By now, short sales and REO’s have entered the mainstream vocabulary to describe properties that are distressed. Recently, due to the increase number of bankruptcy filings, a new opportunity has arisen; purchasing real or personal property in bankruptcy. Perhaps the most recent example of a bankruptcy purchase was the sale of Nortel’s patents to a consortium of investors for $4.5 billion. There, Google, the stalking-horse bidder, sought to purchase Nortel’s patents with an initial offer of $900 million. Although Google made the offer, a bidding war soon followed and the court eventually approved a winning offer after 19 rounds of bidding.
Now, you might not have $4.5 billion to spend, but many buyers are seeking to buy assets in bankruptcy in order to maximize value. However, there are many pitfalls for the unwary investor that can turn the golden opportunity to a costly waste of time.
One of the major advantages of buying from a bankruptcy estate is that, under certain circumstances, a property can be sold free and clear of all encumbrances. This means that if any of the criteria in 11 U.S.C. §363(f) are met, the court can order the sale of the property free of any of those pesky leases or liens that may be on the property.
In addition to buying an unencumbered property, the trustee or debtor in possession (“DIP”) may encourage bidding on an asset by selecting a stalking-horse bidder. A stalking-horse bidder is the initial bidder for a property and is usually incentivized to make the first offer by being reimbursed for its due diligence costs or paid a break-up fee if the initial offer is not the winning bid.
However, as the Nortel case highlights, there can be substantial risk to purchasing bankruptcy property. In normal cases, when the seller accepts a contract, the sale will be consummated according to the terms. In the bankruptcy context, all sales must be approved by the court and are subject to overbids by other interested parties.
In some cases, the trustee is seeking to sell the property over the objection of the homeowner. As expected, many homeowners will attempt to stop or delay the sale. This can lead to a profitable deal turning into a situation where the investors are left only with substantial costs after being outbid by a competitor. Even if there are you end up winning the bid, the court may deny the sale.
If you are interested in purchasing property in bankruptcy, please contact us so that we advise you on navigating the traps for the unwary.
Henry Chuang is an attorney with The Law Office of Peter N. Brewer. The firm serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California. You can contact us at: 2501 Park Blvd., 2nd Floor, Palo Alto, CA 94306, Ph: 650/327-2900, Fax: 650/327-5959, or on the web at: http://www.brewerfirm.com