STUDENT ID No. 3143541 MARIAN IVY F.

REYES-FAJARDO
BUSINESS BANKRUPTCY IN THE UNITED STATES: PAPER No. 3

2. If you were given the power, what aspects of assets sale in a United States bankruptcy case would you
change?

Under Section 363 (b), “the trustee, after notice and a hearing, may use, sell, or lease, other than
in the ordinary course of business, property of the estate, xx” . This provision is invoked to justify sale in
“’emergency situation’ in which an asset is wasting away and losing value.”

Traditionally, the aim of reorganization is to serve the purpose of both creditors and the debtor
with the end goal that “the business would continue to provide jobs, to satisfy creditors’ claims, and to
produce a return for its owners. . ..” (The United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983)).
To ensure this, under ordinary reorganization under Chapter 11, claims are organized into classes and the
approval of each class is necessary for the confirmation of the plan. Also, the debtor is compelled by
disclosure requirements to demonstrate the feasibility of the plan. While the debtor has the exclusive right
to propose the plan, at least in the first 120 days, the plan in the end, is a collaborative effort because of
the disclosure and approval requirements by each class of creditors; the vote of each class, whether
secured or unsecured, being given the same weight.

Under 363 (b), the voice of the unsecured creditors is not as clearly articulated as in Chapter 11
cases. First and foremost, prior to the filing of the motion, the terms of the asset sale agreement have
already been finalized by the debtor and most likely, the major secured creditor buyer. Since the terms of
the asset sale agreement do not have the same limitation on the contents of the reorganization plan
(Section 1123 (b)) and compliance with the sixteen conditions listed in Section 1129 (a), there is no
guarantee that the price or value secured in the asset sale agreement is the best value for the assets.

Also, since only the majority security creditor and the debtor are in negotiation, and in an
“emergency situation”, the interest that are surely to be protected are only theirs, to the exclusion of other
unsecured creditors, with the majority secured creditor having the more bargaining power. This situation
allows a major creditor in an emergency situation to dictate the terms of the asset sale agreement and to
disregard the rights of lesser creditors as in the initial proposal in in re On-Site Sourcing, Inc. That
tendency is apparent, although in the case of In Re On-site Sourcing, the United Stated Trustee and the
Unsecured Creditors Committee insisted on the unsecured creditors trust. The danger is however real. A
highly invested creditor will use the influence to dictate favorable terms of prices for a Section 363 (b)
asset sale at the expense of junior or unsecured creditors who lack the safeguards of the traditional
Chapter 11 reorganization except through the court who will ultimately approve the asset sale under 363
(b) and the terms thereof.

There is a real danger that the value procured in the asset sale agreement is not the real value of
the corporation. The value for which the company is sold is dependent to the number of bids procured by
the corporation, but since this is not court supervised, then there is no guarantee that the bid for which the
assets are sold is the best bid in the market. The rush nature of the sale also prevents it from getting the
best price. The emergency situation can also be manipulated. The debtor can delay the filing of the
motion to do an asset sale last minute in order to force the court to sell to the majority secured creditor
buyer enabling the buyer to dictate the terms as justified by the “emergency situation”.
To my mind, there is a necessity to provide guidelines in Chapter 11 itself, and not only in
common law, to evaluate if the the valuation of the company in an asset sale agreement under Section 363
(b) is right or fair. It should be a set of guidelines or factors that will ensure that the sales value will at

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least approximate what the value of the company will be when reorganized under a plan. I appreciate the
wisdom behind the asset sale, i.e., that is the corporation is in an emergency situation such that any delay
can cause the collapse of the corporation. At a minimum, however, there should be a requirement for the
debtor to justify the sale under this standard, i.e., much akin to the feasibility study requirement under
Section 1129, there should a comparative study of the values, the asset value vis-à-vis the reorganization
value. If asset value is less than what would be gained in standard reorganization plans, this might be a
strong indication that there is no urgency in the same. The judge can then consider this as one of the
factors in approving the asset sale transaction.
The other major issue that needs to be safeguarded against is the manipulation of the secured
creditor buyer of the deal. This could be addressed if only there is a formal disclosure requirement in an
asset sale transaction such as that guaranteed in a regular plan. However, under the rule, there is just a
notice and hearing requirement. The law should allow the option for request for additional disclosure
requirements or hearings by creditors, but always with the discretion of the judge. The court can then
evaluate with a cost-benefit analysis, if there is a necessity for formal disclosure statements in conformity
with Chapter 11. I would therefore suggest additional disclosure requirements or hearings set forth in the
law, but entirely on the discretion of the judge, mindful that these requirements or hearing should not
cause unnecessary delay and should weed out request from creditors who in bad faith only wish to delay
or defeat the sale. If the court is satisfied that there is no danger of manipulation or the impropriety or
misuse of the 363 (b) requirements, then no additional hearing of disclosure requirements is needed. The
judge could proceed with evaluating the transaction under the business judgment rule.