So You Want to Buy PGE — Or Anything Else from a Bankruptcy Estate

By Douglas P. Cushing

The August 28 Wall Street Journal and The Oregonian each reported on Enron's intention to sell Portland General Electric. As those stories noted, the ultimate approval of any sale will be subject to review by Judge Albert Gonzalez, Bankruptcy Judge of the Southern District of New York. The possibility of a multi billion-dollar sale of a public utility sounds outside the ken of most Oregon contractors, but buying assets from bankruptcy estates is or could be an everyday activity.

Such purchase opportunities from either Chapter 7 trustees or Chapter 11 debtors in possession such as Enron may seem more complex and extended than advantageous, but that may be a mistaken view. Depending on the nature of a sale, pricing may be by an auctioneer, a debtor trying for a maximum return from an asset, or it may be a sale forced on a debtor by a secured creditor or its unsecured creditor's committee.

Whether buying a billion-dollar utility or a backhoe, why would one want to buy from a bankruptcy estate? 11 USC 363(f) allows a sale free and clear of liens. The bankrupt seller can sell an asset subject to multiple liens that an owner has been unable to negotiate its way through. What happens to the proceeds? The order allowing sale will provide that the liens attach to the proceeds of sale, be sorted out and adjudicated as to priority later among those making a claim to them. If you are the buyer of that truck or excavator you have free and clear title, and the lien creditors can fight over the proceeds.

Multiple liens aren't the only limiting factor faced by financially strapped owners. Often they have been forced to share ownership with someone else in order to get financing, or may not have handled all the title transfer steps completely. When a business is in trouble, getting that co-owner to sign off without getting anything in return may be an impossibility. 11 USC 363(h) can facilitate such a sale through the Bankruptcy Court. A court may authorize the sale of an asset, including the interest of a co-owner. The court must be able to satisfy the interest of the co-owner, but the judge may convey the co-owners's interest and compensate him with the proceeds while ensuring the buyer's rights.

One aspect of a bankruptcy sale that Enron hopes will occur with the sale of PGE can be found in more mundane deals involving equipment, building lots, or less unique properties where auctions are encouraged to drive up proceeds. A bankruptcy sale notice will typically provide for a minimum upset overbid, whether a fixed dollar sum or a percentage, so that interested parties can in some cases be forced into a courtroom auction.

Bankruptcy courts are reviewing, approving, and declining sales of assets week in and week out, sometimes true bargain basement prices, sometimes at a premium. This process invites secured creditors and unsecured creditors to weigh in on terms, so there may be limits on sales costs or other conditions that neither the seller or buyer originally intended. For example, in the Agripac case Judge Alley imposed several conditions on the sale to resolve objections. The key to their overall success is that they convey free and clear title to the buyer, having removed whatever warts the bankrupt owner brought into the bankruptcy estate.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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