Sales Through Bankruptcy Plans
Another way to buy debtor assets is through a Chapter 11 reorganization plan. A reorganization plan, if it can be confirmed, is generally preferred to a Section 363 sale when a buyer seeks to acquire the equity interests in, rather than the assets of, a debtor or when the buyer seeks to issue new securities. The reorganization plan mechanism also may be favorable if there are other issues that need to be addressed in the transaction, such as a settlement of outstanding litigation or a merger.

The Chapter 11 plan is superior to a Section 363 sale in several respects:

According to Section 1145 of the Bankruptcy Code, a security issued in connection with a Chapter 11 plan is exempt from registration with the Securities and Exchange Commission under many circumstances. This is important to a buyer because under a reorganization, the filing company's assets would vest when the company is reorganized, and that equity interest would then be issued to the buyer. This way, the buyer can purchase assets and at the same time issue free tradable stock-which can be listed on an exchange-or restricted or preferred stock, even when the debtor might not be permitted to.
Section 1146 of the Bankruptcy Code says transactions included in the Chapter 11 reorganization plan will be free from stamp and transfer taxes. In this way, sales of real estate, for example, may proceed without payment of transfer taxes or other taxes required to record a deed.
A Section 363 sale and the associated bidding process can still be contemplated under a Chapter 11 plan, and the bidding process can take place at the same time that the plan process plays out.
A reorganization plan generally gives the parties more flexibility and allows them to find creative solutions to problems. For instance, Section 363 sales are not well designed for non-cash transactions, but those types of transactions can be made under a Chapter 11 plan.   

Like a Section 363 sale, a Chapter 11 reorganization plan will normally be a two-step process. First, the bankruptcy court will consider whether to approve a disclosure statement with background information about the debtor, the events that transpired in the bankruptcy case and the proposed transaction. If the court approves the disclosure statement, the debtor and any other proponents will solicit votes from creditors in favor of the plan. At the confirmation hearing, the bankruptcy court will evaluate whether the requisite creditors accepted the plan and whether the plan satisfies the requirements of the Bankruptcy Code. Assuming that government approvals are unnecessary, the plan can "go effective" or close soon after confirmation by the bankruptcy court. Depending on the facts, a plan process is often completed within 90 days after the execution of a stalking horse agreement.

Although Chapter 11 plans may be used to resolve tricky issues associated with bankruptcy transactions, they are not appropriate for all situations. If a buyer seeks a straightforward cash transaction to acquire assets that are not subject to stamp taxes or similar taxes, the buyer may be best served to pursue a Section 363 sale. (Stamp taxes per se are rare these days, but there are many similar taxes that fall under that definition, including most transfer taxes, sales taxes and gains or profits taxes.) Moreover, if the assets are quickly deteriorating in value or the debtor does not have the liquidity necessary to operate in bankruptcy pending a plan process, it may be best to proceed with a Section 363 sale. Furthermore, since the confirmation of the plan marks the debtor's exit from bankruptcy (which may be an orderly liquidation), proceeding via a plan may result in other parties raising objections that are not relevant to the sale, the buyer or the purchased assets (such as disputes between creditors over which creditor is entitled to the sale proceeds or whether the seller must pay certain taxes) that can result in a significant delay and interfere with the buyer's objectives.

Conclusion
Bankruptcy sales, whether through Section 363 sales or Chapter 11 reorganization plans, are meant to give a buyer a level of certainty about acquiring the assets or equity of a distressed entity. Either a sale order or a plan confirmation order can ensure the buyer is getting the assets free and clear and minimizes the risks associated with successor liability claims.

Although bankruptcy sales are often subject to bid procedures (and the possibility that the buyer will be outbid), the award of breakup fees and expense reimbursements and the approval of a structured bidding process can minimize the downside risk associated with competitive bidding (from the buyer's perspective).

These sales, when properly evaluated, present significant opportunities to the sophisticated investor to structure the terms of an asset or entity purchase and to close on the sale in a protective manner.

At a time when the securities markets are difficult to navigate and present various risks, bankruptcy sales offer a legitimate and attractive opportunity. Sophisticated investors and family offices should consider exploring these options.

Schuyler Carroll, Colonel Betz and Richard London are attorneys at the law firm Perkins Coie. Carroll is a partner in the firm's Bankruptcy & Workouts group and head of the firm's New York office. He focuses on complex restructuring, transactional, litigation and advisory work. He can be contacted at [email protected].
Based in Seattle, Betz is a partner and head of the firm's Family Office Services group and focuses on personal, tax and estate planning for individuals and families as well as the representation of fiduciaries in estate and trust administration. He can be contacted at [email protected].