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Asset Sales


March 7, 2018 | Posted by Philip Guffy | Permalink

The Bottom Line

The Delaware Bankruptcy Court recently held, in Stanley Jacobs Prod., Ltd. v. 9472541 Can. Inc. (In re Thane Int'l, Inc.), No. 17-50476 (KG), 2018 Bankr. LEXIS 464 (Bankr. D. Del. Feb. 21, 2018), that a debtor must file a formal motion to assume and assign an executory contract and, in so holding, rejected the doctrine of “implied assumption” based on the conduct of the debtor.  The decision declined to follow cases allowing assumption by conduct and underscores the need for affirmative motion practice to assume an agreement as part of a sale transaction.

Why This Case Is Interesting

The court adopted a strict, formulaic approach to determining whether a debtor has assumed an executory contract.  Unless the debtor has filed a formal motion that has been granted by the court, the decision supports an argument that the contract has not been assumed even if the debtor or an alleged third-party assignee makes use of the contract and derives a benefit therefrom.  (The decision does not address whether there is another basis to seek damages from the use of the services covered by the unassumed contract.)  In the instant case, the contract could have been included in an underlying sale of assets and the case underscores the need to make sure that, as part of any sale of assets including executory contracts or unexpired leases, the purchaser or the non-debtor contract party will want to verify whether the contract or lease is expressly included as an assumed contract as part of the sale motion.  Conduct or accepting the benefits of a contract or lease alone does not constitute assumption under this decision.

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November 3, 2017 | Posted by Alana Katz | Permalink

The Bottom Line

The Third Circuit recently held, in Schepis v. Burtch (In re Pursuit Capital Management, LLC), No. 16-3953, 2017 WL 4783009 (3d Cir. Oct. 24, 2017), that under section 363(m) of the Bankruptcy Code, if a party does not seek a stay pending appeal of a sale order, it is highly likely that any appeal of such sale will be determined statutorily moot.  That was certainly the case here.

 

Why This Case is Interesting

This case reiterates that fact that the highest bid is not always the best bid if the so-called higher bidder does not following the bidding rules.  The Pursuit Parties’ failure to abide by the court-ordered bidding procedures caused the Bankruptcy Court to rule in favor of the Creditor Group.  Additionally, the Pursuit Parties’ failure to obtain a stay pending appeal, a standard rule for appealing sale orders, caused their appeal to be statutorily moot.  The Third Circuit noted in its decision that if the Pursuit Parties had obtained a stay, they could have avoided the mootness ruling on that basis alone and potentially received a decision on the merits.  This serves as an important reminder for parties and practitioners that following bidding procedures and, if dissatisfied seeking a stay pending appeal, is critical in asset sales. read more
July 26, 2017 | Posted by Marsha Sukach | Permalink

Kramer Levin Naftalis & Frankel and Debtwire recently co-sponsored a retail restructuring discussion that brought together a formidable roster of retail restructuring experts to discuss opportunities and strategies for preserving and unlocking the value of distressed retail assets.  The panel, which was moderated by Debtwire senior legal content specialist Richard M. Goldman, featured Kramer Levin partners Adam C. Rogoff and Erica D. Klein, Berkeley Research Group managing director Steve Coulombe, Gordon Brothers managing director Becky Goldfarb, Keen-Summit Capital Partners managing director Matthew Bordwin, and Consensus Advisors managing member Michael A. O’Hara.  Mr. O’Hara also delivered the keynote address preceding the panel, where he examined the current state of the distressed retail market, factors weighing against typical brick-and-mortar retailers, and efforts being taken by various retailers to keep up with the changing tide.

The panelists agreed that there are and will continue to be numerous opportunities to invest in the retail sector.  Retailers and investors should be aware of market trends and begin a dialogue now to plan a business strategy going forward.

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June 13, 2017 | Posted by Tuvia Peretz | Permalink

The Bottom Line

In a decision addressing the reaches of bankruptcy court subject matter jurisdiction, a First Circuit Panel, including retired Supreme Court Justice Davis Souter sitting by designation, ruled that the bankruptcy court’s subject matter jurisdiction did not extend to determining contractual rights under an asset purchase agreement, even where the sale order approving the sale pursuant to sections 363 and 365 of the Bankruptcy Code contained express provisions regarding the retention of jurisdiction by the bankruptcy court over any disputes arising thereunder.

Why the Case is Interesting

In recent years, more and more chapter 11 cases are resolved through “distressed M&A” and section 363 sales as going concerns.  An important aspect of these cases concerns assumption of liabilities that could otherwise burden the debtors’ estates, especially administrative liabilities.  It is common for these agreements to address the treatment of employees, including claims for severance (which can be treated as administrative obligations depending upon the Circuit).  Treatment of these claims, in turn, can affect the ability of debtors to confirm a liquidating plan.  In other words, assumption or alleviation of liabilities represent important provisions of an APA.  In addition, debtors routinely include provisions in bankruptcy court approved contracts, plans and orders which provide that the bankruptcy court retains jurisdiction over disputes related to the underlying document or transaction.  In this practical (and important) context, the First Circuit has determined that retention of jurisdiction provisions can only be given effect where the underlying jurisdiction (being retained) already exists under 28 U.S.C. Section 1334.  This places a significant limitation on the parties’ control over where future disputes between parties other than the debtor may be heard, despite the parties’ efforts to ensure that the matter remains with the bankruptcy court already familiar with the agreement or transaction.  It is also interesting to consider how the debtor's participation may affect situations like this.  In this case, the debtor was not the party seeking to enforce the APA and the matter was treated as a dispute between two non-debtors – the former employees and the purchaser.  Interestingly, this may have occurred because the bankruptcy court treated the motion against the debtor’s estate to be a motion against the purchaser in denying a claim against the debtor for severance.  Had the disputed amounts been obligations that the debtor would have been liable for if not satisfied by the purchaser (or had the debtor been the party seeking to enforce the APA to provide payment), this may have been a distinguishing factor or justification for finding subject matter jurisdiction.   

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May 26, 2017 | Posted by Philip Guffy | Permalink

The Bottom Line

The Delaware District Court affirmed the bankruptcy court’s decision that the combination of a narrow arbitration provision and the bankruptcy court’s reservation of jurisdiction warranted denial of a motion to compel arbitration.  The specific language of the arbitration provision, combined with the use of an accounting term of art, narrowed the scope of the arbitration provision sufficiently to rebut the presumption of arbitration under the Federal Arbitration Act.

 

Why This Case is Interesting

The decision addresses two basic premises that sometimes clash in bankruptcy.  First, under the appropriate circumstances, arbitration provisions will be enforced in bankruptcy.  However, parties (at least estate-parties) typically want the bankruptcy court to interpret disputes that can affect the assets or liabilities of the estate – especially disputes arising out of a court approved sale agreement.  The resolution of that clash turned here on careful drafting.  Both the bankruptcy court and the district court found the use of an accounting term of art (“item”) to be significant in interpreting a narrow scope of the arbitration provision.  Parties should take care to focus on whether they want to use specific terms of art (to give a narrow scope) or avoid terms of art (for a broader scope).  Second, the decision shows the importance of including the standard retention of jurisdiction language in orders.  Such language is often included by default without giving thought to how it might affect the agreement being approved.  Yet in this case, both the bankruptcy court and the district court found that the parties intentionally included the language as part of the APA despite an arbitration provision.  That warranted giving meaning to the language according to the perceived intent of the parties, in this case removing questions of contract interpretation from arbitration.  As always, drafting matters and this decision highlights an important aspect of preserving (or avoiding) bankruptcy court review of contracts entered into after the commencement of the case.

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May 25, 2017 | Posted by Priya K. Baranpuria | Permalink

The Bottom Line
The Bankruptcy Court for the Central District of California determined the Attorney General’s approval was not required for the sale of a non-operating, non-profit hospital because the hospital no longer qualified as a “health facility” upon its closure. Section 363(d)(1) of the Bankruptcy Code requires that sales of non-profit assets be done “only in accordance with nonbankruptcy law applicable to the transfer of property[.]” California state law requires the Attorney General’s approval for any sale of material assets of a non-profit health facility to a for-profit entity. CAL. CORP. CODE § 5914(a) (West 2017). “Health facility” is defined under California state law as a facility that operates for the diagnosis, care, prevention and treatment of human illness – the key word being “operates”. CAL. HEALTH & SAFETY CODE § 1250 (West 2017). Because the hospital closed its doors and no longer accepted patients, it was no longer operating and therefore was not considered a health facility. If the hospital was no longer a health facility, it was not required to obtain state approval to sell its assets, or, at a minimum, show compliance with the applicable state law standards for such sales.

Why This Case is Interesting
On its face, the decision is a straight-forward application of the definition of a health facility under California law. By determining that a non-operating provider was not required to comply with the statute, the court could proceed to approve the sale under section 363, including section 363(d)(1). As an initial matter, the decision acts as a reminder that sales of non-profit assets may require a review and compliance with applicable state law. However, legislative history to section 363(d) likewise states that the decision need not be made by the applicable non-bankruptcy forum, but rather that the bankruptcy court need only consider whether the sale is consistent with applicable nonbankruptcy law. Therefore, a health care provider as debtor seeking to sell assets as a going concern and facing the prospects of a denial by an attorney general, reviewing the sale under the charitable guidelines, could seek to have the bankruptcy court determine the merits of the sale under applicable nonbankruptcy law as well as the purposes of section 363. By centralizing the issues before the bankruptcy court, a debtor could best ensure that all of the purposes of the restructuring, including the continuation of health care operations and maximizing going concern value, are preserved. Each case will turn on its dynamics (for example, is the state review being done under general charitable entity guidelines or based upon healthcare guidelines), but consideration of “applicable nonbankruptcy law” may best be made by the forum seeing the entire picture of the restructuring.

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May 10, 2017 | Posted by Priya Baranpuria | Permalink

The Bottom Line
The Bankruptcy Court for the District of New Jersey denied the Debtors’ request for approval of a sale of property free and clear of liens encumbering the property. The court determined that the term “value” in section 363(f)(3) of the Bankruptcy Code referred to the face value of all liens on the property and not the “economic value”. Because the value of liens encumbering the property in this case exceeded the proposed sale price, the property could not be sold free and clear of all liens pursuant to section 363(f)(3).

Why This Case is Interesting
Absent a secured creditor's consent, debtors may be unable to sell a property free and clear of all liens. Although Collins remains good law in the Eastern District of Virginia, as Lutz shows, debtors in other jurisdictions may not be able to rely upon section 363(f)(3) in seeking approval of a free and clear sale where the face value of the liens exceeds the proposed sale price. Note that the Court did not address the secured creditor's right to credit bid under section 363(k) which also precludes a debtor from selling the collateral to a third party for less than the allowed secured claim by allowing the secured creditor to submit a protective bid up to the amount of its lien.

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October 23, 2012 | Posted by David Allen | Permalink

The Bottom Line:

 

Intellectual property licenses are often crucial components of licensees' businesses, and despite Congress's adoption of section 365(n) of the Bankruptcy Code and its provision that licensees can continue to use licensed intellectual property after a license is rejected by a debtor, a licensor's fall into bankruptcy still raises serious concerns on behalf of non-debtor licensees.  The Seventh Circuit, however, may have provided some comfort to licensees by more definitively limiting the ability of a debtor-licensor's rejection power and the ability to deprive non-debtor licensees of their right to continued use of licensed property. In Sunbeam Prods., Inc. v. Chicago Am. Manuf., LLC, the Seventh Circuit considered the effect on a trademark licensee of the rejection of the intellectual property license by the bankrupt licensor.  No. 11-3920 (7th Cir. July 9, 2012).  While section 365(n) provides that licensees of patents and copyrights can continue to use the intellectual property post-rejection, the statute is silent as to the treatment of trademarks.  The Seventh Circuit held that, despite pre-section 365(n) precedent from the Fourth Circuit (Lubrizol), rejection does not rescind or terminate the underlying agreement itself, and, therefore, the rights of licensees under the license remain intact post-rejection.

 

Why the Case is Interesting:

 

The Fourth Circuit's holding in Lubrizol rattled the intellectual property market, spurring Congress into action.  Despite the adoption of section 365(n), however, concerns have persisted over the ability of debtor-licensor to disrupt the ongoing business operations of non-debtor licensees by rejecting license agreements in bankruptcy, particularly with respect to the licensing of trademarks.  The Seventh Circuit's opinion (rejecting Lubrizol) puts trademark licensees on the same footing as other intellectual property licensees protected by section 365(n), despite Congress's omission of trademark licensees from the statute itself.  More broadly, the Court's characterization of the nature of a debtor's rejection power implies that section 365(n) may not even be necessary for licensees to continue to use intellectual property post-rejection. 

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June 1, 2012 | Posted by Benjamin Wolf | Permalink

The Bottom Line

In a unanimous decision (with Justice Kennedy not participating), the Supreme Court issued a decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 2012 WL 1912197 (U.S. May 29, 2012), (“RadLAX”) in which it held that section 1129(b)(2)(A) of the Bankruptcy Code does not permit a debtor to “cram down” a plan of reorganization that provides for the sale of encumbered assets free and clear of liens at auction without permitting the lienholder to credit bid at such auction.

Why the case is interesting:

Some recent decisions, including the Third Circuit’s In re Philadelphia Newspapers, LLC, 599 F.3d 298, 313 (3d Cir. 2010), as amended (May 7, 2010) opinion have held that a debtor may sell encumbered assets free and clear of liens under clause (iii) of section 1129(b)(2)(A) of the Bankruptcy Code without giving the lienholder the right to credit bid.  Such decisions introduced uncertainty with respect to secured creditors’ credit bidding rights. By holding that the credit bidding requirements of clause (ii) also apply to clause (iii), the Supreme Court has the solidified secured creditors’ credit bidding rights in the cram down context.

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August 31, 2011 | Posted by Joshua Friedman | Permalink

The Bottom Line:

Asset sales are a major part of chapter 11 cases.  And with asset sales usually come expense reimbursements and break-up fees for stalking horse bidders.  Although not as frequent an occurrence as compensating the stalking horse, instances arise in which potential non-stalking horse bidders will only agree to proceed with due diligence and bidding if they are reimbursed their expenses. On August 16, 2011, the United Stated Court of Appeals for the Fifth Circuit upheld a decision authorizing a debtor to reimburse qualified bidders participating in the second-round of bidding at an auction for the sale of a substantial estate asset.  In the Matter of ASARCO, L.L.C., No. 10-40930, 2011 U.S. App. LEXIS 16892 (5th Cir. Aug. 16, 2011).  In doing so, the Fifth Circuit elected to use the more liberal “business judgment rule” standard under section 363 and not the stricter standard outlined under section 503(b) used by certain courts in evaluating break-up fees. The Court also held that the bankruptcy court’s order authorizing the reimbursement of expenses was a final order, which was immediately appealable under 28 U.S.C. § 158(a).

Why the Case is Interesting:

Not all bankruptcy auctions are the same and not all auction processes respond to the same rules.  In Asarco, the Fifth Circuit recognized that asset value maximization might require more flexibility – as determined in a debtor’s reasonable business judgment – to incentivize bidding.  While the case applies to a potentially complicated asset being sold – in that case, a litigation claim – the flexibility to incentivize participants in a multi-stage auction to perform additional due diligence regarding an asset that was difficult to value was important.

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August 3, 2011 | Posted by Rachael Ringer | Permalink

The Bottom Line:

On June 28, 2011, the United States Court of Appeals for the Seventh Circuit affirmed the bankruptcy court’s denial of bid procedures filed in connection with a proposed chapter 11 plan that failed to provide secured creditors with the right to credit bid, finding that the denial was not “fair and equitable” treatment as required under section 1129(b). River Road Hotel Partners LLC v. Amalgamated Bank (In re River Road Hotel Partners, LLC), Nos. 10-3597, 10-3598 (7th Cir. June 28, 2011).  As an initial matter, the Seventh Circuit held that the appeal was not “moot” merely because the time periods in the asset purchase agreement underlying the Chapter 11 plan had expired.  On the substantive issue of credit-bidding, the Seventh Circuit found that the Chapter 11 plan could not be “crammed down” on the secured creditors where the plan provides for a sale of collateral without giving the lenders the right to credit bid their claims under section1129(b)(2)(A)(ii).  The Seventh Circuit declined to follow other circuits that allow for sales without credit-bidding by relying instead upon the “indubitable equivalent” provision of section 1129(b)(2)(A)(iii).

Why the Case is Interesting:

The Seventh Circuit’s decision in In re River Road Hotel Partners presents a view in opposition with that of the Third and Fifth Circuits – thereby splitting Circuit Courts over the important and strategic issue of whether a contested Chapter 11 plan can deprive a secured creditor of the right to credit-bid for its collateral in an asset sale under the plan.  In the Seventh Circuit, disagreeing secured creditor’s cries of “give me credit” must be provided for in the plan.  It remains to be seen whether other Circuit Courts will choose a side or, ultimately, whether the issue finds its way to the Supreme Court.

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March 11, 2011 | Posted by Adam C. Rogoff | Permalink
Corporate Restructuring and Bankruptcy partner Adam C. Rogoff's article "Critical Transplants: Sales of Distressed Health Care Assets in Bankruptcy" appears in the March 2011 issue of The Journal of Corporate Renewal, published by the Turnaround Management Association. The article highlights factors that must be considered for transferring health care services beyond the customary rules of Section 363. read more