Receiverships are another non bankruptcy alternative for accomplishing a transfer. You can seek the appointment of a receiver through the commencement of an action in state or federal court. Once appointed, a receiver may be empowered to sell the assets of the business in receivership. Such sales sometimes involve overbids and credit bids, similar to bankruptcy sales.
Unlike a bankruptcy case, which is subject to a complex statutory scheme and a plethora of (sometimes inconsistent) case law, a receivership typically is a flexible process tailored to each case, though applicable laws vary from state to state. This lack of defined playing rules in receiverships can enhance their appeal, but should also warn of potential difficulties. Where cooperation among creditors is lacking, receiverships may not be practical. Counsel should alert clients to this early in the process.
In a few states, such as California, assignments for the benefit of creditors are increasingly common. In an ABC, the distressed business (the assignor) enters into a contract with a selected assignee that takes control of the assignor's assets. The assignee sells them, then distributes the sale proceeds to the assignor's creditors, in accordance with the priorities established under applicable state law. Often the purchaser is selected prior to the official commencement of the ABC. To be effective, ABCs typically require the consent of secured creditors.
Like receiverships, ABCs provide asset purchasers the benefit of buying assets from an independent fiduciary charged with protecting the best interests of the creditors of the distressed entity. This promotes a finding that the sale occurred at arm's length for a fair price under the circumstances and that, in turn, helps protect against successor liability claims. Corporate counsel should look at the debt structure and at whether secured creditors are willing participants when clients are considering an acquisition out of a receivership or ABC.
Foreclosure, receivership, and ABC alternatives must be weighed against the backdrop of often-increased costs and delays in the 363 sale process and other related risks. At the same time, purchasing assets with the protection of a free and clear order continues to have substantial value, and bankruptcy sales typically remain the best way to purchase assets owned by entities with a complex capital structure and by those confronting divergent creditor positions. Corporate counsel to a potential purchaser of assets from a distressed business need to evaluate each of these options to determine the best way to close a sale under the circumstances presented.
Sara L. Chenetz and John E. Lucian are partners in Blank Rome's business restructuring and bankruptcy practice group.