Chapter 7 Asset Sales in the Digital Age: Suggested Process Improvements to Maximize Estate Values

The current process for administering chapter 7 cases was established at a time when paper documents had to be hand-delivered to the courts for processing. It was an era of “runners.”[1] Over the decades, the proliferation of filing and case-management software has increased efficiency for trustees with respect to administrative tasks, and runners have been replaced by point-and-click.

However, the dissemination of information, a key component to maximizing returns on sales of assets, has not seen the benefits of the technology age. Many trustees administering chapter 7 cases have not taken advantage of technological advancements that could be utilized with minimal effort to improve their day-to-day processes for the purposes of disclosing asset-liquidation information earlier and in more detail. Creating such transparency as a matter of course would inherently lead to a maximization of the returns to the estate with less effort.

The fact that technology has failed to pervade many trustees’ day-to-day processes in a manner that efficiently increases transparency for asset liquidations is an oddity in and of itself. However, this oddity is most striking considering the purposes established by the U.S. Trustee Program (USTP). The USTP’s mission  “is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders — debtors, creditors, and the public.”[2]

Updating legal processes to remain logical in the face of technological advancements is not a novel concept. Recently, Karen Cordry of the National Association of Attorneys General suggested improvements to notice procedures in her January 2016 ABI Journal article.[3] In its Final Report and Recommendations,[4] the ABI Commission to Study the Reform of Chapter 11 recommended the preparation of valuation information packages to improve the chapter 11 process. These publications demonstrate the need for participants in the legal arena to rethink existing processes and improve them where possible.

Trustees, in performing their duties to liquidate assets in chapter 7 cases, are one such group of participants: They need to update their processes to increase transparency, thereby maximizing the value of the bankruptcy estate and returns to creditors in chapter 7 asset cases. This can easily be done by leveraging the government’s existing court electronic records system, as explained in greater detail in the following proposed solutions.

Background of the USTP

The USTP was established by the Bankruptcy Reform Act of 1978[5] as a pilot effort encompassing 18 districts. It was expanded to 21 regions[6] nationwide, covering all federal judicial districts[7] except Alabama and North Carolina, by enactment of the Bankruptcy Judges, U.S. Trustees, and Family Farmer Bankruptcy Act of 1986.[8] The USTP is funded by the U.S. Trustee System Fund, which consists primarily of fees paid by parties and businesses invoking federal bankruptcy protection.

The attorney general is charged with the appointment of U.S. Trustees and Assistant U.S. Trustees. The Executive Office for U.S. Trustees (EOUST) in Washington, D.C., provides general policy and legal guidance, oversees the USTP’s substantive operations, and handles administrative functions. The EOUST director, whose authority derives from the attorney general, oversees a staff comprised of the offices of the director, general counsel, administration, review and oversight, and research and planning. EOUST also provides administrative and management support to individual U.S. Trustee offices in their implementation of federal bankruptcy laws.[9]

Principal U.S. Trustee Duties under the Bankruptcy Code for Chapter 7

U.S. Trustees supervise the administration of liquidation proceedings under chapter 7.[10] In a chapter 7 “liquidation” proceeding, assets that are not exempt from creditors are collected and liquidated. The proceeds are then distributed to creditors by a private trustee appointed to administer the debtor’s estate under chapter 7.[11] An eligible debtor may receive a “discharge” from his/her debts under chapter 7, except for certain debts that are prohibited from discharge by the Bankruptcy Code.

Overview of § 363 of the Bankruptcy Code

Section 363 of the Bankruptcy Code authorizes the trustee to sell property of the estate other than in the ordinary course of business. A proposed sale of estate property will be approved if it is in the best interests of the estate, based on the facts and history of the case.[12]

There are various types of sales that can take place, but the two most typical are a private sale and a sale subject to overbid. A private sale is a sale between just the estate and the purchaser. A sale subject to overbid is a sale between the estate and the purchaser, but a third party can come into the process and state that it is willing to purchase the asset for more than the sale price, and then there will be bidding between the parties, like at an auction. Once an offer is obtained, the trustee will negotiate and ensure that the relevant information, type of sale and language is in the purchase agreement or sale documents. All agreements are subject to bankruptcy court approval.

Thus, once the parties agree to the terms, the trustee will file a motion with supporting documents (including the agreement itself), obtain a hearing date and serve these documents on all creditors and parties-in-interest. It usually takes 30 days from the date that the motion has been filed before the matter is heard by the court. If no party objects to the sale and the court determines that the aforementioned factors have been satisfied, it will approve the sale. An order will be submitted by the trustee and entered by the court, usually within the week. The order is deemed final 14 days after entry. If there was an escrow, it can close; otherwise, any and all appropriate transfer documents can be exchanged.

Outdated Practices Should Be Re-Evaluated

This process has remained virtually unchanged since 1991, yet, as the author has observed, after listing nearly 11,000 sale motions[13] in 2015, that process in fact may not maximize the bankruptcy estate’s value. Based on countless interactions with customers and investors who actively participate and/or seek to participate in bankruptcy asset sales, the stalking-horse bidder in the vast majority of cases succeeds in purchasing an asset without any overbids. In fact, the author has observed that the current process of filing a sale motion only after identifying a stalking-horse bidder sends a “chilling effect” to other prospective purchasers and deters them from bidding because by the time a buyer is aware of an asset sale from the sale motion, it is too late to act.

Proposed Solutions

Since the implementation of CM/ECF and PACER, trustees have had technology at their disposal that allows public dissemination of information without costs. The author believes that improvements to the chapter 7 process can be made by leveraging these existing technologies, thus realizing benefits that would far outweigh any costs. Below are such improvements that could be made.

Formalize Practices Followed in Ohio to Ensure Maximum Marketing of Assets Prior to Engaging with the Stalking-Horse Bidder

In the Northern District of Ohio, as a matter of practice, as soon as the trustee believes that a case is either expected to be or is declared to be an asset case, the trustee in that jurisdiction files Form 1[14] on the docket, which lists all of the assets that are available or possibly available for sale. This “initial report” is typically docketed when the notice of an asset is filed with the court, which gives all prospective bidders the earliest possible notice that an asset is being considered for sale and provides all prospective bidders with the opportunity to become the stalking-horse bidder. The author believes that this practice should be rolled out nationwide and formalized in the USTP’s instructions to Form 1 with the following italicized revisions.

On Page 1 of 1:

This record must be maintained and filed on the docket for every case that is either expected to be or is declared to be an asset case by the trustee, for each case in which the trustee has received funds of the estate, and for each case in which a no-asset report (NDR) has not been filed and no later than 10 120 days have passed since the initial examination of the debtor at the § 341(a) meeting.

On Page 4 of 5:

Other Information. Additional information is required at the bottom of Form 1. Under “Major Activities Affecting Case Closing,” the trustee should provide information about matters pending in the case, such as:

1. assets that will be abandoned and why;

2. status of liquidation efforts: seeking stalking-horse bidder, pending sales, hearing or auction dates, etc.;

3. status of adversary actions and appeals;

4. status of claims objections/claims review and tax returns; and

5. any other actions necessary to complete administration of the case.

Reduce the “Chilling Effect” Once the Stalking-Horse Bidder Has Been Chosen

The best antidote to the stalking-horse “chilling effect” is to provide prospective buyers with as much information as soon as possible. PACER.gov is a public, cloud-based, document storage and sharing service. Practitioners should think of it as a public Dropbox or Google Drive where files can be easily shared and distributed to prospective buyers. Since PDF files can be created with attachments, a trustee can upload files to the PACER website that contain Excel, Word, PowerPoint and/or image files that contain appraisals, financial models, asset images, etc. With this flexibility and capability of distributing files, all sale motions should include an exhibit of all publicly available “materials” that were distributed to the stalking-horse bidder. This will not only increase transparency but should also help level the playing field for all prospective bidders.

Conclusion

The USTP should encourage methods, easily attainable in today’s technological landscape, for fulfilling its mission to promote the efficiency of the bankruptcy system for the benefit of all stakeholders. The author hopes that these suggestions and those from others to improve the liquidation of chapter 7 assets will not only be considered but will also implemented in the near future.