Richards Layton & Finger

Fiduciary Considerations for Pre-Bankruptcy Transactions

September 24, 2014

While Chapter 11 remains an attractive mechanism for selling distressed assets, some purchasers and sellers looking to avoid the costs or oversight associated with the Chapter 11 process instead choose to effectuate a pre-bankruptcy sale followed by filing a Chapter 7 petition. There is no denying that Chapter 11 can be expensive and that there may be a heightened level of scrutiny from committees or other interested parties analyzing the transaction. There may also be less certainty for the proposed buyer, as a Chapter 11 process is likely to result in a competitive auction process where other prospective purchasers may submit higher bids. That said, a pre-bankruptcy sale is not free from challenge. A Chapter 7 trustee will undoubtedly scrutinize the pre-petition transaction for potential causes of action that could result in a potential recovery for the bankruptcy estate.