I've been writing a lot lately about the Chrysler bankruptcy and will probably be writing a lot more about the GM bankruptcy to come (it's happening Monday - mid-day press conference in NYC). As a creditor oriented bankruptcy attorney in a Michigan based firm with more than twenty plus years of experience, I just can't help myself - this really is the biggest thing to come down the pike in my professional life as far as actual relevance to the real world. I've even written a fair amount about the 363 sale process itself -- and for those of you wanting more detail about how all this works, please visit -- but I thought it might be helpful to address the basic questions about 363 sales in general (and with respect to Chrysler and GM in particular) in one place with, hopefully, a minimum of legalease...
1. What is a “363 sale”?
It is a sale of assets in a bankruptcy case, generally in a Chapter 11 reorganization, so named because of the section of the Bankruptcy Code dealing with the procedure. A discrete asset or assets, such as a particular piece of equipment or parcel of real estate, may be sold pursuant to 11 USC §363, or, especially recently, several bankruptcy courts will authorize a sale including all, or substantially all, of the bankrupt company’s assets. The assets will be conveyed to the purchaser free and clear of any liens or encumbrances. Those liens or encumbrances will then be attached to the net proceeds of the sale and paid as ordered by the Bankruptcy Court.
2. What is the purpose of a 363 sale?
According to the legislative history, the purpose of section 363 of the Bankruptcy Code is to “define the rights and powers of the [bankruptcy] trustee [or Debtor] with respect to the use, sale, or lease of property and the rights of other parties that have interests in the property involved.” It permits the disposition of assets of the bankrupt company outside the ordinary course of business
3. What is the process for a 363 sale?
The bankrupt company (known as the Debtor or Debtor-in-Possession) or bankruptcy trustee in chapter 7 cases must file a Motion with the Bankruptcy Court in which the case is pending seeking the Bankruptcy Court’s approval of the terms and conditions of the proposed sale. Opponents of the proposed sale will have a designated response period determined by the pertinent Bankruptcy Court (often 10 or 20 days) in which to file written objections to the proposed sale. Frequently, although not always, this time period will be shortened considerably and be little more than a few days.
The Bankruptcy Code then requires “notice and a hearing” on the Motion at which each side can present its argument. Although an “actual” hearing is not required, typically there will be one. Then the Bankruptcy Judge considers the arguments made and either approves the sale as outlined by the Motion or denies approval. If the sale is approved, then the Debtor will proceed with making it a reality.
4. What is the timeline for a typical 363 sale?
A 363 sale may take anywhere from a few days to several months to complete, depending upon whether there is opposition to the sale and how many parties are interested in purchasing the assets being offered. Generally speaking, the process can be completed in a few weeks.
5. What information does the motion seeking approval of a 363 sale have to contain?
The Motion or exhibits attached to it must provide detailed information about all of the essential terms and conditions of the contemplated sale, including the identity of the prospective purchaser, purchase price, assets to be sold, and the like. Frequently, the actual Purchase Agreement between the Debtor and prospective purchaser (sometimes referred to as a “stalking horse”) is attached to the Motion as an exhibit.
Generally, the Motion will also contained specific detailed provisions regarding the timing and manner applicable to the submission of any competing offers for the assets to be sold.
It is also possible that the Motion will simply seek approval of a auction or other sales procedure to determine who the successful purchaser will be.
6. What are the requirements for approval of a 363 sale?
The Bankruptcy Court must determine:
- Whether the terms of the sale constitute the highest and best offer for the assets to be sold;
- Whether the negotiations concerning the terms and conditions of the proposed sale were conducted at arm’s length;
- Whether the sale is in the best interests of the bankruptcy estate and its creditors
- Whether the purchaser has acted in good faith and the sale itself is being made in good faith [we’re big on “good faith” in bankruptcy law]
Unless the answer to all of these is “yes”, the sale will not be approved. In addition, there are several other requirements designed to protect the interests of creditors who have previously been granted lien on the assets to be sold as collateral for loan or other credited previously given to the Debtor. Essentially, if the purchase price is not enough to pay all of these creditors in full, the sale cannot be approved over the objection of the creditor unless applicable non-bankruptcy law could force the creditor to accept the situation. Because junior lienholders sometimes do not get paid in state court foreclosures, it has been generally assumed that this requirement can be met fairly easily.
7. Who decides whether a 363 sale is appropriate?
The bankruptcy judge presiding over the case will determine if the requirements for approval of a 363 sale have been met.
8. How is a 363 sale different from a plan of reorganization?
It is sometimes argued that the approval of a 363 sale of substantially all of a bankrupt company’s assets early in a bankruptcy will have the practical effect of deciding many important issues that would ordinarily arise in due course during the bankruptcy proceeding and be addressed as part of the plan confirmation process.
A sale of assets in bankruptcy can often be accomplished more quickly with a 363 sale rather than in the context of a plan of reorganization. A 363 sale requires only the approval of the Bankruptcy Judge while a plan of reorganization must be approved by a substantial number of creditors and meet certain other requirements to be “confirmed.” A plan of reorganization is much more comprehensive than a 363 sale in addressing the overall financial situation of the Debtor and how its exit strategy from bankruptcy will affect creditors.
Additional statutory protections for creditors and greater emphasis on valuation and feasibility of the post-sale business operations made possible by the sale also exist in the case of a plan of reorganization. In addition, there are also statutory notice periods entailing several weeks applicable to the plan confirmation process that cannot be shortened (other than possibly in the context of a prepackaged bankruptcy).
A proposed plan of reorganization is a lengthy and extremely detailed document which classifies the claims of various sorts of creditors into designated “classes” and then prescribes various “treatment” concerning how those claims will be dealt with. The Bankruptcy Code requires that the proposed Plan of Reorganization be accompanied by a “Disclosure Statement” similar in purpose and appearance with a prospectus used in the sale of stock and securities. The Disclosure Statement explains how the debtor came to be in bankruptcy and must provide "adequate information" about a plan and its implementation and consequences such that a hypothetical investor would be able "to make an informed judgment about the plan".
9. What is a “sub rosa” plan?
A “sub rosa plan” is what opponents of a 363 sale may call it if they believe the terms and conditions of the proposed 363 sale extend well beyond what they believe is the meaning and purpose of Section 363 of the Bankruptcy Code. The argument here is that except in the context of highly perishable goods, a sale of substantially all of a company’s assets must only be done in the context of, and with the protections of creditors inherent in, the plan confirmation process and a 363 sale is intended only for more piecemeal disposition of assets.
10. What happens to creditors after a 363 sale occurs?
Once a 363 sale has been consummated and the purchase price paid, the bankruptcy court will decide how the proceeds of sale are allocated among secured creditors with liens on the assets sold. In the event additional proceeds exist, they will be allocated to unsecured creditors and other claimants in accordance with the statutory provisions of the Bankruptcy Code.
11. What is a “stalking horse”?
A “stalking horse” is the initial prospective buyer willing to set forth specific price and terms for the purchase of the bankrupt company’s asset or assets. The prospective purchaser usually negotiates for payment of a break-up or topping fee to it in the event it does not wind up being the approved purchaser to ensure that any competing bid is meaningfully more valuable to the bankrupt company.
12. What is a “topping fee” or “break-up fee”?
A “topping fee” or break-up fee” is a specified amount to be paid to a stalking horse in the event that it is not the successful bidder for the assets. The theory is that it will compensate the stalking horse for certain “due diligence” it undertook and ensure that any competing bid is meaningfully more valuable.
13. What are “bidding procedures”?
“Bidding Procedures” are the procedural rules proposed by the Debtor concerning the process and form by which offers for the asset or assets to be sold should be made by parties other than the “stalking horse”, if any. They are often included as part of the 363 Motion as a means of keeping the process orderly and avoiding chaos, but are sometimes seen by other prospective purchasers as designed to chill competing offers by imposing onerous procedural requirements.
14. What is a “credit bid”?
A “credit bid” occurs when a secured creditor can bid up to the amount of the debt owed it by the Debtor for the purchase price of the assets to be sold without having to come out of pocket for any actual cash. The difference between the amount owed and the credit bid will then become the amount of the lienholder’s unsecured claim.
15. Is there any recourse after a Bankruptcy Court approves a 363 sale?
An Order approving a 363 sale can be appealed either to the applicable U.S. District Court or the Bankruptcy Appellate Panel for the applicable U.S. Circuit Court of Appeals, if there is one. Certain statutory provisions have limited the ability of any successful appeal to unwind the transaction, but more recent cases have raised some questions about the proper interpretation of those provisions.
16. How are the Chrysler and GM bankruptcy 363 sales the same or different from the ordinary 363 sale?
The Chrysler and likely GM contemplated 363 sales are considerably more complex than a typical 363 sale and involve a number of other provisions adjusting relationships with various creditors such as dealers and suppliers that would more often be found in a plan of reorganization. They are also proceeding much more rapidly than would ordinarily be the case.
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