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| vol 19, num 1 | February 2022 |
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| 2021 Asset Sale Committee Co-Chair Column |
| We hope this report finds you and your family doing well. 2021 was another year of lockdowns and Zoom meetings, but also COVID-19 shots and slowly returning to the real world. Our committee leadership has strived to help its members navigate the ever-changing world of distressed sales via access to helpful content and the opportunity to engage in discussions on topics relevant to asset sales. Below are a few highlights of the committee’s activities over the past year.
Asset Sale of the Year Award
This past summer, our committee named the winners of the Third Annual Asset Sale of the Year Award. The award is given to a sale that provided stakeholders with value, displayed excellence from start to finish and was of strategic or legal significance and impact. This year’s award went to In re Verity Health System of California Inc., Case No. 2:18-bk-20151-ER (C.D. Cal.), which Samuel R. Maizel and Tania M. Moyron of Dentons nominated. The committee selected Verity as the top asset sale because the sale (1) was part of one of the largest hospital bankruptcies ever filed, (2) established important precedent regarding the transfer of Medicare and Medicaid provider agreements in a bankruptcy case and the limited scope of the California Attorney General’s powers over the sale of nonprofit health care assets in bankruptcy, and (3) saved important
institutional hospitals, preserving thousands of jobs and ensuring that residents in these counties and communities continue to have access to critical health care. Honorable mentions were awarded to the asset sales in In re Southern Foods Group LLC, et al. (S.D. Tex.), submitted by Brian Resnick of Davis Polk & Wardwell LLP, and In re OGGUSA Inc., f/k/a GenCanna Global USA Inc. (E.D. Ky.), submitted by Michael Boyer of Huron Consulting Group, Inc.
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| Sales Under Subchapter V of Chapter 11: Case Law Review |
| In January 2021, we published an article exploring the legislative history and broad provisions of subchapter V of chapter 11 as they relate to asset sales. In that article, we acknowledged that liquidation and going-concern sales are possible under subchapter V, but predicted that the majority of § 363 sales under subchapter V would be of discrete assets because subchapter V was designed to encourage traditional reorganization. The case law since then has been mostly consistent with that prediction. But we also predicted that sales in subchapter V would more likely be used to “downsize” rather than liquidate. This latter prediction has
proven to be less accurate. The rest of this article will review the cases that have discussed or approved sales of substantially all assets under subchapter V.
Subchapter V May Include Liquidation Sales
While most courts have taken for granted that asset sales may occur in subchapter V, one court analyzed the statutory authority for asset sales. In In re Port Arthur Steam Energy L.P., the bankruptcy court noted that “Section 1181 of the Bankruptcy Code lists sections of the Code that do not apply in Subchapter V cases” and does not exclude § 1123(b)(4), “which provides that a chapter 11 plan may provide for the sale of all or substantially all of the property of the estate and the distribution of proceeds to creditors and equity interest holders.” Admittedly, this discussion is possibly dicta because the issue in Port Arthur was whether liquidating assets qualifies as business activity for the purpose of determining eligibility to be a debtor under subchapter V. The parties were not actually disputing whether a subchapter V debtor may
conduct a sale under § 363, but regardless of whether its discussion of asset sales is dicta, In re Port Arthur provides the only extensive analysis by any court so far.
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| Changed Circumstances in § 363 Sales: What if the ‘Highest and Best’ Offer Suddenly … Isn’t? |
| What happens when intervening events or a change of circumstances occurs that affects the value of the assets and the benefit to the estate when selling them to one bidder over another? Three recent cases provide some insight into what bankruptcy courts consider when a trustee’s or debtor’s business judgment is called into question because the ground beneath the parties has shifted during the sale process.
Background: The Business-Judgment Standard for § 363 Asset Sales
A trustee or debtor in possession is permitted to “use, sell, or lease” property of the estate outside of the ordinary course of business under § 363(b)(1) of the Bankruptcy Code. Bankruptcy courts permit the sale of the debtor’s assets as long as the debtor or trustee has an “articulated business justification” for doing so.
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| Fourth Annual Asset Sale of the Year Nominations Due Feb. 28 |
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| The Asset Sales Committee is actively soliciting nominations for the Fourth Annual ABI Asset Sales Committee Sale of the Year Award. Details are set forth below. Please submit your best deal.
Nomination Deadline
Monday, February 28, 2022
Criteria
- Completion of a distressed sale (in or outside of court via § 363, a plan, an assignment for benefit of creditors, Article 9, receivership, etc.) that was strategic and provided stakeholders with value (“Sale”);
- A display of excellence across the full spectrum of the Sale process, from the initial targeting through pursuit, structuring and financing, to completion of a transaction;
- A Sale that reflects a high level of professional expertise in the design of the transaction, and/or creativity and skill in completing the transaction; and/or
- A Sale of strategic or legal significance and impact (winning entries might focus on overcoming challenges to complete the Sale, innovative financial engineering, and/or motivating agreement across multiple stakeholders). The dollar amount of the Sale is not relevant.
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