6 Moss & Barnett is pleased to report that an article retired shareholder, Cass S. Weil, wrote for our Fall 2013 Firm Newsletter, “Section 363 of the Bankruptcy Code – A Tool for Buying and Selling Financially Distressed Assets,” has been included in a Harvard Business School (HBS) Case Study written by Professor Nori Gerardo Leitz and Alexander W. Schultz, “The U-Turns of National Truck Stops,” Case No. N9-217-062 (May 17, 2017). The HBS case study is a teaching vehicle that presents students with a critical management issue and serves as a springboard to lively classroom debate in which participants present and defend their analysis and prescriptions. It goes without saying that this is a tremendous endorsement of the quality of the article written by Cass. We are reprinting the article here. Consider these common “distressed asset” scenarios: A business only has capital to operate for a short time. A lender or potential purchaser is willing to provide only short-term financing to a struggling business. A potential purchaser says that it will pay more for assets if it can acquire the assets “free and clear” of existing liens and interests and be assured that the sale will not be set aside by a court. A quick transaction may preserve the value of business assets, including relationships and employee loyalty, but there is resistance from one or more constituent groups. In each of the foregoing circumstances, the provisions of Section 363 of the Bankruptcy Code may provide a useful tool for accomplishing objectives of both buyers and sellers. Since the changes to the Bankruptcy Code in 2005, sales of assets of businesses of all sizes pursuant to Section 363 of the Bankruptcy Code, as opposed to reorganization and restructuring through the full process of Chapter 11, have become increasingly popular as a method by which buyers and sellers transfer financially distressed assets. A Section 363 sale is a procedure by which debtors can fulfill their fiduciary obligations to creditors and ownership by maximizing value and minimizing transaction costs. Purchasers get enhanced value by proceeding quickly in often deteriorating circumstances and obtaining the protections afforded by a sale “free and clear” of preexisting liens and interests, as well as enhanced finality compared to sales outside of bankruptcy. What is a “Section 363” Sale? “Section 363” refers to the portion of the Bankruptcy Code that authorizes a debtor to sell its assets “outside the ordinary course of business.” Sales of assets “outside the ordinary course of business” are sales that are either dissimilar to the sales that the debtor would engage in as part of its day-to-day operations or different from the type of transactions that the debtor typically engaged in before it sought bankruptcy protection. A Section 363 sale transfers the debtor’s assets to a buyer in a discrete transaction that will be approved by the bankruptcy court if the debtor can demonstrate a “substantial business justification” for the sale. Unlike a full Chapter 11, a Section 363 sale does not require the debtor to propose and gain acceptance of an overall plan of reorganization before the sale can be consummated. In fact, debtors’ cases can be converted to liquidations after consummation of the Section 363 sale. Advantages of Section 363 Sales Because it can be accomplished quickly, the sale of a debtor’s assets under Section 363 requires less cash or credit to keep the debtor’s business going to preserve the value of assets by, among other things, maintaining uninterrupted business relationships and retaining employees, than would be required for a non-bankruptcy sale process or Chapter 11 reorganization. Typically, Section 363 sales can be accomplished in 60 to 90 days. Under the appropriate circumstances, however, the time from the bankruptcy filing through completion of a sale can be much shorter. A well-known example is the liquidation of Lehman Brothers Holdings, Inc., in 2008. The debtor’s assets, valued at approximately $639 billion dollars, were sold to Barclays within five days of the bankruptcy filing. Other notable examples of rapid sales of substantial amounts of assets in a short time include General Motors and Chrysler. Section 363 permits the sale of assets “free and clear” of existing liens and interests. Another notable benefit is that the bankruptcy court approves the purchase price as fair consideration for the acquired assets, thus minimizing the chance that the sale will be challenged as a fraudulent transfer or that the purchaser will incur Section 363 of the Bankruptcy Code – A Tool for Buying and Selling Financially Distressed Assets By Cass S.Weil Section 363 of the Bankruptcy Code – A Tool for Buying and Selling Financially Distressed Assets - Continued on Page 7 “A well-known Section 363 sale is the liquidation of Lehman Brothers Holdings, Inc., in 2008. Approximately $639 billion dollars worth of debtor’s assets, were sold to Barclays within five days of the bankruptcy filing. ” Cass Weil is a retired shareholder and valued colleague who served with Moss & Barnett from 1984 until 2013 in the areas of creditors’ remedies and bankruptcy law.