1. Is Section 363 All You Need to Know about Chapter 11?
Breaking it Down and Recent Developments
Jonathan N. Helfat
David W. Morse

2. Overview
The New Chapter 11 Paradigm? 363 Sales replace the Plan of Reorganization—How did we get here?
The 363 Sale Process
What is it?
Why is it so popular?
What do you need to know about it?
What’s a “credit bid” and how does it work?
Chrysler in perspective: What really happened?
Your rights under the loan documents when it comes to a sale of the business

3. Why Are We Talking About 363 Sales? How Did We Get Here?
Once upon a time…Companies spent months and years in Chapter 11
Now—30, 60, 90 days—Then, a sale of the business…
Why?
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)
Too much leverage…

4. What about the 2005 Amendments Led to This?
Utilities protection: Additional adequate assurance for utilities
Vendor protection: Additional reclamation claims for vendors
Employee protection: Increase in monetary limits on priority claims for wages, etc.
Post-petition claims for ad valorem taxes priming secured and administrative claims
Accessing value of real estate: Timing for acceptance or rejection of leases
Limiting exclusivity period

5. The Debt Laden Balance Sheet…
Access to credit allows weak companies to survive longer
Companies arrive in Chapter 11 with more debt
Where are the assets to generate liquidity to support the restructure?
No reason for secured lenders to take risk to provide liquidity unless certainty of collateral values
Scarcity of capital generally
Loss of value of real estate and leases

6. What is a Section 363 Sale? Section 363(b):
Chapter 11 Debtor may only sell assets--other than in the ordinary course of business—
with approval of the Bankruptcy Court after notice and a hearing
Sales can be of any assets or all or substantially all of the assets
Highest and best price
Good faith: Sale in good faith in an arms’ length transaction

7. The Section 363 Sale Process
Step 1
Debtor markets assets
Step 2
Prospective buyers offer LOIs
Step 3
First Auction: Debtor selects stalking horse
Step 4
Debtor and stalking horse negotiate:
Purchase agreement
Deal protections
Bidding procedures
Step 5
Debtor files motion to approve sale and bidding procedures
Step 6
20 days later: Court approves bid procedures
Step 7
Second Auction: Highest and best
Step 8
Order entered to approve sale
Step 9
10 days after sale order, if no objections order becomes final and non-appealable, unless waived by court
Step 10
Closing

8. Why a Section 363 Sale? Reason #1: Speed
Timing: Faster than a plan process
Origins of 363: The “melting ice cube” metaphor
1983 Second Circuit Lionel decision:
Is the asset increasing or decreasing in value?
Proper business justification
Sub rosa plan argument
Some courts have problem with speed

9. Why a Section 363 Sale? Reason #2: Transfer of Executory Contracts
Buyers have ability to obtain some contracts and leases and not others
Anti-assignment clauses otherwise enforceable, not enforceable in bankruptcy
Requirements for Debtor to “assume and assign”
Cure any defaults
Adequate assurance of future performance

10. Why a Section 363 Sale? Reason #3: Sale Free and Clear of Liens
Section 363 allows sales free and clear of liens with or without consent of lienholder
But under Section 363(f) one of following conditions must be satisfied:
Applicable non-bankruptcy law permits sale of such property free and clear of interest
the lienholder consents
The sale price of the property is greater than the “aggregate value of all liens on such property”
The interest in the sold property is in a bona fide dispute
The lienholder could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of its interest

11. Why a Section 363 Sale? Other Limitations on Sale Free and Clear
Lienholder must receive proper notice of sale
Some liabilities cannot be eliminated
Environmental liabilities
Successor liability for labor and tort claims
Assets outside of the United States
Assumption of liabilities
New caveat of Clear Channel

12. Reason #4: Finality of Sale--Good Faith Purchaser Protection
Court examines conduct of buyer—absence of:
Fraud
Collusion between buyer and seller
Unfair advantage of other bidders
Bribes to insiders of debtor
Sale order must expressly state: buyer is “good faith purchaser”
What are protections?
Waiver of automatic 10 day stay period after sale order
Statutory “mootness”: Sale cannot be modified or overturned, unless the sale is stayed pending appeal

13. Trouble in Paradise: Good Faith Purchaser Protection Meets Clear Channel
DB Burbank, LLC makes $40 million loan to PW secured by 18 parcels of real estate
Borrower defaults
DB Burbank starts foreclosure
PW files Chapter 11; Chapter 11 trustee appointed
DB becomes stalking horse bidder with credit bid equal to its $40 million debt
DB is winning bidder; assets sold free and clear of all liens—including junior lien of Clear Channel

14. The Clear Channel Problem: So What Happened?
Clear Channel had objected to sale
Bankruptcy Court
Overruled objection
Denied request for a stay and
Sale went forward
Credit bid did not result in any cash to bankruptcy estate—Clear Channel receives nothing
Sale Order says DB Burbank, LLC is “good faith purchaser”
On appeal, Bankruptcy Appellate Panel says:
Sale is valid
But not “free and clear”: Clear Channel junior lien continues
Remands back to Bankruptcy Court

15. The Clear Channel Problem: So What Does this Mean?
Intercreditor Agreement any one?
New tool for junior lienholders?
Delay closing until appeals are settled?
Provisions in purchase agreements to protect purchasers
Lower purchase price
Present the evidence: Need 1 of 5 ways to satisfy 363(f) to allow lien release
Clear Channel decision not binding outside 9th Circuit

16. Why a 363 Sale? Other Reasons
No fraudulent transfer liability risk
No bulk transfer liability
Ability to bind non-consenting stockholders
Less diligence on liabilities since sold free and clear
Ability to credit bid

17. Consent to the Sale and Credit Bidding: What is Credit Bidding?
Section 363(k)
Secured creditor right to bid at 363 sale
Offset claim against purchase price
Credit bids using senior secured claims are like cash bids
Bid total face amount of claim
Impact on “highest and best” requirement
Results in transfer of collateral to Lender in exercise of remedies by Lender

18. Key Points for the Secured Lender in a 363 Sale: You May Not Get it All!
Estate cannot be left “administratively insolvent”
Assignment and assumption of contracts
Other creditors to be paid
Funding of business from filing to sale
Transfer of trademark licenses

19. Chrysler: What Really Happened?
April 30: Chrysler and 24 subs file Chapter 11
May 1: Debtor engage financial consulting and advisory firms and investment bankers
May 1: Debtors seek approval for an expedited hearing on motion to approve bidding procedures and schedule sale hearing
May 31: Bankruptcy Court renders opinion approving the Debtors’ motion seeking authority to sell substantially all of its assets

20. Chrysler: What Happened to the Sale Proceeds?
$10 billion first lien facility provided by syndicate of lenders
$2 billion second lien facility provided by Daimler Financial and Cerberus
$4 billion third lien facility provided by US Treasury
$4.96 billion DIP financing provided by US Treasury and Export Development Canada

21. Chrysler: So What is the Issue?
Equity owners of “New Chrysler”
VEBA owns 55%
US Treasury owns 8%
Export Development Canada owns 2%
Fiat owns 20%
What rights would these parties have had in a plan?
Bankruptcy Court and secured lenders have no say over who owns the purchaser

22. The “Real” Issue: What are Your Rights under the Loan Documents?
Consent to Sale
Credit Bid

23. Your Rights under the Loan Documents: Background
Origins of syndicated loan structure
Appointment of Agent
Agent’s discretionary rights
Rights of individual Lenders to enforce rights
Amendments and Waivers
Forgive principal
Extend maturity
Release all or substantially all of collateral or guarantees

24. Rights under the Loan Documents: The Beal Case
New York Court of Appeals March 2007
Parent gives a “keep-well” agreement
Agent and Lenders with 95.5% of debt enter into settlement agreement
Settlement agreement includes forbearance from calling on keep-well agreement
Beal holds out—starts unilateral action to collect payment under keep-well agreement

25. The Beal Case: NY Court of Appeals Says… “Collective Enforcement Mechanism”
For Beal:
Keep-well agreement says it is for the benefit of and shall be enforceable by the Agent and each Lender
Credit Agreement says no amendment, modification or waiver so as to release the Sponsors under the Keep-Well Agreement…without the consent of all Lenders
For Agent and Other Lenders:
Credit Agreement says, if any Event of Default occurs…Agent, upon direction of Required Lenders…shall exercise any or all rights and remedies…, including recover judgment on the Keep-Well Agreement
Credit Agreement authorizes Agent to act on behalf of Lenders and to exercise powers delegated to it

26. Consent to Sale: Enforcement Provisions
Chrysler (May 31, 2009)
Each lender designated Agent to act as such lender’s agent in exercising powers delegated to Agent
During default, Agent has power to take any Collateral Enforcement Actions including to realize upon the Collateral
No secured party will take any Collateral Enforcement Action without consent of Agent
Metaldyne (August 12, 2009)
Each lender appoints Agent to take such action on its behalf as are delegated to the Agent by terms of the Loan Documents
Agent may exercise all rights afforded a secured party, including the right to sell or otherwise dispose of the Collateral

27. Amendment Provisions v. Enforcement Provisions
Dissenting lenders argue that credit agreement says no waivers or amendments to release all or substantially all of Collateral without the written consent of all lenders
Courts say:
Transfer of purchased assets does not require any amendment or waiver
Loan documents authorize Agent to consent to sale without need to amend or modify the loan documents
Chrysler: “Restricting enforcement to a single agent to engage in unified action for the interest of a group of lenders, based upon a majority vote, avoids chaos and prevents a single lender from being preferred over others”.

28. What about Credit Bidding? GWLS Holdings
All first lien lenders except Grace Bay consent to sale of all assets under Section 363 and purchase with credit bid
Grace Bay: Credit Agreement says: All Lenders must consent to release of substantially all of the collateral
Agent: Security Agreement authorizes Agent to exercise rights and remedies under applicable law
Court says:
Right to exercise rights and remedies under applicable law includes credit bid under Section 363(k)
Exercise of remedies is not amendment or waiver based on Security Agreement

29. THE END