Asset sales of substantially all of the assets of a corporate debtor early in a chapter 11 case have become routine. Orders approving motions to approve streamlined procedures for sales of de minimis assets in large chapter 11 cases have also become routine. In re Borders Group, Inc. [1] addressed the tension that arises from the understandable desire of debtors to maximize efficiency and expediency in sales of de minimis assets free and clear of liens, claims and encumbrances against the competing desire of buyers for assurance that their purchases are not subject to later attack.
In Borders, the debtors filed a motion seeking an order approving proposed procedures (the “procedures”) for the debtors to sell certain de minimis assets. These assets consisted of surplus, obsolete, noncore or burdensome assets owned by the debtors free and clear of liens, claims and encumbrances (collectively, the “liens”) without the need for court approval of any individual transaction or series of related transactions to a single buyer or group of affiliated buyers with an aggregate selling price equal to or less than $1 million (the “motion”). The motion further provided that the liens would attach to the proceeds of the sale transactions with the same validity, extent and priority that existed immediately prior to the transaction. The Borders court denied the motion in part, but approved the procedures subject to debtor’s counsel submitting a new proposed form of order consistent with the court’s opinion.
The court began its analysis of the motion by observing the well-established principle that “[i]n approving a transaction conducted pursuant to section 363(b)(1) [of the Bankruptcy Code], courts consider whether the debtor exercised sound business judgment.” [2] The court found that the debtors had exercised sound business judgment and established that relief under § 363(b) was appropriate because, inter alia, (1) the value of each proposed transaction would be relatively small compared to the aggregate value of the debtors’ assets, (2) the court had previously approved streamlined procedures in other cases for the sale of de minimis assets, (3) it was not necessary or cost-efficient for the debtors to seek court approval of each proposed transaction, (4) the debtors would avoid maintenance and storage costs associated with the de minimis assets and (v) the procedures allowed the debtors to meet deadlines relating to the turnover of leased premises to landlords.
Having determined that the debtors established that relief was appropriate under § 363(b), the court found that the “efficiency of the Procedures did not satisfy the protections required by the Bankruptcy Code, at least for sales for $300,000… or less.” [3] Under the procedures, the debtors proposed to give notice of proposed sales for transactions of $300,000 or less to “no party other than the DIP Agents—including the Official Committee of Unsecured Creditors (the “Committee”) and known lienholders.” [4] With regard to sales of the de minimis assets with a selling price of greater than $300,000 and less than or equal to $1 million, the procedures required the debtors to provide written notice at least five business days prior to the closing of any transaction via email or overnight mail to (1) the Office of the U.S. Trustee, (2) counsel to the committee, (3) counsel for the debtor-in-possession (DIP) agents, (4) attorneys for certain landlords, (5) attorneys for Bank of America, (6) any known affected creditor asserting a lien on the relevant de minimis assets and (7) those parties requesting notice pursuant to Bankruptcy Rule 2002.
Turning to the question of the sufficiency of notice, the debtors argued that they had already obtained the consent of the DIP agents for approval of the procedures and “erroneously state[d] that ‘all relevant parties, including all known parties with a Lien on the subject assets, will have sufficient notice and ability to object to the transaction.’” [5] The court rejected the argument because the debtors’ proposed procedures did not require notice to any known affected creditor asserting a lien on the relevant de minimis assets if the sale transaction had a sale price less than $300,000. Ultimately, the court held that “the notice proposed [by the debtors] for sales in excess of $300,000…is proper, but on all proposed sales below that dollar threshold, notice of sales should be filed on ECF, and, in addition, specific notice should be given to the U.S. Trustee, Counsel for the Official Committee of Unsecured Creditors, and any known creditor asserting a lien against the property Debtors propose to sell.” [6]
The court observed that if proper notice is given, a sale free and clear of liens pursuant to § 363(b) may be approved if at least one of five conditions of § 363(f) are met. The court further observed that “a lienholder who receives notice of a sale but does not object within the prescribed time period is deemed to consent to the proposed sale, and assets thereafter may be sold free and clear of liens.” [7]
The court then addressed the debtors’ request that the court find that the proposed sales of de minimis assets be deemed arm’s-length transactions so the buyers would be entitled to the protections under § 363(m) of a good-faith purchaser for value without knowledge of adverse claims. The court rejected the debtor’s request and held that it is impossible to determine whether a buyer has satisfied its burden of establishing good faith before any de minimis asset sales have taken place. Nevertheless, the court suggested that a “streamlined procedure that includes a good faith finding by the court is still possible if, before or immediately after the sale closes, a declaration or other competent evidence, along with a proposed order with a good faith finding, is submitted to the Court on presentment.” [8] The court’s suggestion provided a mechanism by which bankruptcy counsel may obtain orders, including a good-faith finding under § 363(m), and directly addressed a buyer’s need for assurance that their purchases are not subject to later attack.
Finally, the court summarily rejected the debtors’ suggestion in a footnote that they could hire brokers, auctioneers or liquidators without filing retention applications for such professionals because of the limited value of the de minimis assets. The court noted that applications to retain brokers, auctioneers and liquidators are commonplace and need not be an expensive or time-consuming process. Because the proposed sales were outside of the ordinary course of business, the professionals conducting these sales are not ordinary-course professionals and accordingly, they must be retained upon application under §§ 327(a) and 328(a).
1. 2011 WL 1795604 (Bankr. S.D.N.Y. May 12, 2011).
2. Id. at *3.
3. Id. at *4.
4. Id. (emphasis in original).
5. Id. at *5 (emphasis in original).
6. Id. at *7.
7. 11 U.S.C. § 363(f)(2).
8. Id. at *6-7.
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