Bankruptcy Asset Sales During COVID-19 Crisis

Section 363 of the Bankruptcy Code

Section 363 of the Bankruptcy Code allows a debtor to sell all or substantially all of its assets free and clear of all interests in the assets without confirming a Chapter 11 plan (363 Sales). In recent years, 363 Sales of a debtor's business as a going concern or other major business assets have increased in importance and regularity. Below is a brief overview of the benefits and drawbacks of a 363 Sale, the 363 Sale process, the role of stalking horse bidders, the auction process and other aspects of 363 Sales.

There are numerous benefits of 363 Sales versus non-bankruptcy asset sales, including:

• 363 Sales are free and clear of liens, claims and interests, generally including successor liability claims;
• The purchaser has the ability to "cherry pick" favorable contracts and leases;
• State laws regarding bulk sales and shareholder approval generally do not apply;
• Section 7A waiting period under the Clayton Act is shortened to 15 days; and
• The purchaser is protected from fraudulent transfer claims and subsequent attacks on the sale.

However, there are some potential drawbacks of 363 Sales versus non-bankruptcy asset sales that should be considered, including: 1) the risk that any purchase agreement with a debtor will be subject to court approval and usually be subject to higher and better bids at an auction; 2) the potential for negative publicity for the target business as result of bankruptcy; and 3) the increased costs and time due to the court approval process.