Purchasers' Ability to Preserve Tax Attributes in Context of ' 363 Sales

This article addresses a growing trend in bankruptcy sales whereby purchasers decline to effectuate an asset purchase under Bankruptcy Code ' 363, and instead, acquire the debtor's stock by sponsoring a reorganization plan designed to preserve valuable tax attributes. Generally, as an alternative to effectuating an asset purchase under Bankruptcy Code ' 363, a reorganization plan permits certain qualified creditors to acquire the stock in a reorganized debtor in exchange for satisfaction of their prepetition claims and an additional cash infusion. The alternative reorganization plan enables the reorganized debtor to avoid a limitation on the ability to use previously generated net operating losses (“NOLs”) under Section 382 of the Internal Revenue Code of 1986, as amended (the “Tax Code”), and, thereby, preserve the debtor's previously generated NOLs which may offset future taxable income. The transaction structure typically includes a winning cash bid for a contingent sale of substantially all of the assets by a qualified creditor. The contingent asset sale is effectuated only in the event the qualified creditor is unable to sponsor a reorganization plan under which the qualified creditor acquires a majority of the common stock of the reorganized debtor. The transaction combines the certainty of a Bankruptcy Code ' 363 “cash for assets sale” with the potential for increased recovery due to the additional value associated with the preservation of NOLs (in the event the contingent asset sale is not consummated and the alternative plan of reorganization is approved).