Learn about the bankruptcy court’s role in approving the sale of a financially troubled business with insider connections under Section 363 of the Bankruptcy Code. Explore a case study involving an offshore mussel farm acquisition, creditor objections, and the court’s considerations. Case reference: In Re Catalina Sea Ranch, LLC.
May 1, 2020
Introduction:
When a financially troubled business is bought, buyers often prefer using bankruptcy courts and Section 363 of the Bankruptcy Code for the acquisition. This allows buyers to purchase the business assets without taking on the seller’s liabilities, which may come from federal and state laws regarding successor liability.
The Deal:
In this case, the distressed business was a company established for an offshore mussel farm. Due to financial issues, it went into bankruptcy. A buyer proposed purchasing the company’s assets through a Section 363 sale under the Bankruptcy Code.
The Lawsuit:
A creditor of the seller was the estate of an individual who had allegedly died due to the seller’s negligence. This creditor objected to the sale of the business to the buyer, arguing that a $10 million claim based on successor liability should not be dismissed as part of the sale.
The creditor filed a complaint with the bankruptcy court opposing the sale to the buyer. One argument was that the buyer had significant connections to the seller through insiders.
The court recognized various connections between the seller and the potential buyer. These connections included the buyer being the seller’s secured lender before bankruptcy and lender during bankruptcy. The buyer had taken over the seller’s operations when it ceased functioning, as the seller had no employees. Additionally, two members of the seller’s board of directors, one of whom was the seller’s CEO, owned or controlled the buyer.
Because the buyer was the sole bidder and due to the presence of insiders, the bankruptcy court examined the proposed sale more closely. After reviewing the case, the court determined that the sale process was designed to secure the best offer for the assets, leading to the approval of the transaction.
Comment:
The court acknowledged that it’s common for a buyer involved in a Section 363 sale to have connections with the distressed seller. While these connections invite closer scrutiny, they aren’t inherently problematic. Insiders often have valid reasons to offer higher bids, such as tax benefits, shared liabilities, specialized knowledge, or confidence in future asset value growth. Therefore, it’s not suspicious that the buyer in this case presented an offer that no other buyer was willing to match.
Case Reference:
This case is referred to as In Re Catalina Sea Ranch, LLC, Case No. 2:19-bk-24467-NB United States Bankruptcy Court, C.D. California, Los Angeles Division (Decided April 13, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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