Businesses considering Chapter 11 bankruptcy often ask whether the process allows the business to buy and sell assets during the bankruptcy process. Generally, a business that is the debtor in possession during a Chapter 11 case may buy and sell real property and other types of assets, as long as specific requirements are met.

The Chapter 11 Process

To understand how buying and selling of assets by a business might occur during a Chapter 11 case, it is important to know how the process works overall.

A Chapter 11 case begins with the filing of a petition for bankruptcy in the bankruptcy court where the debtor has a domicile, residence, or principal place of business. Filing the petition creates an automatic stay that prohibits most creditors from pursuing payment requests, collections, eviction, foreclosure, and other property seizure and collection processes. The business becomes the debtor in possession after the petition is filed and continues to manage and operate the business during the bankruptcy case.

Unless the business requests and receives an extension, a Plan of Reorganization and a Disclosure Statement must be submitted to the bankruptcy court within 120 days after the petition is filed. If a business owner wishes to buy or sell assets during a Chapter 11 case, one way of securing authorization is to include the purchase or sale of real property and other assets in the Reorganization Plan submitted to the court. If the plan is approved by the creditors’ committee and the court, the business is free to conduct sales and purchases during Plan implementation.

Responsibilities of a Debtor in Possession

As a debtor in possession, a business has significant fiduciary responsibilities for managing and operating the business throughout the bankruptcy case. Generally, the duties and powers of a debtor in possession are the same as a Chapter 11 trustee would have. In buying and selling assets, the business owner must conform to the requirements those duties impose.

The duties of a debtor in possession include the obligation to run the business in a manner that preserves and maximizes the value of the business for the benefit of all stakeholders. That means making sound business decisions, exploring possible revenue streams, and minimizing losses. The business has an obligation to act in good faith toward all creditors, secured and unsecured, which means providing accurate and timely reports, negotiating a fair reorganization plan, and assuring the protection of collateral of secured creditors. The debtor also must maintain detailed records of all financial transactions, assets, and liabilities, and file regular financial reports with the bankruptcy court.

A debtor in possession is subject to ongoing oversight by the U.S. Trustee, the creditors’ committee, and the bankruptcy court. It is imperative for the business to comply with all applicable bankruptcy laws, regulations, guidelines, and court orders in buying and selling assets. Ensuring full compliance during the case is a crucial reason for the debtor to secure assistance from an experienced Chapter 11 bankruptcy lawyer prior to filing a petition.

Asset Sales During Chapter 11

In a recent blog article, we discussed using Chapter 11 to liquidate some or all of the assets of a business. In that situation, the sale of assets generally occurs under an approved reorganization plan. However, a business may also be able to sell assets before plan approval.

By filing a motion with the bankruptcy court, the debtor may request permission to sell specific assets during the Chapter 11 case. The court is obligated to consider specific factors in determining whether to approve the sale request. Those factors include:

• Proportionate value of the proposed sale, compared to the bankruptcy estate as a whole
• Amount of time elapsed since filing
• Likelihood of proposal and approval of a reorganization plan in the near future
• Effect of proposed disposition on future reorganization plans
• Proceeds compared to appraisals
• Whether the asset is increasing or decreasing in value
• Who benefits from the sale

To grant the motion and approve the sale, the court must conclude, from all the evidence, that the debtor has satisfied their fiduciary duties and that there is a valid business justification for the sale outside of a reorganization plan.

When a sale is made pursuant to a bankruptcy court order and specific requirements are met, the asset is conveyed free and clear of liens, claims, and encumbrances, which has significant benefits. For this reason, using Chapter 11 to make asset sales is a powerful part of the Chapter 11 bankruptcy process.

Asset Purchases During Chapter 11

Asset purchases by the debtor during a Chapter 11 case are subject to all applicable provisions of the Bankruptcy Code, as well as rules and guidelines of the court and U.S. Trustee, and the provisions of any relevant court orders. As long as the debtor also complies with their fiduciary duties, asset purchases outside of an approved reorganization plan are generally permissible.

Importance of Legal Counsel

Chapter 11 is the most complex type of bankruptcy. The necessity for a debtor in possession to comply with specific laws, rules, and court orders in conducting sales and purchases illustrates the critical importance of the need for trustworthy legal advice. Any business considering Chapter 11 bankruptcy should consult with an experienced Chapter 11 bankruptcy attorney and fully understand the process before proceeding with filing a petition.

At Wernick Law, we focus primarily on assisting debtors in obtaining Chapter 11 protection and achieving debt restructuring and company-wide reorganization. We apply more than 20 years of complex bankruptcy experience in providing comprehensive Chapter 11 legal services.

Our proven record of success is due to the high level of Aaron Wernick’s knowledge and skill, his steadfast dedication to protecting his clients’ interests, and his exceptional problem-solving and negotiation skills. Aaron successfully guides difficult cases to the finish line by focusing on what best serves the client and advocating for the client, while strategically and efficiently pursuing solutions that resolve disagreements and ultimately lead to confirmation of a reorganization plan.

Connect With an Experienced Florida Chapter 11 Lawyer

Wernick Law welcomes Florida businesses wishing to learn more about our Chapter 11 reorganization bankruptcy practice, small business bankruptcy under Chapter 11, subchapter V, or individual bankruptcy under Chapter 11 to schedule a consultation by calling 561-961-0922 or using the online contact form. Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.