363 Sales in Bankruptcy

One of the casualties of the 2009 bailouts is United States bankruptcy law in Chapter 11.  Chapter 11 provides a complex procedure for the reorganization of bankrupt companies.  Once reorganized, the companies emerge as continuing operating businesses.  An emergency short-circuit of the reorganization procedures is contained in section 363 of the Chapter.  The section permits a bankruptcy judge to approve the sale of the company (or a major part of the company) to an outside bidder, with the proceeds of the sale distributed to claimants in a Chapter 7 style liquidation distribution.  The government used the section in both auto bailouts, to sell Chrysler to itself, Fiat and the unions and to sell GM to itself, Canada, the unions and the secured creditors.   In the Chapter 11 for Lehman Brothers, Barclay bought Leman’s United States broker-dealer subsidiary in a 363 sale.  The risk, of course, it that a 363 sale, made in a rush, can under-value company assets.  In a huge suit over the Lehman Brothers sale to Barclays, what is left of Lehman is now arguing exactly that — that Barclays got a steal, literally. The year following the Lehman sale, Barclays booked a $4.2 billion gain on the deal, a deal that was supposed to be a “wash” of assets and liabilities.  The eventual outcome of the case will be notable not only on the facts of the deal but also on whether 363 sales should be so widely used in distress situations involving major american companies.

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