All Is Not Lost: A Case Study in Selling a Chapter 7 Small Business as a Going Concern

Bankruptcy attorney Noel Boeke wrote an article published in the Tampa Bay Bankruptcy Bar Association's Cramdown newsletter about a rare instance in which a company emerged from Chapter 7 bankruptcy as a going concern under new ownership. In the case, a pool services company filed for Chapter 11 bankruptcy, but the U.S. Bankruptcy Court for the Middle District of Florida converted it to Chapter 7. Typically, this spells the end of the line for a business: A Chapter 7 trustee winds down operations and distributes liquidated assets to creditors. However, Section 721 of the U.S. Bankruptcy Code states that the court can allow the trustee to operate a Chapter 7 debtor's business for a limited period of time, and Section 363(b)(1) allows the trustee to use, sell or lease the business. Here, the trustee saw an opportunity in a willing buyer and harnessed these provisions to operate the company under an agreement in which the buyer would handle management responsibility and cure salary obligations and the company's former president would manage day-to-day operations. The trustee then authorized bid procedures and a stalking horse asset purchase agreement as well as found a second qualified bidder, which doubled the net stalking horse offer. Ultimately, the deal went forward, and the business and workforce were preserved.

In his article, Noel concludes that the case highlights the power of Section 721, under the right circumstances, to bridge the gap to a value-maximizing sale. He also says it shows creative structuring can help eliminate risk and demonstrates that, even in Chapter 7, all is not lost – bankruptcy proceedings can be the vehicle for finding new life under new ownership, and unlocking new value.

READ: All Is Not Lost: A Case Study in Selling a Chapter 7 Small Business as a Going Concern (Article begins on page 13)