Four decades ago, when I began my legal career, bankruptcy sales were held in low regard. They were regarded, and often referred to, as “fire sales” that were almost certain to attract no interested parties other than bottom feeding liquidators seeking to pay only a fraction of the value of the marketed assets. For this reason, potential sellers steered clear of bankruptcy.
Much has changed in the ensuing decades. The sheer number, financial significance and strategic importance of bankruptcy sales have skyrocketed. There are several probable reasons for this phenomenon: changes in the bankruptcy law itself, as it applies to sales of assets; the expansion of the doctrines of successor liability and fraudulent transfer, and the concomitant recognition by would-be purchasers that a bankruptcy court order is the most effective way of avoiding potential claims under these doctrines; and other bankruptcy “benefits” enjoyed by the seller.
It is not the purpose of this article to explain and analyze these successor liability doctrines in any detail. Suffice to say, the assertion and application of these doctrines has multiplied exponentially in recent decades. As this has occurred, an increasingly savvy universe of potential business acquirers have insisted that proposed acquisitions be accomplished pursuant to bankruptcy court orders declaring, among other things, that a proposed sale is “free and clear of any and all claims and liens of any type” and that the sale is for “fair” or “reasonably equivalent” consideration. Absent showings of fraud or bad faith, such orders are non-assailable.
In other words, the buyers (not the sellers) have insisted that the sales be accomplished under the auspices of the bankruptcy court. The purchasers often pay a price for their insistence that the sale be accomplished in bankruptcy for the reason that bankruptcy courts routinely require, as a condition of any such sale order, that there be an appropriate marketing process (calculated to attract other potential purchasers and create an auction) for the subject assets. While the initial buyer, labeled a “stalking horse,” can achieve certain protections in any such auction such as a “break-up fee” and reimbursement of expenses, if its real goal is to be the successful purchaser, these protections are offer scant consolation if the assets are ultimately sold to the stalking horse at an enhanced price or are sold to an alternative bidder. Nonetheless, the protection from successor liability often motivates the purchaser to insist on a bankruptcy sale.