Buying Assets in Bankruptcy: 10 Essential Tips for In-House Counsel

Petersen Health, an Illinois-based company that operates nursing facilities in the Midwest, filed for Chapter 11 bankruptcy protection in March 2024. Within one month, the company had received 20 bids from potential buyers seeking to purchase various Petersen assets out of the bankruptcy proceedings and, on July 3, Law360® reported that U.S. Bankruptcy Judge Thomas Horgan granted permission for them to accept the highest bid for their skilled nursing facilities.

As noted in our post earlier this month, U.S. corporate bankruptcies have returned to a more normal level of activity this year, following a two-year decline in Chapter 11 bankruptcy filings in the immediate post-COVID period. Some bankruptcy experts forecast this trend will continue.

“A confluence of economic factors is expected to challenge companies in 2024, with a range of industries under enough pressure to potentially see a rise in bankruptcies this year,” reported Law360.

In-house counsel need to be prepared for the emergence of strategic opportunities for their organizations to acquire strategic assets that may become available during other companies’ Chapter 11 bankruptcy proceedings. Court approval must be obtained for asset sales under Section 363 of the Bankruptcy Code, which means that in-house counsel may be called upon to advise their executive teams on the process for purchasing assets that counsel includes communicating key benefits, disadvantages and potential roadblocks.

10 Key Considerations for Buying Assets in Bankruptcy Section 363 Sales 

The Practical Guidance team at LexisNexis® published a Buyer’s Considerations in a Section 363 Sale Checklist, which can be used to guide in-house counsel who are assisting potential purchasers of assets in bankruptcy proceedings. Here are 10 tips excerpted from that checklist:

1. Public Process — The terms of the sale will be publicly disclosed as the debtor must file the asset purchase agreement and related sale pleadings on the bankruptcy docket to obtain court approval.
2. Auction — A Section 363 sale is generally implemented through a public auction rather than through a private sale. Prospective purchasers should be aware that they could be outbid at the auction.
3. Fast Timeline — Bidders for assets in a bankruptcy sale are often faced with formal, court-mandated bidding procedures that impose strict (and often short) deadlines for submissions of bids, as well as for the auction, the court hearing and the closing of the sales.
4. Multiple Parties — A Section 363 sale will usually involve other parties who seek to influence the sale and/or wish to have a seat at the negotiating table. This could include the Creditors’ Committee, the lenders and other parties asserting liens on the assets to be sold.
5. Sale Free and Clear — An asset may be sold free and clear of any interest in such property of an entity other than the bankrupt estate if any one of the statutory conditions of Section 363 is satisfied. This provision can provide purchasers with broad protection from third-party claims.
6. Rejecting Contracts — The buyer is not bound to all of the debtor’s contracts as the debtor can generally reject any executory contracts or unexpired leases that are not purchased. In most cases, this relieves the debtor (and the buyer) from future performance.
7. Fraudulent Transfers — Buyers purchasing assets under Section 363 can avoid the risk that a court will void the transfers to the purchaser under a fraudulent transfer claim.
8. No Collusion — Section 363 governs collusion and provides that for the avoidance of sales where there was an agreement between potential bidders that controlled the price at bidding. Counsel representing prospective purchasers should be advised of these rules.
9. Credit Bidding — Credit bidding is the right of a secured creditor to bid at the auction for the purchase of the secured creditor’s collateral using the amount of the debt that is owed by the debtor to that creditor, as opposed to paying in cash or some other form of value. Secured parties that “credit bid” have a significant advantage against other interested bidders.
10. Sales to Insiders — Asset sales in bankruptcy proceedings will be subject to a stricter scrutiny standard and entire fairness tests usually associated with insider transactions. It may be advisable to have an independent fiduciary appointed to review and negotiate for the debtor so that the transaction can be conducted at arm’s length.

Bankruptcy Asset Sales: Practical Guidance for In-House Counsel

In-house counsel need to stay informed of the key legal issues involved with the sale of assets as part of a Chapter 11 bankruptcy plan so they are prepared to advise corporate executives and boards of directors of emerging strategic opportunities. LexisNexis offers a number of Practical Guidance resources to assist with these insights, including the Bankruptcy Transactional Resource Kit and the Asset Acquisition Resource Kit.

These resource kits include detailed practice notes, templates and checklists to provide in-house counsel with the practical resources they need. Get a free trial of  Practical Guidance from LexisNexis.

All of these news, analysis and practice resources regarding Chapter 11 bankruptcy filings are accessible from the Lexis+® General Counsel Suite, providing in-house counsel with a vast collection of legal resources, breaking business and legal news, and Practical Guidance content.

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