Class 13 Bankruptcy, Spring, 2009 Sales of Assets Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/[email protected]

Class 13Bankruptcy, Spring, 2009

Sales of AssetsRandal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 19, 2023 Copyright © 2005-09 Randal C. Picker 2

363

Use, sale, or lease of property (b)(1) The trustee, after notice and a

hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate … .


363 (cont.) Use, sale, or lease of property (cont.)

(c)(1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.


363 (cont.) Use, sale, or lease of property

(e) Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. This subsection also applies to property that is subject to any unexpired lease of personal property (to the exclusion of such property being subject to an order to grant relief from the stay under section 362).


Lionel

Core Facts Lionel files for C11 Holds as investment stock of Dale Lionel owns 82% of Dale; other 18% owned

by public and stock traded on American Stock Exchange


Lionel

Creditor’s committee pushes for sale of Dale prior to plan of reorganization as device to fund plan

Equity committee opposes preplan sale Key Question

What, if anything, limits the possible scope of a sale under section 363(b)?


Possible Approaches

Past Practice under the Chandler Act? “Upon cause shown” Focus on “perishability” of the asset

Sell the asset to protect against loss in value


Possible Approaches

Achieve Consistency with C11 Protections? Procedures?

Structured disclosure requirements for C11 plan

Price? “Reorganization under the 1938 Act was

often unfair to public investors who lacked bargaining power”


Evidence in the Case

Value of Stock Not a wasting asset Financial expert says Dale stock has low

variance CEO Testimony

Wants to keep the stock What should we make of this information?


Court’s Conclusion

Holding “There must be some articulated business

justification” “Good business reason” Making creditor’s committee happy

insufficient and “ignores the equity interests required to be weighed and considered under Chapter 11”


And the Laundry List Consider A Non-Exclusive List:

“the proportionate value of the asset to the estate as a whole; the amount of elapsed time since the filing; the likelihood that a plan of reorganization will be proposed and

confirmed in the near future; the effect of the proposed disposition on future plans of

reorganization; the proceeds to be obtained from the disposition vis-a-vis any

appraisals of the property, which of the alternatives of use, sale or lease the proposal envisions; and

most importantly perhaps, whether the asset is increasing or decreasing in value”


Sales Strategy

Key Question How should we sell assets in bankruptcy?

Before the plan is confirmed? Within the plan? What are the advantages and

disadvantages of those approaches?


363 (cont.)

Use, sale, or lease of property (f) The trustee may sell property under

subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if -

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;


363 (cont.)

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal

or equitable proceeding, to accept a money satisfaction of such interest.

Sales Free and Clear

Hypo 1 Trustee wants to sell property subject to a

security interest Proposed sale price is $10,000; debt

secured by property is $8,000 Sale free and clear allowed?



Hypo 2 Trustee wants to sell property subject to a

security interest Proposed sale price is $10,000; debt

secured by property is $18,000 Sale free and clear allowed?



Hypo 3 Property is piece of real estate subject to city

zoning rules Property subject to zoning rule is worth $10,000 Property value absent restriction is $15,000 Trustee seeks to sell for $15K free and clear of

zoning rule Sale free and clear allowed?



Hypo 4 Property is piece of real estate subject to

federal environmental statute Property is dirty; $100,000 will be required to

clean it up; clean property would be worth $125,000; dirty property would sell for $25,000

Federal law provides that any owner of the property is obliged to clean the property



Trustee seeks to sell the property at auction free and clear of clean up obligation

Proposes to give feds $100,000 unsecured claim in the case

Sale free and clear allowed?



TWA

Core Facts 9 Jan 01: American agrees to buy TWA

assets through bankruptcy 10 Jan 01 [not 02]: TWA files C11 (for the

third time!) Feb 01: Sale Approved


The Sale Order

Sec. 363(f) Free and Clear Provision “the free and clear delivery of the Assets

shall include, but not be limited to, all asserted or unasserted, known or unknown, employment related claims, payroll taxes, employee contracts, employee seniority accrued while employed with any of the Sellers and successorship liability accrued up to the date of closing of such sale.”


The Sale Order

The Injunction “Pursuant to §105(a) and §363 all Persons

are enjoined from taking any action against Purchaser or Purchaser’s Affiliates including, without limitation, TWA Airlines LLC, to recover any claim which such Person had solely against Sellers or Sellers’ Affiliates.”


The Challenge

EEOC Contended it had employment

discrimination claims that could be asserted against TWA

Wanted to assert those against American as successor to the assets


The Challenge

Travel Voucher Program Awarded to TWA flight attendants as

settlement of a sex discrimination class action


Classifying These

Key Questions Are these “claims” under Sec. 101(5)? Are these “interests in property” for the

purposes of Sec. 363(f)? For 363(f)(5), could “such entity could be

compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest”?


101(5) ‘Claim’ means—

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured;

The Voucher Claim

Four Versions 1. They sue; win; receive damage award in

cash of $100,000; not paid; TWA files C11 2. Same as above, except TWA forced to give

them security interest in airplane 3. Same as 1 above, except award is to be in

services going forward, meaning $100,000 in future TWA flights; not used up; no SI; TWA files C11


The Voucher Claim

4. Same as 1 except two possible state laws relevant

“Claims of this sort are not dischargeable in a federal bankruptcy proceeding”

“Claims of this sort attach to whomever holds the assets that gave rise to these claims”


The EEOC Claim

How does this compare to the voucher claim?


Documents

Class 13 Bankruptcy, Spring, 2009 Sales of Assets Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/[email protected]