It is now quite common that shortly after a Debtor files for Chapter 11 bankruptcy protection, it seeks court authorization to conduct a quick sale of substantially all of its assets outside of a plan of reorganization. Recently, in In re Exaeris, Inc. et al., 380 B.R. 741 (Bankr. D. Del 2008) a Delaware bankruptcy court denied authorization to conduct such a sale and emphasized that such transactions would be looked at closely.
The proposed sale contemplated the complete transfer of one of the debtor entities, Exaeris, to an individual who served as chairman of the board of a second debtor entity that was also the parent and sole shareholder of Exaeris. Because he served as board chair of the parent company, the individual was considered an insider of Exaeris under the Bankruptcy Code. This insider also provided $2.1 million in financing to the debtors during their bankruptcy case. Under the terms of the sale, in exchange for a credit bid of this amount, the insider was to receive all of the assets and business of Exaeris, as well as a release of all liabilities owed to the company. He also agreed to assume up to $62,500 due for fees payable to counsel to the Official Committee of Unsecured Creditors in the case, which sought approval of the sale jointly with the debtor.
The court noted that, while such sales were not unusual or inappropriate, they were subject to careful review. In order to obtain approval of a sale, case law provides that the proponent must satisfy several criteria: (i) there is a sound business purpose for the sale; (ii) the price is fair; (iii) there has been reasonable notice; and (iv) the buyer has acted in good faith. Finding that the proposed sale did not meet these criteria, the court would not approve it.
First, the court did not find a sound business purpose simply because the case would convert from a Chapter 11 to a Chapter 7 liquidation if the sale not to occur. Rather, it was determined that there was no evidence put in that would allow the court to make an informed decision regarding the relationship of the sale price to the value of the assets. Similarly, because there was no evidence presented as to asset value, including the business being sold, claims being released, inventory, etc., the court could not find that the sale price was fair.
As to reasonable notice, it could not be found when there was only three weeks notice of the sale as well as a complete lack of evidence demonstrating what efforts were made to identify potential purchasers, other than disclosing the identity of four parties that received notice of the sale without any further showing that they were contacted or negotiated with.
Turning to the good faith requirement, the court determined that neither the Committee nor the Debtor demonstrated that they conducted adequate negotiations with the insider purchaser. This, combined with the lack of information concerning the Committee's investigation of the particulars of the sale, the proposed release to the insider purchaser and the "unwarranted lightning schedule" of the sale precluded the court from finding that the sale was a good faith transaction.
Comment : While the court denied the motion to approve the sale, it noted that the parties did the best they could in an effort to make something positive happen for their clients "out of nothing," as the court put it. Thus, although the quick sale was denied in this particular case, the practice of conducting these rapid transactions should continue to be the norm. Parties must, however take care to satisfy the requisite standards in order to obtain sale approval. For a good example of what must be provided in connection with a sale motion, reference can be made to Delaware Local Bankruptcy Rule 6004-1, which sets forth the categories of information and documentation that should be included in sales and sales procedures applications.
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