The Art of Bidding at 363 California Bankruptcy Sales Involving Settlement Offers

Earlier this year, I helped a client purchase real property out of a chapter 11 California bankruptcy case.  The process can be confusing and stressful, but it is worthwhile for a potential buyer who has found the right real property and is willing to pay above and beyond what the next best offer is in the bankruptcy case.  It’s even more confusing for a potential buyer when real estate is being transferred as part of a third party settlement in a bankruptcy proceeding,  and an outside buyer wants to come in and overbid on the real estate to provide more value to the bankruptcy estate than the settlement offers.
Now while a buyer of real estate just wants to buy the real estate and wants nothing to do with a third party settlement between the Debtor and other creditors, it is important one understand the settlement matters because the real estate is involved in the settlement.  So the settlement can’t be ignored and it’s not as simple as just buying a piece of real property outright by necessarily offering more money.
Here’s the standard to determine whether the settlement can be approved:  In determining whether a settlement is fair and equitable where disposal of estate property is contemplated, the Court must consider the possibility of a higher sales price obtained through a competitive process as part of a § 363 sale.  (March, Ahart & Shaprio,CAL. PRAC. GUIDE: BANKRUPTCY (TRG 2014),§ 20:302)( citing to In re Mickey Thompson Entm’t Group, Inc., 292 B.R. 415 at 421-422 (B.A.P. 9th Cir. 2003).
Whether a Court should “impose formal sale procedures is ultimately a matter of discretion that depends upon the dynamics of the particular situation.”  Id. at 422.  The Debtor in Possession, wherein no trustee has been appointed, nonetheless has a fiduciary duty to maximize the value to the estate over any agreement that requires court approval.  Id. at 421.
So this all means a bankruptcy court should consider whether a settlement is fair and equitable and in doing so must consider a higher sales price offered by someone such as a third party buyer for the real estate.  Ultimately, a court has some leeway in determining the multitude of factors, and the Court must make considerations that best benefit the bankruptcy estate.  This is a concept sometimes that gets lost in the weeds.  The Court must do what’s best for the bankruptcy estate, not just what’s best for a buyer or a seller, or another third party, or even the Debtor.  The bankruptcy court has the tough task of balancing all these factors and weighing them against the interests of differing parties with different agendas.
In my case in which I helped my clients purchase acres of real property, my client presented an offer valued higher than what the settlement in the bankruptcy offered as value for the real property.  However, our offer required financing and was not an outright cash offer.  The problem is that the Debtor who owned the property in the chapter 11 case structured the process so that only cash offers could be contemplated.  Ultimately, the bankruptcy court made a tough call in this case where both parties could not agree on this point.  The court determined that if my clients offered a non-refundable substantial good faith cash deposit, it would allow us to move forward coupled with a very short closing window to get everything completed and funded.  If my clients failed to fund, the deposit would be lost and the bankruptcy estate would have a extra money to administer the estate than it previously did and could move forward with its settlement as proposed.
Ultimately, my clients were able to close the deal and are now owners of the real estate they coveted.  Who would have thought the world of bankruptcy would have best provided them with this unique opportunity?
JCH Law Firm has experience dealing in these matters.   Attorney Jeff Hsu is a California state certified bankruptcy specialist & attorney.  We have successfully represented clients in bankruptcy cases of various shapes and sizes.   Give us a call at 626-999-5959 or email us your inquiry at [email protected].   Thank you and we look forward to hearing from you.
 
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