Selling Bankruptcy Estate Property In A Chapter 11 Case

Business bankruptcy cases can be different from personal cases, in that assets will often need to be sold off soon after a petition is filed.  This can happen in personal cases as well, of course, but businesses cases can sometimes carry with them a special sense of urgency.  Cash often needs to be raised, or the business may need to shed itself of unwanted assets.

Real estate cases see this issue with some frequency, where closing and sale dates are negotiated in advance.  Assets can be sold before, during, and after confirmation of a Chapter 11 plan.  Sections 363 and 1123 of the Bankruptcy Code govern preconfirmation and postconfirmation sales of estate assets, respectively.

Other than using cash collateral, a debtor in possession can sell off estate assets in the “normal course of business” without court permission (by way of notice to the creditors and opportunity for a hearing).  But if the proposed sale of estate assets is for something that is NOT in the ordinary course of business of a debtor, then notice and a hearing would normally be required.

The next question, of course, that arises is the definition of “ordinary course of business.”  What is it and how is it defined? The term has generally been construed to mean the normal day-to-day business affairs of the debtor.  Regular, normal sales of items in the chain of commerce (e.g., inventory, products, supplies) are day-to-day business transactions.  It is obviously a very fact-specific determination, but in practice it is one that is straightforward to make.

If a sale is not in the ordinary course of a debtor’s business, then court permission must be sought before it can be done.  The court and the creditors will need to know the precise details of what is being proposed and how, if at all, the sale may affect the bankruptcy estate.  Transfers to insiders, sales that are greatly below market value, any liens that may exist on the property, and similar irregularities are going to be closely examined for reasonableness.  Most sales of assets “free and clear” of existing liens are outside the normal course of a debtor’s business.  Additional complexities can arise when the property proposed to be sold is co-owned by another entity.

The bottom line is that you should consult in depth with your attorney on this issue, and craft a sale proposal that balances your goals in the Chapter 11 filing with the court’s reasonable concerns on the impact that the sale will have on the bankruptcy estate.

Read More:  The Order Of Priority Of Claims And Interests In A Chapter 11 Case

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