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Phillips Esq.
Phillips Esq., Attorney-at-Law
Category: Bankruptcy Law
Satisfied Customers: 12955
Experience:  B.A.; M.B.A.; J.D.
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Can Bankruptcy Judge challenge asset sale at Fair Market Val

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I'm a member of an MBO team which is negotiating the purchase of certain assets from a Delaware registered corporation operating in Atlanta, Georgia (and I think therefore under Georgia law regarding bankruptcy?). I and my colleagues are offering to purchase a list of assets including Intellectual Property Rights and have constructed an asset purchase agreement which requires the Sellers to provide clear and unencumbered title to these assets in exchange for what we consider to be a fair market value (approx. $3,500,000) but we are concerned as to the position in the event (which we think is highly likely) that the Sellers then immediately file for bankruptcy to avoid debts they have incurred in other parts of their business over which the MBO team has neither had nor has control. Is there a risk that the bankruptcy court could set aside what we consider to be a normal legitimate transaction done for fair market value as a result of the Sellers either electing or being forced into bankruptcy and how can we secure our new assets against this eventuality?

Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  Phillips Esq. replied 1 year ago.
Thank you for giving me the opportunity to assist you. Kindly use CONTINUE or REPLY button to ask for clarification or follow-up questions.


Question: I'm a member of an MBO team which is negotiating the purchase of certain assets from a Delaware registered corporation operating in Atlanta, Georgia (and I think therefore under Georgia law regarding bankruptcy?). I and my colleagues are offering to purchase a list of assets including Intellectual Property Rights and have constructed an asset purchase agreement which requires the Sellers to provide clear and unencumbered title to these assets in exchange for what we consider to be a fair market value (approx. $3,500,000) but we are concerned as to the position in the event (which we think is highly likely) that the Sellers then immediately file for bankruptcy to avoid debts they have incurred in other parts of their business over which the MBO team has neither had nor has control. Is there a risk that the bankruptcy court could set aside what we consider to be a normal legitimate transaction done for fair market value as a result of the Sellers either electing or being forced into bankruptcy and how can we secure our new assets against this eventuality?




Response: There is likelihood that bankruptcy trustee would go after this transaction as preference transaction if the company files for bankruptcy protection within 90 days of the transaction. So, the Bankruptcy Court would then put a hold on the transaction until the issue has been resolved by the Court. However, if you paid fair market value for the assets in question, then you would vigorously defend your position that this should fall under exception to the preference treatment because it is a contemporaneous exchange, etc. See 11 U.S.C. Section 547(c). You have to be certain that you infact offered fair market value for the assets and you have to have documentation as to how you arrived at the fair market value. This means that you would need the assets professionally appraised and keep copies of all the appraisals.



Debtors should refrain from filing for bankruptcy protection immediately after the deal. They should wait at least 91 days before doing so. This would take the transaction outside the preference period and make it more difficult for the bankruptcy Court to undo the sale. See 11 U.S.C Section 547.




http://doney.net/bkcode/11usc0547.htm


http://doney.net/bkcode/11usc0547.htm
Customer: replied 1 year ago.

PhillipsEsq,


Many thanks for your reply which is very helpful but one thing is not clear from the detail :-


 


In the event that the Seller does either elect or get forced into Bankruptcy proceedings within 90 days of our planned transaction, can we still continue to use the assets we've purchased e.g. the software codes, the trademarks etc. or will we be forced to stop?


 

Customer: replied 1 year ago.

PhillipsEsq,


 


Thanks for your response and explanation of the position regarding preference transactions etc. however I'm unclear whether the Seller declaring bankruptcy either voluntarily or involuntarily within 90 days would mean that we'd be unable to continue to use the assets e.g. software code, trademarks etc. which we are purchasing or if we'd be forced to stop using these by the Court regardless of whether we've paid a Fair Market Value for them or not but just because they (the Court) are defining the transaction as a preference transaction? I assume that paying over independently assessed Fair Market Value would negate this risk?

Expert:  Phillips Esq. replied 1 year ago.

Many thanks for your reply which is very helpful but one thing is not clear from the detail :-

In the event that the Seller does either elect or get forced into Bankruptcy proceedings within 90 days of our planned transaction, can we still continue to use the assets we've purchased e.g. the software codes, the trademarks etc. or will we be forced to stop?

Response 1: Yes, you can continue to use the assets you have purchased unless the Bankruptcy Court issues an Order stopping you from using the assets until any action brought by the Bankruptcy Trustee to avoid the transaction is resolved.




Thanks for your response and explanation of the position regarding preference transactions etc. however I'm unclear whether the Seller declaring bankruptcy either voluntarily or involuntarily within 90 days would mean that we'd be unable to continue to use the assets e.g. software code, trademarks etc. which we are purchasing or if we'd be forced to stop using these by the Court regardless of whether we've paid a Fair Market Value for them or not but just because they (the Court) are defining the transaction as a preference transaction?


Response 2: You can continue to use the assets you have purchased unless the Bankruptcy Court issues an Order stopping you from using the assets until any action brought by the Bankruptcy Trustee to avoid the transaction is resolved. So, continue to use the assets until the Court stops you from using them. This means that you can still use the assets while action is pending in the Bankruptcy Court regarding the assets. Unless the Bankruptcy Court issues a Temporary Restraining Order against the use of the assets, you can continue to use the assets.

I assume that paying over independently assessed Fair Market Value would negate this risk?


Response 3: No, unfortunately not and you should not do that. You should not pay more than the independently assessed Fair Market Value. Paying more than the value of the assets would not deter a Bankruptcy Trustee from pursuing the transaction under a preference action.

Phillips Esq., Attorney-at-Law
Category: Bankruptcy Law
Satisfied Customers: 12955
Experience: B.A.; M.B.A.; J.D.
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