New Sale Guideline Rules for the Eastern District of New York

The Business Advisor
(John P. Campo, Jeffrey S. Berkowitz, Christopher A. Albanese)
April 30, 2010
On March 29, 2010, the Bankruptcy Court for the Eastern District of New York adopted guidelines governing the conduct of asset sales in the Eastern District Bankruptcy Court under section 363(b) of the Bankruptcy Code (the “EDNY Order”). The guidelines in the EDNY Order primarily deal with the procedures required to conduct an asset sale and the content of sale orders. The EDNY Order supplements Sections 363(b) and 365 of the Bankruptcy Code, Rules 2002 and 6004 of the Federal Rules of Bankruptcy Procedure, and Rules 6004-1 and 6005-1 of the local rules for the Bankruptcy Court for the Eastern District. The press release and EDNY Order can be downloaded from the Bankruptcy Court for the Eastern District for New York website. Below are highlights of several provisions of the new guidelines.

Sale Motions should now be made as a single motion seeking two orders -- a Sale Procedures Order and a Sale Order -- each to be considered at a separate hearing. The Sale Procedures Order establishes procedures for the sale process and identifies the stalking horse bidder, if one exists. The Sale Order approves the sale to the successful bidder. The Sale Motion should explain the reasons if a sale is not structured as an auction.

The Sale Procedures Order should contain proposed bidding procedures designed to maximize the sale price that do not chill the receipt of higher and better offers, consistent with the debtor’s fiduciary duties.

Bidders seeking to bid have to qualify and provide financial information by a deadline stated in the Sale Procedures Order. Bidders may also be required to work off the stalking horse agreement to make its bids, rather than provide its own form agreement, and may be required to include a good faith refundable deposit. Break-up fees, topping fees and other bidding protections are now only allowed on a case-by-case basis. “No-shop” and “no-solicitation” provisions will be permitted only when necessary to obtain a sale, consistent with the debtor’s fiduciary duties, should not chill the receipt of higher or better offers and must be appropriate under the circumstances.

“Extraordinary Provisions” in Sale Procedures Orders must be disclosed conspicuously in a separate section of the motion and proposed order, and the debtor, where applicable, must provide substantial justification for those provisions. Extraordinary Provisions include: sales to insiders; agreements with management; private sales and non-competitive bidding; deadlines which limit notice; waiver of a good faith deposit; interim arrangements with proposed buyers; use of sale proceeds; tax exemptions; record retention agreements; sales of avoidance actions; requested findings as to successor liability; requested determinations as to future conduct; requested findings as to fraudulent conveyances; sales free and clear of expired liens; and requests for relief from the stay of the order authorizing the sale imposed by Bankruptcy Rule 6004(h).

Notice of the Sale Procedures hearing has also been affected by the EDNY Order, as the EDNY Order clearly defines when a hearing is necessary and allows a debtor to limit notice to certain parties-in-interest. For proposed Sale Procedures Orders which comply with the EDNY Order requirements and do not contain Extraordinary Provisions, the mandatory 21-day notice period set forth in Bankruptcy Rule 2002(a) may be shortened. The EDNY Order seems to favor the 14-day notice period as set forth in the local rules for ordinary sale hearings. The EDNY Order also limits notice of the Sale Procedures Order to parties-in-interest best situated to articulate an objection.

For the Sale Order, the 21-day notice period will not be waived except for good cause shown, and the EDNY Order expands notice to additional parties-in-interest beyond those receiving notice of the Sale Procedures hearing. The EDNY Order also standardizes the contents of the notice and requires inclusion of specific materials and, if appropriate, representations.

The EDNY Order contemplates that at the Sale Hearing sufficient evidence be presented to enable the court to find, inter alia, that: a sound business reason exists for the transaction; the property has been adequately marketed; the purchase price is the highest or best offer providing fair and reasonable consideration; the proposed transaction is in the best interests of the estate, the creditors, and, where relevant, its interest holders and the purchaser acted in good faith (within the meaning of Section 363(m)). The debtor must also demonstrate that it, or the assignee, has cured or will promptly cure all existing defaults under the proposed sale agreement, and that the assignee can provide adequate assurance that it will perform under the terms of the agreement.

The Sale Order itself should limit the findings to those required for the Sale Motion and recommends a single decretal paragraph approving the sale. The Sale Order may be entered, approving the sale and purchase agreement, transferring assets free and clear, and assuming and assigning contracts, if substantiated through evidence. Finally, the Sale Order should cite the sections of the Bankruptcy Code relied upon and any sections which, to the extent permitted, are proposed to be limited. The Sale Order should also state that the transaction has been proposed and entered into without collusion, from arm’s-length bargaining positions and in good faith within the meaning of Section 363(m) of the Bankruptcy Code, and should specify that neither the debtor nor purchaser engaged in conduct which could permit the transaction to be avoided under Section 363(n) of the Bankruptcy Code.

As adopted, the EDNY Order and its guidelines should provide direction to debtors in preparing Section 363 asset sales and facilitate bids by potential purchasers. The guidelines may facilitate an efficient reorganization or liquidation by the debtor and help standardize Section 363 sales, which may help reduce costs. For more information, please contact a member of the Financial Restructuring group of Gibbons P.C. in New York.