs of an unsuccessful bid?

An investor can make an offer to purchase an asset or company through the bankruptcy court by making a stalking horse bid. In the event that bid is not the winning bid, then the investor may request a breakup fee. Distressed companies may welcome a stalking horse bid because they know there is a buyer willing to pay a minimum bid, and that bid may prompt other investors to make better offers.

EXAMPLE
Consider a situation where Jimbo’s Gym is insolvent because of a large lawsuit and is forced to file for Ch. 11. Assume Jimbo (“the Debtor”) is in control of the bankruptcy estate (Please note: certain creditors may have influence over a debtor’s decisions). Jimbo has hired analysts who have valued Jimbo’s Gym at $2.5 million.

Billy Buyer, who watches the Ch. 11 filings via Inforuptcy, realizes an opportunity if he were to buy Jimbo’s Gym for $2 million. Billy Buyer spends $60,000 investigating the potential purchase of Jimbo’s Gym.

Billy Buyer negotiates with Jimbo an asset purchase agreement whereby Billy Buyer will purchase Jimbo’s Gym’s assets in exchange for $2 million cash ̵#8211; this is the stalking horse bid. Billy Buyer knows he is offering to buy the assets for Jimbo’s Gym at a discount and may be outbid prior to the confirmation of the asset purchase agreement. As a preemptive measure, Billy Buyer has included a clause in the asset purchase agreement whereby if he is outbid, he, with the approval of the bankruptcy court, will be allowed to recoup his investment investigation or due diligence costs, and some of the time he spent (this is the breakup fee). The Debtor knows he may have entered into an asset purchase agreement whereby Billy Buyer may be able to purchase the assets of Jimbo’s Gym at a discount, but believes the opening bid of $2 million will attract other buyers that may make a better offer.

One of two things can happen: (1) there is no other bid and Billy Buyer wins, or (2) there is another bid and Billy Buyer loses.

1. There is no other bid.

If there is no other bid, Billy Buyer will receive all of the assets of Jimbo’s Gym for $2 million.

2. There is another bid.

Millionaire Max, at the same time Billy Buyer noticed that Jimbo’s Gym had filed Ch. 11, also subscribes to Inforuptcy and noticed Jimbo’s Gym had filed Ch. 11. Millionaire Max believes $2.5 million is a steal and will not hesitate to pay that amount. Millionaire Max offers $2.5 million and, accordingly, the offer is accepted.

Billy Buyer, who has spent $60,000 thus far, has lost and now wants to recoup his breakup fee. The bankruptcy court agrees Billy Buyer’s bid prompted Millionaire Max to pay the full price, and therefore, benefited the estate and agrees to allow Billy Buyer recover his due diligence costs and a reasonable breakup fee.

MIXED OFFERS
Assume that instead of offering cash, Millionaire Max offers a combination of cash and stock. The combination of cash and stock from Millionaire Max must be compared the all-cash offer from Billy Buyer. If Jimbo believes the combination of stock and cash from Millionaire Max is worth more than Billy Buyer’s all-cash offer, then he should still accept Millionaire Max’s offer over Billy Buyer’s.

CONCLUSION
In conclusion, there may be opportunities within the bankruptcy court should investors monitor the bankruptcy filings using tools like those provided through Inforuptcy.

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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
Three Elements For Foreign Investors
Sale of a Claim or Compromise of an Asset?

Sale of a Claim or Compromise of an Asset?

Posted by Zev Shechtman, Esq., on June 7, 2015

Zev Shechtman, Esq.
Danning Gill Diamond & Kollitz LLP
www.dgdk.com

Bankruptcy trustees are authorized to use, sell or lease estate property.[1] Trustees are also authorized to enter into compromises or settlements on behalf of the estate.[2] Both sales outside of the ordinary course of business under section 363 of the Bankruptcy Code and compromises of disputes under rule 9019 of the Federal Rules of Bankruptcy Procedure require bankruptcy court approval after notice and a hearing. In general, sales, on one hand, and compromises, on the other, each require the satisfaction of different legal standards. When considering a sale under section 363, the court’s obligation is “to assure that optimal value is realized by the estate under the circumstances.”[3] When considering the approval of a compromise, the court must determine whether the proposed compromise is “fair and equitable,” which requires the consideration of four factors: (1) probability of success in litigation, (2) collectability; (3) complexity, expense, inconvenience and delay attendant to continued litigation; and (4) the “paramount” interest of the creditors.[4]

While settlements of disputes and sales of assets might generally seem like two clearly distinct and distinguishable events, there are circumstances, blurring the line between the two. For example, what happens if the trustee settles claims against a defendant for cash, but a creditor contends that the claims are worth more than what the trustee is getting for them? On the other hand, what if a trustee seeks to sell a property interest in the estate’s claims to a third party or even one of the litigants? What standard applies?

In the case of In re Mickey Thompson Enter. Grp., the trustee originally sought to compromise a dispute of potential fraudulent transfer claims. A creditor objected because a third party was willing to pay more than the settlement amount for the settled claims. Although the trustee first replied that he would set overbidding procedures in order to obtain the best sale price for the claims, at the hearing the trustee reversed course asserting that the original settlement was in the best interest of the estate “when he entered it” and that he was contractually bound by the agreement. Although the bankruptcy court decided that it could not substitute its judgment for the trustee’s, the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals (“BAP”) reversed. The BAP found that both the standards for compromises and sales were implicated by the transaction. The BAP opined that any purported contractual obligation of the trustee was trumped by the duty to maximize estate assets.[5]

The case of In re Lahijani involved a trustee’s efforts to sell claims against the debtor and others to the highest bidder. The trustee sought from the sale an all-cash offer as opposed to a combination of cash and a percentage of the recovery from the lawsuit. The successful bidder was a company set up by the debtor’s co-defendant, who had no intention of actually prosecuting the claims. The unsuccessful bidder appealed. The BAP reversed because the bankruptcy court wrongly ruled solely based on the sale price, when it should have examined each factor of the fair and equitable test in order to approve what fundamentally was also a compromise.[6]

In In re Fitzgerald, the trustee sought to sell the estate’s interest in a certain company and litigation claims consisting of a pending cross-complaint in a pending action. The only bidders were the plaintiff/cross-defendant and the life partner of the debtor/defendant/cross-complainant. The bankruptcy court approved the sale based on a dollar-to-dollar comparison of the bids. However, in light of the relationships between the parties and the constrained competition due to the nature of the asset, the BAP found that the transaction required stricter scrutiny. Indeed, the BAP again found that the bankruptcy court should have applied the fair and equitable standard applicable to compromises.[7]

The lesson from this line of cases is that, when in doubt as to which standard applies in a contested transaction, a trustee or purchaser should ensure that both the “optimal value” standard for sales and the “fair and equitable” standard for compromises are fully satisfied.

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[1] 11 U.S.C § 363. With certain exceptions, chapter 11 debtors in possession are generally vested with the same rights and duties as trustees. See 11 U.S.C. § 1107.
[2] Fed. R. Bankr. P. 9019.
[3] In re Lahijani, 325 B.R. 282, 288 (B.A.P. 9th Cir. 2005).
[4] Id. at 290.
[5] In re Mickey Thompson Enter. Grp., 292 B.R. 415 (B.A.P. 9th Cir. 2003). The BAP suggested that the concern about a potential breach of contract by the trustee was misplaced since the agreement would only be enforceable after approval by the court. Id. at 421.
[6] Lahijani, 325 B.R. 282.
[7] In re Fitzgerald, 428 B.R. 872 (B.A.P. 9th Cir. 2010).

__________________________________

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
Three Elements For Foreign Investors