Information Wish List to Evaluate a First-Day Asset Sale Motion

Kenneth A. Rosen Lowenstein Sandler LLP Roseland, N.J.

[1]Chapter 11 has largely become the sale chapter of the Bankruptcy Code. If the case is not a quick sale case, then it probably is a debt-for-equity swap. A traditional chapter 11 reorganization is expensive and, because of its relatively low success rate, is viewed by many lenders as not worth it.

The typical “first day” sale motion asserts that the debtor is hemorrhaging cash, that there are no options besides a quick sale and that delay will severely erode the estate. The bankruptcy judge is placed in the difficult position of having limited information before a creditors’ committee has been appointed and sometimes even after the committee has been appointed. Therefore, the bankruptcy judge, with his/her back up against the wall and concerned about being proven wrong if they do not allow the expedited sale process to go forward, reluctantly agrees.

For some secured lenders, there is no real second chance in bankruptcy court. Trip or stumble, and be sold or liquidated. The debtor’s threat to the secured lender that it should be careful or else it may receive what it asks for has become hollow because more lenders today are very willing to become owners and are highly experienced in chapter 11. The ability of unsecured creditors to reap benefit from the debtor’s downsizing, reconfiguration and refinancing is gone.

It is not my view that all expedited “363” sales should be disallowed. I recognize that in many situations, the debtor has suffered from “debtor syndrome” and got too close to the end of the runway before filing its petition. In other situations, valiant efforts to turn around the debtor’s business prior to bankruptcy simply did not work — perhaps because of a changing marketplace, consumer demand or obsolescence. However, the bankruptcy judge and also unsecured creditors are entitled to a thorough explanation of how and why the debtor’s predicament arose and also of all efforts to avoid a sale or liquidation. Most expedited sale motions just do not meet this test.

Below is a list of the information that I’d like to see presented if I wore the black robe.

1. the approximate date on which sale process was commenced;
2. the date on which board of directors authorized commencement of the sale process;
3. the date on which the board of directors authorized retention of investment banker or financial professional to assist in the sale process;
4. the date of the retention agreement with investment banker or financial professional that assisted in the sale process;
5. the name of investment banker or financial professional that assisted in the sale process;
6. the fee arrangement with investment banker or financial professional that assisted in the sale process;
7. the amount of retainer paid to investment banker or financial professional that assisted in the sale process;
8. the date on which the retainer was paid to investment banker or financial professional that assisted in the sale process;
9. the amount(s) of pre-petition fees and expenses paid to investment banker or financial professional that assisted in the sale process;
10. the dates on which pre-petition fees and expenses were paid to investment banker or financial professional that assisted in the sale process;
11. the name of the debtor’s officer who oversaw the pre-petition sale process;
12. the title of the debtor’s officer who oversaw the pre-petition sale process;
13. whether there was a special committee of the board charged with overseeing the sale process;
14. the names of board members on any committee of the board charged with overseeing the sale process;
15. the number of pre-petition board meetings at which sale of the debtor’s assets or business was on the agenda;
16. the dates of the pre-petition board meeting at which the sale of the debtor’s assets or business was on the agenda;
17. copies of the minutes of pre-petition board meetings at which the sale of the debtor’s assets or business was on the agenda;
18. a copy of the solicitation-of-interest letter and a “teaser” sent to prospective acquirers;
19. the number of nondisclosure agreements signed by potential acquirers;
20. the names of potential acquirers that signed nondisclosure agreements;
21. a list of documents in the due diligence room;
22. the number of potential acquirers that accessed the due diligence room;
23. a copy of any management presentation(s) provided to potential acquirers;
24. the names of potential acquirers that had face-to-face meetings with management representatives of the debtor(s);
25. the dates on which potential acquirers had face-to-face meetings with management representatives of the debtor(s);
26. copies of preliminary expressions of interest received from potential acquirers;
27. a copy of term sheets signed by potential acquirers;
28. copies of contracts/agreements signed by potential acquirers;
29. business plan(s) considered by the debtor’s board of directors as an alternative to a sale of the debtor’s assets or business;
30. analyses of the debtor’s assets or business(es) reviewed by the debtor’s board of directors in determining whether to sell the debtor’s assets or business;
31. the name of the financial advisor or turnaround consultant retained by the debtor(s);
32. the date on which a financial advisor or turnaround consultant was retained by the debtor(s);
33. the amounts of pre-petition payments made to financial advisor or turnaround consultant retained by the debtor(s);
34. the dates of pre-petition payments made to financial advisor or turnaround consultant retained by the debtor(s);
35. the terms of the retention by the debtor(s) of the financial advisor or turnaround consultant retained by the debtor(s);
36. pre-petition efforts to reduce expenses and overhead (preceding 12 months);
37. the number of leases and/or contracts terminated and when (preceding 12 months);
38. the annual savings from leases and/or contracts terminated (preceding 12 months);
39. the number of employees separated and when (preceding 12 months);
40. the annual savings from employees separated pre-petition (preceding 12 months);
41. a description of any assets sold outside the ordinary course of business (preceding 12 months);
42. the aggregate proceeds from assets sold outside the ordinary course of business (preceding 12 months);
43. cash flow by month (preceding 12 months) for each business unit and as a whole;
44. the net income on a cash basis (preceding 12 months) for each business unit and as a whole;
45. net income on an accrual basis (preceding 12 months) for each business unit and as a whole;
46. the amount(s) of interest, fees and expenses paid to the secured lenders other than for ordinary course of business (preceding 12 months);
47. the reduction in inventory (book value) by month (preceding 12 months);
48. the reduction in furniture, fixtures, machinery and equipment (book value) by month (preceding 12 months);
49. the reduction in aggregate accounts receivable (book value) by month (preceding 12 months);
50. reduction(s) in 0-30-31-60, 61-90 and over 90 accounts receivable (book value) by month (preceding 12 months);
51. projected cash flow 13 weeks post-petition with chapter 11-related expenses;
52. projected cash flow 13 weeks post-petition without chapter 11-related expenses;
53. projected net income on an accrual basis 13 weeks post-petition with chapter 11-related expenses;
54. projected net income on an accrual basis 13 weeks post-petition without chapter 11-related expenses;
55. projected net income on a cash basis 13 weeks post-petition with chapter 11-related expenses;
56. projected net income on a cash basis 13 weeks post-petition without chapter 11-related expenses;
57. diminution in asset value at 13 weeks and bases for determination;
58. projected chapter 11 professional fees for 13 weeks;
59. whether there was an unofficial or ad hoc committee of creditors formed pre-petition;
60. approximately when the unofficial or ad hoc committee of creditors was formed;
61. who the members of the unofficial or ad hoc committee of creditors are/were;
62. the nature of the claims represented by the unofficial or ad hoc committee of creditors;
63. whether the unofficial or ad hoc committee of creditors objects to the sale process; and
64. whether there are any current equity-holders (over 5%), former equity-holders (over 5%) or current creditors of the debtor’s stalking horse bidder.