Source: https://www.inforuptcy.com/company-blog/archive/201501
Timestamp: 2019-04-24 02:05:26+00:00

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Guest Post (1/3) By Leonard P. Goldberger, Esq.
The U.S. bankruptcy court system is a marketplace or, as I like to think, a giant discount department store. You can buy anything, cheap. Although not exactly like a traditional marketplace because current owners are not necessarily “willing” sellers, the bankruptcy process compels some form of transaction by which liquidity is created to repay creditors. One type of transaction is, of course, the section 363 sale (or its first cousin, a liquidating plan of reorganization). Moreover, this marketplace has (for various reasons beyond the scope of this series of articles) become even more robust during the aftermath of the financial crisis. Indeed, the nature of business reorganization cases is trending from traditional stand-alone reorganizations to relatively quick sales of assets early in the bankruptcy case. As the roots of globalization sink deeper, this marketplace provides many opportunities for foreign investors to make acquisitions of quality assets (or otherwise deploy capital) that may be superior to those in their domestic markets. These foreign investors have the cash and are willing to spend it abroad; they have their own government’s approval – as well as various U.S. governments’ incentives – to make outbound investments; and they have the strategic need to do so to effectively compete in a global economy.
Good Stuff. The range of assets available for acquisition in the U.S. bankruptcy court system is exceedingly broad. (One need only read a single issue of Inforuptcy Bankruptcy Assets for Sale to quickly reach this conclusion.) In this discount department store, the choices of investment opportunities are varied and extensive, and often align themselves well with strategically-targeted industries, such as renewable energy, advanced manufacturing, pharmaceuticals and biotechnology, medical devices, healthcare technology, computer and information technology, retail and consumer brands, waste management and environmental services, financial services, shipping and distribution, natural resources and, of course, the perennial favorite, real estate. As such, foreign investors can acquire either discrete strategically-important assets, or entire companies.
Strategic Positioning. In the increasingly competitive global economy, the need for foreign investors to engage in strategic positioning becomes ever more important. This applies equally to those that want access to the valuable U.S. market in order to build global brands, as well as to those seeking advanced U.S. technologies (no military sales, please) to improve their competitiveness in their own domestic and/or other international markets. Assets are available in the U.S. distressed marketplace that can satisfy both of these strategic objectives. For example, in 2014, Sailing Innovation, a consortium of a Chinese investment firm and a Chinese department store operator, bought Brookstone, the 240 store U.S. mall-based retailer, at a bankruptcy court auction for $173 million. The consortium will continue to operate the Brookstone stores as part of a larger strategy that involves other international acquisitions. Increasingly, foreign investors are able to get past the so-called stigma of bankruptcy and recognize the hidden opportunities of acquiring high quality, but otherwise stranded, U.S. assets, i.e., good assets trapped in financially-distressed corporate structures.
Open and Transparent Process. Like any good discount department store, the U.S. bankruptcy courts are always open to the public. Moreover, with appropriate guidance from experienced U.S. insolvency practitioners, the bankruptcy sale process is fairly transparent. Once a foreign investor decides to get into the game, the playing field is generally level. This means that opportunities to participate in the bidding process are available regardless of national origin; foreign investors have the same ability as their domestic counterparts to be heard on objections to the fairness of bidding procedures before bankruptcy court approval; they have equal access to financial and business-related information necessary to inform the investment decision; the bidding process is open and transparent, and subject to bankruptcy court oversight to enforce legal prohibitions against collusion; and subject to final bankruptcy court approval to ensure the good faith of the entire sale process.
Free and Clear, Final & Certain. An exceptional aspect of the U.S. bankruptcy sale process is the ability to provide foreign investors with practical business assurances necessary to mitigate the bundle of risks inherent in any cross-border transaction. These assurances flow from the combination of sections 363(f) and (m) which together allow the bankruptcy court to not only to “cleanse” assets of liens, claims, encumbrances and other interests by providing “free and clear” title, but also to provide legal finality and financial certainty that the deal is done once the sale closes. The ability to efficiently and effectively deliver this practical result benefits foreign investors who might otherwise reluctantly have to be become entangled in messy, protracted, and expensive U.S. litigation in order to exploit the commercial benefits of the targeted assets.
Cheap (Sort Of). Distressed assets often trade at liquidation value, or below. Between the generally lowered expectations of value in the bankruptcy marketplace, and bankruptcy court-approved sale procedures that do not always create true competitive bidding, distressed assets can often be acquired cheaply. This, of course, provides an incentive for foreign investors to participate in this marketplace. Conversely, in a world where “cash is king,” U.S. creditors are incentivized to embrace sales to foreign investors. Foreign investors flush with cash (e.g., Chinese state-owned enterprises) can affect a favorable outcome in a marginal bankruptcy case where the alternative to the instant liquidity created by a sale is for a secured creditor to bid in its lien and simply take back its collateral. Sometimes, however, in the face of a foreign investor’s compelling strategic need for targeted assets, price considerations become secondary. Consider, for example, where Wanxiang Auto Group (a large, state-owned Chinese auto parts company, acting through its U.S. subsidiary) outbid Johnson Controls (a U.S. company) by over $125 million to acquire the advanced lithium-ion electric automotive battery technology out of the A123 Systems bankruptcy case. (A year later, in the Fisker Automotive bankruptcy case, Wanxiang Auto Group also acquired the Fisker electric car – which (not coincidentally) uses the A123 Systems electric battery.
The marketplace that exists within the U.S. bankruptcy court system is increasingly affected by the powerful forces of globalized commerce. Not surprisingly, forward-thinking foreign investors recognize – and, accordingly, are attracted to – the many investment opportunities in the U.S. distressed marketplace in order to satisfy their global strategic goals and objectives. Not only is an array of strategically significant assets readily available, but the legal and commercial benefits inherent in the process itself encourage foreign investors to participate in this marketplace. As successful acquisitions like A123 Systems-Fisker Automotive illuminate the possibilities, other foreign investors will undoubtedly follow. Indeed, although Wanxiang Auto Group is a large Chinese state-owned enterprise, these types of successes will encourage foreign investors who are small to medium-sized enterprises to also participate. All of this will likely increase the vibrancy, competitiveness and liquidity of the U.S. distressed marketplace, all to the benefit of (primarily, U.S.) creditors. Other aspects of this process will be explored in the next two articles in this series.
 See 11 U.S.C. § 363 (sales of assets); 11 U.S.C. § 1123(a)(5)(D) (liquidating plan of reorganization).
 In 2014 alone, according to a study by Rhodium Group, Chinese investors made investments in the U.S. totaling in excess of $12 billion. See http://rhg.com/notes/chinese-fdi-in-the-united-states-q4-and-full-year-2014-update.
 See, e.g., the various industries targeted for development by China’s 12th Five-Year Plan, adopted by China's legislature, the National People's Congress, on March 14, 2011.
 Although foreign investors can bid freely in a bankruptcy sale, closing on any acquisition may be subject to review by The Committee on Foreign Investments in the United States, a federal inter-agency committee chaired by the Secretary of the Treasury that is charged with reviewing transactions that result in control of a U.S. business by a foreign person in order to determine the effect of such transaction on the national security of the United States.
 11 U.S.C. §§ 363(f) and (m).
Guest Post By Matthew Lein, Esq.
Investors must purchase assets from the district/venue where the bankruptcy case is filed. If you purchase an asset of a bankruptcy estate, without further considerations, that asset must be purchased through the bankruptcy court where the case is pending. In most individual or small business cases, the bankruptcy case will be filed in the district where the consumer(s) or business is located. However, larger businesses (i.e. Enron Corp., Caesars Entertainment Corp.) may have additional choices in venue.
Most cases must be filed in the federal district either: (1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the 180 days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or (2) in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership. 28 USC 1408(1)-(2).
The above statute applies to bankruptcy chapters 7 through 13.
Most non-large bankruptcies are filed in the district where the consumer(s) or business is physically located. Those bankruptcies involve a consumer(s) or business that does not involve “[an] affiliate, general partner, or partnership” that reside outside the district.
Larger bankruptcies may involve “[an] affiliate, general partner, or partnership” that do reside outside the district where courts have looked to a variety of factors when determining if a venue is proper.
No case is similar and almost no case fits perfectly in the statutory language outlined in 28 USC 1408(1)-(2). Accordingly the court may rely on a number of factors outlined in previous bankruptcy cases to help it determine the correct venue. The principal place of business and major business decisions are significant factors.
In conclusion, in most instances that do not involve a large corporation, the asset will be purchased from the nearest bankruptcy court. In instances that do involve a large corporation, the buyer must be prepared to purchase the asset from a non-local bankruptcy court.
Guest Post By Zev Shechtman, Esq.
The threat of bankruptcy is ever present in the world of distressed property investing. The filing of a bankruptcy petition triggers an automatic stay that stops actions by other parties against the debtor and the debtor’s property. While this can result in delays of asset acquisitions and dispositions, it is not necessarily an insurmountable obstacle. In some cases it may even create opportunities for deals.
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title….
In other words, the automatic stay stops a wide range of actions against a debtor or the debtor’s property, including foreclosure, eviction and other collection and enforcement actions.
(1) What happens to a foreclosure if the property owner files for bankruptcy protection?
If a debtor files for bankruptcy before the debtor’s property is sold in foreclosure, the foreclosure sale is barred by the automatic stay. If the sale goes through despite the bankruptcy filing, in the Ninth Circuit such sale is void. However, if the debtor files for bankruptcy protection after the completion of the foreclosure, then the automatic stay generally does not affect the validity of the sale.
The automatic stay is not necessarily a permanent bar from proceeding with foreclosure. A lien holder seeking to foreclose after the bankruptcy filing may file a motion seeking relief from the automatic stay under 11 U.S.C. § 362(d) seeking an order “terminating, annulling, modifying or conditioning” the stay. To obtain such an order, the movant must generally show (1) “cause, including the lack of adequate protection”; or (2) that “the debtor does not have an equity in such property” and “such property is not necessary to an effective reorganization.” “Adequate protection” can be satisfied in various ways, including by an equity cushion in the collateral above the value of the lien.
As an example, if a property is worth $500,000 and the lien against the property is for $700,000, the lien holder would likely argue under section 362(d)(2) that relief from the automatic stay should be granted because there is no equity in the property and that such an “underwater” property cannot be useful in any reorganization. If the lien holder succeeds in obtaining an order granting relief from stay, then the lien holder can proceed with foreclosure under applicable nonbankruptcy law.
There is an exception to the automatic stay (among others) benefiting a lien holder who previously obtained an order for relief from stay on the basis that the bankruptcy filing was part of a scheme to hinder, delay or defraud creditors involving unauthorized transfers of the property or multiple bankruptcy filings. If the lien holder previously obtained the order as to the same real property within two years before the new bankruptcy filing, such lien holder can proceed with foreclosure or other enforcement action without seeking relief from stay. However, the debtor in the new bankruptcy case can ask for relief from the prior order based on changed circumstances or good cause shown.
(2) Can the automatic stay result in opportunities for asset purchasers?
It is important to remember that while the automatic stay stops a foreclosure of property, it does not prevent a chapter 7 trustee from selling the same property. Indeed, if the chapter 7 trustee determines that a sale of property pursuant to 11 U.S.C. § 363 will benefit the estate, the bankruptcy filing allows for a sale by the trustee without resort to foreclosure. A sale under section 363 can be advantageous to lien holders, who may prefer to avoid a lengthy foreclosure, and junior lien holders in particular who may receive full value from a bankruptcy sale. A section 363 sale is also attractive to asset purchasers because it affords an opportunity to purchase property free and clear of liens and other interests.
Knowledgeable buyers of bankruptcy assets can create opportunities to realize value for lien holders and bankruptcy estates. For example, a buyer scanning bankruptcy schedules for underwater properties may consider contacting a lien holder (typically a financial institution that is the beneficiary under a trust deed) with respect to an attractive property and inquiring whether such lien holder would consent to a short sale by the bankruptcy trustee. Trustees typically do not sell assets that are over-encumbered, but if the lien holder is willing to allot a certain portion of the proceeds that are subject to its lien to the estate (or “carve out”) in an amount sufficient to benefit creditors, then a trustee may consider selling the property under section 363. This could benefit the lien holder if it saves time and expense in the foreclosure process, and it could benefit the investor who may be able to acquire a valuable property.
A relief from stay motion, which is intended to enable a lien holder to foreclose on a property, can also serve as an opportunity for potential purchasers. The hopeful buyer can contact the lien holder, through the attorney who filed the motion, and inquire regarding the possibility of a short sale. The lien holder may welcome the opportunity to shortcut the relief from stay and foreclosure processes and to see the property brought directly to a sale under section 363.
(3) How does the automatic stay impact the efforts of an owner trying to obtain possession of property from a debtor who is a former owner or tenant?
If the debtor as lessee does not voluntarily vacate the leased property, the owner generally needs to obtain relief from the automatic stay before the owner can proceed with eviction proceedings. As discussed above, relief from stay may be given for “cause”, which includes a debtor’s failure to pay rent.
Evictions seeking possession of residential real property based on “endangerment” of the property or use of illegal controlled substances on such property.
The automatic stay is a broad protection for debtors affecting a wide range of assets in different ways under different scenarios. It can be a formidable obstacle, but can sometimes create deal opportunities.
A party subject to the automatic stay should evaluate whether the filing of a motion for relief from stay is appropriate or whether an exception to the automatic stay applies in any given circumstance. Even where an exception to the automatic stay may apply, a party may choose in certain situations to file a motion for relief from stay to avoid a potential argument by the debtor or trustee that the party has knowingly violated the automatic stay.
 Additional bases for relief from stay exist in “single asset real estate” cases, 11 U.S.C. § 362(d)(3), and cases filed as part of a scheme to hinder delay and defraud creditors involving unauthorized real property transfers or multiple bankruptcy filings. 11 U.S.C. § 362(d)(4).
 11 U.S.C. §§ 362(k), 105(a).
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References: § 363
 § 1123
 § 362
 § 363
 § 362
 § 362