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The Sale of Assets Outside of a Plan
of Reorganization under the Bankruptcy Code

Outline of Presentation


I.
Introduction.
The past year has seen an explosion in the so-called mega
chapter 11 cases (Enron, United, Adelphia, WorldCom, Global
Crossing). In the Bay area, of course, scores of dot. com
companies and start up technology ventures have filed chapter
11.

All of the assets that find their way into chapter 11 are
going to be disposed of one way or another -- pursuant to
liquidation sales, sales on going concern bases, or to creditors
under a plan of reorganization. This is an extraordinarily large
market place for assets.

The purpose of my remarks this morning is to give you a
better feel for what that market is all about. Unfortunately, even
if you understand the chapter 11 process, it is not very easy to
access the market. There is no central clearing house for
investors to access these opportunities -- I'll talk about how to
find out about these deals later in my remarks.

I am going to focus my remarks on one aspect of this
marketplace --the sale of assets outside of a plan of
reorganization. This is by far the most common avenue for




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assets to be disposed of in chapter 11 cases and therefore the
greatest opportunity for participating in a transaction.

Other vehicles, however, exist to invest in bankruptcy
situations, and I want to at least highlight them before I discuss
sales outside of a plan of reorganization. Those opportunities
include:

1. "Outside" Investment. Sometimes, an investor
acquires the equity in the debtor under a plan of reorganization
in exchange for undertaking to satisfy secured claims over time
and unsecured claims on a discounted basis. Sometimes, the
investor seeks to stretch out secured or unsecured creditors or
convert unsecured debt into minority equity in the reorganized
debtor. To illustrate, US Air announced when it filed for
chapter 11 that TPG was going to try to effectuate such a
transaction.

2. "Inside" Investment. In other transactions, the
investor is an insider of the debtor. Where the investor is an
existing shareholder seeking to recapitalize the debtor under a
plan of reorganization, the plan is known as a "new value" plan.

3. Merger Transaction. Still other times, an entity is
merged into the debtor, with creditors receiving stock in or
deferred payments from the merged entities, e.g.,
ToyBiz/Marvel. Sometimes a debtor's affiliates proposes to
acquire the debtor via merger. These transactions can be used
by the merger partner to go public, particularly where the debtor
is publicly held.





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4. Public Securities Offering. The debtor sometimes
accesses the public markets by issuing securities to the public,
the proceeds of which are used to satisfy claims and possibly
interests. These transactions are relatively infrequent.

5. Claim Acquisition. An investor buys publicly or
privately held claims as part of an effort to take control of a
chapter 11 debtor. These are sometimes done as part of a hostile
takeover.

So there are many avenues out there to obtain value in a
chapter 11 environment.

II.
The Purchase and Sale of Assets.
A. The Benefits.
As noted, however, by far the most common investment
opportunity is a straight sale of some or all of a debtor's assets
during the chapter 11 case outside of a plan. We have seen this
in large cases such as Global Crossing, and we are likely to see
it in United with respect to the sale of gates and slots. But it
literally happens dozens of times, every day, across the country
in cases large and small.

Chapter 11 cases are supposed to be completed under a
plan of reorganization. That is the document under which value
is distributed to creditors and shareholders. But many times, the
debtor's property is depreciating in value or the value may never
be higher. So the debtor seeks to sell some or all of its assets
before a plan is presented. Generally speaking, courts defer to a




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debtor's decision to sell assets outside of a plan, but the debtor
has to articulate a business justification for not waiting until the
plan is confirmed.

[Discuss mechanics: accomplished by debtor negotiating
and entering in to agreement with third party, going to court on
notice to creditors, and obtaining approval]

One of the key policies underlying American bankruptcy
law is the free alienability of property that winds up in
bankruptcy, so as to derive the highest and best value for
creditors. The Bankruptcy Code contains a number of
provisions that are designed to facilitate the sale of assets for
value outside of a plan. These provisions are a major reason
why, for example, banks and financial institutions are some of
the Bankruptcy Code's largest supporters, because they can
obtain more value than would be derived from forclosure.

Those provisions include:

1. Broad Scope of Assets that are Subject to Bankruptcy
Administration. The Bankruptcy Code provides that essentially
every conceivable asset of value that is owned a held by a debtor
enters the bankruptcy estate on the filing of a chapter 11 petition
and is subject to the bankruptcy court's administration. By
contrast, a creditor trying to foreclose on assets that are located
across the US may need to commence dozens of foreclosures
across the country.

2. Ability to Sell Assets Free and Clear Based on Court
Order. The Bankruptcy Code also permits a debtor to sell assets




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free and clear of liens, irrespective of whether the lien holder
consents to the sale, subject to certain limitations. By contrast,
there really is no mechanism to sell assets free and clear outside
of bankruptcy, other than the disposition of collateral in the
ordinary course. The Bankruptcy Code in effect permits
creditors to squeeze every drop of value from an asset, and then
distribute the proceeds to creditors.

3. Ability to Sell Contracts and Leases. The Bankruptcy
Code permits a debtor to assume and assign a lease or contract
to a buyer, notwithstanding a prohibition on assignment. So if
the contract or lease has value (i.e.. equity), creditors can
squeeze value from those assets despite restrictions on
assignment. Outside of bankruptcy, this is often next to
impossible.

4. Ability to Sell Most or All Assets Even if
Shareholders Do Not Approve. Most corporate laws require
shareholder approval to sell substantially all of a debtor's assets.
Courts have held, however, that in bankruptcy a debtor may
propose and a court can approve a sale without shareholder
approval. And the Court's blessing of the sale may protect the
buyer against risks associated with purchasing assets from an
insolvent company.

5. Ability to Moot any Appeal from Sale. The
Bankruptcy Code gives good faith buyers protections against
appeals from Bankruptcy Court orders approving sales, by
providing that where a buyer acts in good faith and the order
approving a sale is not stayed pending consummation, any
appeal from a sale order is rendered moot.




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6. Sale on an Expedited Basis. Many Bankruptcy Courts
will expedite the sale approval process in favor of getting the
assets out of the estate as quickly as possible.

These are very powerful provisions, and they have made
the market for assets in bankruptcy very attractive.

In addition, prospective buyers in chapter 11 always are
confronted with a very willing and eager seller--a seller that
needs money and needs to move quickly, or creditors that are
motivated try to move mountains to move the process quickly.
The debtor is interested in cash and often is willing to sell at a
discount.

B. The Drawbacks.
This is not to suggest that the bankruptcy process is some
sort of nirvana for prospective buyers. There are a number of
risks and drawbacks that need to be highlighted.

1. Only the Debtor/Trustee can Sell Outside of A Plan.
Only the debtor or a court appointed trustee can sell assets
outside of a chapter 11 plan of reorganization. Creditors have
no right to sell a debtor's assets. This essentially means that the
party with the least stake in the outcome (i.e the debtor) has the
most to say. Many times the debtor will defer to the wishes of
creditors with respect to a sale transaction. But not always. At
its worst, the fact that the debtor has the control sometimes gives
the debtor enormous leverage to extract concessions for
management and other insiders as the price of going forward.




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2. Sale Free and Clear May be Vitiated if Adequate
Notice is Not Given. A court order authorizing a sale free and
clear may not be effective as against a lien holder and possibly
even a creditors where the lien holder/creditor did not receive
notice of the proposed sale. This means that the buyer may face
some risk that a party that did not receive notice may show up
after the closing and assert that the sale is not free and clear of
its claim.

3. Successor Liabilities May not be Insulated from Sale
Order. The materials we prepared discuss at length the case law
on whether a sale free and clear order cuts off claims based on
successor liability, where the buyer essentially performs the
same business as the debtor did pre-closing. The case law is
mixed, to say the least.

4. Sale As is/Where is. Most assets are sold on an as is
where is basis, with few representations and warranties.
Virtually all debtors will turn around and distribute the
consideration they receive from their buyers. This means that
even if the debtor were willing to give broad representations and
warranties in connection with the sale, the buyer often is without
any redress if the debtor breaches them. Sometimes deals are
structured to include holdbacks or baskets, to give the buyer
some redress.

5. Overbid Risk. Bankruptcy court hearings are open to
the public. Therefore, absent rules established in advance, any
person can show up at a sale hearing and offer more for assets




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than the so-called stalking horse bidder has offered.
Mechanisms to address this:

a. Overbid Procedures: Minimum overbids, bid on
same agreement, bid increments.
b. Break-Up Fee/Expense Reimbursement. 3-5% of
amount.
c. Fox/Carolco experience.
6. High Transaction Costs. The bankruptcy process is
archaic and specialized. Sometimes the professionals are not
motivated to lower costs. Transactions often do not move
quickly.

7. The Market is Becoming More Efficient. More people
are finding out about opportunities to bid on assets, and
therefore the opportunities to take advantage of market
inefficiencies are fewer.

Despite all of this, it is my impression that most successful
buyers of assets end up getting a bargain. But a lot of bidders get
left at the alter.

C. How to Find Out about Opportunities.
Dove Bid.
Deals Dot com.
Investment bankers who get pitch books: Imperial Capital,
Houlihan Lokey, Murphy Noel.
Attorneys in the field.