Inforuptcy Blog Categories: bankruptcy assets

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).

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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?
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).

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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:

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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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.

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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

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Inforuptcy Blog Categories: bankruptcy assets

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

Sale of a Claim or Compromise of an Asset?

Three Elements For Foreign Investors

Effectively Compete For U.S. Bankruptcy Acquisitions

Introduction

The Three Elements

The Circle of Effectiveness

Conclusion

Things to Remember when your Bankruptcy Sale includes Leases and Contracts