With interest rates at historic lows, investors are increas-

ingly purchasing assets out of receiverships and other similar liquidation proceeds, in order to maximize yield. In the right cases, it’s a classic win-win scenario: investors purchase “opportunistic” assets at a significant discount, and federally appointed receivers and trustees have the opportunity to fund an estate, thereby allowing the receiver to pay creditors with a higher distribution dividend.

In the case of a federal receivership there is typically an asset or group of assets which serve as the main attraction for the case. These assets may include valuable real estate, patents or other intellectual property, and business equipment. But what about the less desirable assets, such as vacant land in re-mote locations, certain litigation rights which the debtor may have had, or other similarly speculative assets which do not have a ready market? Purchasers of these so-called “remnant assets” serve a unique function by providing liquidity to an otherwise insolvent estate while also allowing the receiver to close the case in a timely fashion.

The process of purchasing assets from a receivership case typically involves bidders for the asset(s), an auction process and a court hearing approving the sale.

This article will discuss the sale process in a receivership action as well as the issues typically facing investors when purchasing distressed assets from a federal equity receiver.

1. Statutory and Judicial Authority Granting Powers to Receivers to Sell AssetsAs a preliminary matter, a sale by a federally appointed

receiver is similar to a sale by a bankruptcy trustee in a fed-eral bankruptcy proceeding. A sale through a receivership is a transparent process since the sale is being supervised by a federal court and creditors have the opportunity to object to the sale procedures and even the ultimate purchaser. There is typically a competitive bidding procedure in place which is well publicized to the creditors and other interested parties.

With respect to receivership proceedings, a number of courts have emphasized that the district court has the equi-

Let’s Make a Deal: Purchasing Remnant Assets in Federal Receivership ProceedingsSteven Mitnick, Esq. and Marc D. Miceli, Esq, SM Law PC

table power to appoint a receiver who has the discretion to administer the assets under its control.1 As part of this power, a federal court may authorize a receiver to sell acquired assets by public sale pursuant to 28 U.S.C. §§2001 and 2004.2 Sec-tion 2004 requires any personalty sold under any order or de-crees of a federal district court to be sold in accordance with 28 U.S.C. §2001, unless the court orders otherwise.3 Section 2001, which governs sales of real property by a court-appoint-ed receiver, provides that a sale of such realty may be con-ducted by public auction or private sale. If the property is to be sold by private sale, Section 2001 requires that the property be appraised by “three disinterested persons” appointed by the court before the court can confirm the private sale.4

Assets are often sold in a receivership proceeding “free and clear” of claims, with any such liens or encumbrances attaching to the proceeds of the sale.5 In this regard, the federal statutes governing federally appointed receivers are analogous to the Bankruptcy Code, and specifically, 11 U.S.C. §363, which governs sales through a bankruptcy proceeding.6 Not surprisingly, courts dealing with sales in a receivership context look to the Bankruptcy Code, and particularly 11 U.S.C. §363(f), for guidance on the sale process in a federal receivership case.7

Thus, one of the advantages of purchasing assets from a

court-appointed federal receiver is that the assets can be sold to a purchaser free and clear of liens and encumbrances, making this an attractive option when compared with the purchase of assets outside of a receivership process.

Further, since courts presiding over receiverships often look to bankruptcy law for guidance on issues arising in connection with sales in the receivership context, purchas-ers and receivers have the opportunity to review the robust case law from the Bankruptcy Courts if an issue arises in a receivership proceeding. An analysis of CONTINUED NEXT PAGE G

Thus, one of the advantages of purchasing assets from a court-appointed federal receiver is that the assets can be sold to a purchaser free and clear of liens and encumbrances, making this an attractive option when compared with the purchase of assets outside of a receivership process.

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bankruptcy cases on certain sale issues, therefore, can serve to provide more clarity and certainty when sale issues arise in the receivership context.

For example, bankruptcy courts have consistently held that a buyer of a debt-or’s assets pursuant to a Section 363 sale takes free from successor liability resulting from pre-existing claims.8 While more judicial authority exists in the bankruptcy context with respect to successor liability, the public policy of allowing such assets to be sold free and clear of such successor liability equal-ly exists in the receivership context, which is to incentivize investors to purchase distressed assets by allowing them to take free of any future liability associated with the sales transaction.9

Another issue routinely dealt with in bankruptcy proceedings, which also arises with sales in the federal receiv-ership context, is the issue regarding a stalking-horse’s proposed break-up fee if the asset is sold to a competing bidder. The stalking horse serves as the first bidder and sets the minimum floor for the opening bid. The stalking horse will typically sign an asset purchase agreement with the receiver or trustee, which will be subject to higher and bet-ter offers and eventual court approval.10 In that regard, the stalking horse will typically require a “break up” fee in the event that another bidder becomes the ultimate purchaser of the assets at the auction.11

The purpose of the break-up fee is to induce the stalking horse bidder to enter into and pursue a transaction though auction and closing.12 Accord-ingly, the break-up fee serves to com-pensate the stalking horse bidder for any lost opportunity costs in pursuing the purchasing opportunity, as well as compensate the stalking horse for his or her time and expense incurred in the investigation and performance of the required due diligence with respect to the asset, as well as any time

spent in negotiating the proposed asset purchase agreement.13 The break-up fee is subject to court approval, and often serves as a point of contention in larger bankruptcy cases, which can apply different standards in evaluating the appropriateness of the proposed break-up fee depending on the juris-diction.14 Case law in the bankruptcy context are particularly instructive and apply equally in receivership proceed-ings since the public policy concerns regarding the appropriateness of a pro-posed break-up fee are similar, if not identical, in the receivership context as they are in the bankruptcy context.

Notice of a sale of assets in a re-ceivership case is also similar to a bankruptcy sale under 11 U.S.C. §363. Typically, a sales procedure order will include the date and place of the sale, the asset(s) which are to be sold, the bid procedures (including the bid deadlines, the minimum bids and bid increments), the amount of the break-up fee, and any relevant contact information for written bids.15

Notice for the sale of real property in a receivership action is governed under 28 U.S.C. §2002. A public sale of realty requires notice “published once a week for at least four weeks prior to the sale in at least one newspaper regularly issued and of general circulation in the county, state, or judicial district of the United States wherein the realty is situated.”16 The notice must also contain a description of the property by reference, or otherwise as the court approves.17 Further, in the case of real property which is situated in more than one jurisdiction, the notice “shall be published in one or more of the counties, states, or districts wherein it is situated, as the court directs.”18 The Court may also direct that the notice be made in other newspapers.19

2. Assets Available in Receivership SalesSimilar to a federal trustee in a bank-

ruptcy proceeding, a federally appoint-

ed receiver is tasked with marshalling and selling assets to the highest bidder for the benefit of creditors. While these cases may have valuable assets which are sold quickly after the liquidation proceeding is commenced, often times there are many assets which remain in the estate due to the particular asset not having a ready market.

Assets which are typically retained by the receiver are those assets which will generate cash for the estate in a rela-tively short period of time, or which have a high probability of collectability. One such example which typically arises in receiverships are interests in residential real (or commercial) prop-erty. This type of asset, assuming it is in a desirable geographical location, gen-erally has a ready market value based on an appraisal and can therefore be sold relatively quickly by the trustee in the market. This also applies to other types of assets, such as exotic automo-biles and yachts often sold by receivers in actions involving Ponzi schemes.

But what about other more specu-lative assets, such as a parcel of vacant land in the middle of New Mexico; or a damage claim which the debtor had against a defendant in China which has not been collected or pursued to conclusion; or what about a fractional interests in property where a debtor has, for example, a 1/5 interest in a house with his or her siblings? These assets are problematic for trustees since valuation is immensely difficult and a market is not readily available for these more obscure type of assets.

While not uncommon, one such asset which falls into this category are default judgments entered in connec-tion with fraudulent transfer lawsuits bought by the equity receiver. Similar to bankruptcy trustees, equity receiv-ers are vested with the same powers of bankruptcy trustees with the right to bring summary proceedings and the ability to bring actions under state fraudulent conveyance laws.20 In fact, in some instances, courts have actually

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utilized and imported certain provi-sions of the Bankruptcy Code, namely, sections 544 and 547, into receivership actions.21 While, in most cases, the receiver will have the avoidance actions resolved by way of trial or settlement with the defendant parties, in other cases, and in particularly larger re-ceiverships, the receiver may be left with several default judgments against individuals and businesses to which collectability is uncertain.

These default judgments may be sold by an equity receiver to investors who are willing to take their chances and who have the virtue of time to pursue their collection activity. The default judgments are highly specu-lative since they may ultimately be uncollectable, but for those investors who have seasoned and experienced

collection counsel on their side, a portfolio of judgments purchased from an equity receiver may prove to be a prudent investment.

This is also a win-win for the receiver who is also able to generate cash for an otherwise insolvent estate and is able to make a distribution and close-out the receivership estate in a more timely fashion. Receivers in this regard do not have the luxury of time to pursue speculative collections activity and selling such remnant assets allows receivers to close-out receiverships in a more timely fashion.

Other similar assets may also in-clude fractional interests in business-es, business partnerships, residential housing or commercial real estate. These assets are often difficult to sell due to the lack of transparency in

financial records (especially in closely held businesses) and the fact that it is extremely difficult for anyone to obtain an accurate valuation. Once again, for those experienced investors who have time on their side, these assets can bear fruit in years to come.

ConclusionPurchasing assets out of a receiver-

ship proceeding is not for the faint of heart but can prove to be a prudent investment in the long run. The choice of assets in these type of proceedings is virtually limitless. Beside more tradi-tional-type assets, such as real estate or business equipment, there is a plethora of other exotic-type assets which an estate may possess but may have to be surrendered to the receiver. Examples include interests in CONTINUED NEXT PAGE G

October 2017 | Issue 5 • Page 5

time shares and music royalties or oth-er literary intellectual property by rel-atively unknown artists which appear time and again, as well as more specu-lative type assets such as fractional interests in oil and gas rights, interests in damage awards against third parties which the estate has or had at one time, and even sports memorabilia which may attract only a limited number of potential investors.

Purchasing distressed assets not only allows an experienced investor to build or diversify his or her asset portfolio, but also has the added benefit of assist-ing a receiver in generating proceeds for an insolvent estate in a timely fashion and allowing a higher dividend percentage to be paid to creditors.

FOOTNOTES1 Matter of McGaughey, 24 F.3d. 904,

907 (7th Cir. 1994) (“Federal courts have an inherent equitable power to appoint a receiver to manage a de-fendant’s assets during the pendency of litigation…The appointment of a receiver is an especially appropriate remedy in cases involving fraud and the possible dissipation of assets since the primary consideration in determining whether to appoint a receiver is the necessity to protect, conserve and administer property pending final disposition of a suit.”)

2 See Regions Bank v. Egyptian Con-crete Co., 2009 U.S. Dist. LEXIS 111381, *18 (E.D. Mo. 2009); see also SEC v. Capital Cove Bancorp LLC, 2015 U.S. Dist. LEXIS 174856, *13 (C.D. Cal. 2015); see also SEC v. American Capital Investments Co., 98 F.3d. 1133, 1144 (9th Cir. 1996) (pur-suant to 28 U.S.C. §754, a receiver is “vested with complete jurisdiction and control of all such property” and selling such property is an exercise of that control) (emphasis in origi-nal).

3 28 U.S.C. §2004.4 28 U.S.C. §2001.

5 Regions Bank v. Egyptian Concrete Co., 2009 U.S. Dist. LEXIS 111381, *18 (E.D. Mo. 2009) (stating that “[i]t has long been recognized that under appropriate circumstances, a federal court presiding over a receivership may authorize the assets of the receivership to be sold free and clear of liens and related claims.”).

6 See 11 U.S.C. §363(f). A sale of property free and clear of liens can be approved pursuant to § 363(f) only if at least one of five conditions has been satisfied: (1) applicable nonbankruptcy law permits sale of such property free and clear of such [lien] interest; (2) the entity [the lienholder] consents; (3) such inter-est is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such lien interest. In re Hanson, 2007 Bankr. LEXIS 4850 *15, 2007 WL 7535075 (2007, BAP9 Cal).

7 See e.g. SEC v. Capital Cove Bancorp LLC, 2015 U.S. Dist. LEXIS 174856, *13-14 (C.D. Cal. 2015), interpret-ing California’s local rule governing receivers and looking at Bankruptcy Code Section 363 for guidance on the sale of assets in a receivership (“[b]ecause Local Rule 66-8 directs a receiver to ‘administer the estate as nearly as possible in accordance with the practice in the administra-tion of estates in bankruptcy[,]’ the Court looks to the Bankruptcy Code for guidance.”).

8 See e.g. Rubinstein v. Alaska Pac. Consortium (In re New England Fish Co.), 19 B.R. 323, 329 (Bankr. W.D. Wash. 1982) (Court allowed transfer of property free and clear of Title VII employment discrimination and civil rights claims of debtor’s em-ployees); In re Hoffman, 53 B.R. 874, 876 (Bankr. D.R.I. 1985) (Court al-lowed transfer of liquor license free and clear including claims in con-nection with the bankruptcy estate’s

unpaid taxes); In re All American of Ashburn, Inc., 56 B.R. 186, 190-191 (Bankr. N.D. Ga. 1986) (Court allowed sale free and clear of certain product liability claims); and WBQ Partnership v. Virginia Dept. of Med-ical Assistance Services (In re WBQ Ptnr), 189 B.R. 97, 103-105 (Bankr. E.D. Va. 1995) (Court allowed assets to be sold free and clear of Virginia’s right to recover certain depreciation expense overpayments reasoning that such depreciation recapture constituted an “interest” within the meaning of section 363(f)).

9 See e.g. In re Dura Auto. Sys., 2007 Bankr. LEXIS 2764 *267-268, 2007 WL 7728109 (Bankr. D. Del. 2007) (“[t]he purpose of an order pur-porting to authorize the transfer of assets free and clear of all ‘interests’ would be frustrated if claimants could thereafter use the transfer as a basis to assert claims against the Prevailing Bidder arising from the Debtors’ pre-sale conduct. Under section 363(f) of the Bankrupt-cy Code, the Prevailing Bidder is entitled to know that the Sale Assets are not infected with latent claims that will be asserted against the Prevailing Bidder after the proposed transaction is completed.”).

10 See e.g. Citizens & Northern Bank v. Pembrook Pines Mass Media, N.A., 2013 U.S. Dist. LEXIS 90686, *; 2013 WL 3282877 (W.D.N.Y. 2013); see also Farmers & Merchs. State Bank v. Direct Scaffold Servs., Co., LLC, 2009 U.S. Dist. LEXIS 101899, * (M.D. Tn. 2009).

11 For an example of an approved break-up fee in a receivership case, see e.g. Farmers & Merchs. State Bank v. Direct Scaffold Servs., Co., LLC, 2009 U.S. Dist. LEXIS 101899, * (M.D. Tn. 2009).

12 In re JW Res., Inc., 536 B.R. 193, *196 (Bankr. E.D. Ky. 2015).

13 See e.g. In re Antaramian Props., Inc., 564 B.R. 762, *766 (M.D. Fla. 2016) (stating that “[t]he [break-up] fee is intended to compensate the bidder for the time, effort, and risk of being the stalking horse, and to encourage

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the bidder to do the necessary due diligence with the assurance that its efforts will be compensated if it is unsuccessful.”).

14 For example, many courts, including the courts in the Southern District of New York, utilize the “business judgment” standard and analyze the appropriateness of the break-up fee in terms of whether the break-up fee was negotiated in good faith and with due care. Thus, courts applying the “business judgment” standard use a three-part test to determine the appropriateness of the proposed break-up fee. Accordingly, break-up fees in these jurisdictions will be ap-proved if (i) there was no evidence of self-dealing or manipulation, (ii) the bidding incentive encourages, rather than chills, the competi-tive bidding process; and (iii) the amounts are reasonable in compari-son to the purchase price. See e.g. In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547, 552 (Bankr. S.D.N.Y. 1997); citing Official Comm. Of Subordinat-ed Bondholders v. Integrated Res., Inc. (In re Integrated Res. Inc.), 147 B.R. 650, 657 (S.D.N.Y. 1992).

Other courts, including a bankruptcy court in Arizona, do not focus on the debtor’s business judgment, but rather focus on the best interest of the estate. See In re American West Airlines, 166 B.R. 908, 912, (Bankr. D. Ariz. 1994) (“[a]s stated, the stan-dard is not whether a break-up fee is within the business judgment of the debtor, but whether the transaction will ‘further the diverse interests of the debtor, creditors and equity holders, alike.’”). See also In re Hupp Industries, Inc., 140 B.R. 191, 194 (Bankr. N.D.Ohio 1992) (applying a seven-part test to determine if the break-up fee is in the best interest of the estate).

Finally, the Third Circuit, applies an “administrative expense” standard as set forth in Calpine Corp. v. O’Brien Env’t Energy, Inc. (In re O’Brien Env’t Energy, Inc.), 181 F.3d. 527, 537 (3rd Cir. 1999), which examines a break-up fee under the same analysis used

to determine the reasonableness of administrative expenses. Under this analysis, courts have identified at least two scenarios where the break-up fee may be approved: (1) “assurance of a break-up fee pro-moted more competitive bidding, such as inducing a bid that other-wise would not have been made and without which bidding would have been limited” or (2) where the initial bidder was induced to research the value of the debtor, “the bidder may have provided a benefit to the estate by increasing the likelihood that the process at which the debtor is sold will reflect its true worth.” O’Brien, 181 F.3d. at 537. See also e.g. In re Reliant Energy Channelview LP, 594 F.3d 200, 206 (3rd Cir. 2010) (holding that administrative expense treat-ment is the only appropriate stan-dard for ruling on break-up fees). But see ASARCO, Inc. v. Elliot Mgnt. (In re ASARCO, LLC), 650 F.3d. 593, 603 (5th Cir. 2011) (rejecting the Third Circuit’s reliance on adminis-trative expense treatment as the only appropriate standard and affirming the bankruptcy court’s approval of break-up fees in advance of an auction based on a “compelling and sound business justification” pursu-ant to Section §363(b)).

15 For an example of the type of infor-mation contained in a sales proce-dure order in a receivership context, see e.g. Citizens & Northern Bank v. Pembrook Pines Mass Media, N.A., 2013 U.S. Dist. LEXIS 90686, *; 2013 WL 3282877 (W.D.N.Y. 2013); see also Farmers & Merchs. State Bank v. Direct Scaffold Servs., Co., LLC, 2009 U.S. Dist. LEXIS 101899, * (M.D. Tn. 2009).

16 28 U.S.C. §2002.

17 Id.

18 Id.19 Id.20 Bambach, Alistaire, The SEC in

Bankruptcy: Past, Present and Future, 18 Am. Bankr. Inst. L. Rev. 607, 612-613 (Winter 2010).

21 Id.

NAFER Events CalendarFor additional information, view the NAFER webpage –

www.NAFER.com–– SEPTEMBER 2017––

Regional Educational Series Distribution Issues In Federal

Equity Receiverships and Bankruptcies: Victim v. Creditors

September 12, 2017 Reception - 5:30 pm to 6:30 pm

Dinner and Program – 6:30 pm to 8:30 pm

Hotel du Pont 11th & Market Streets Wilmington, DE 19899

Judicial Outreach CommitteeMeeting with the District Court Judges in the District of Utah

September 28, 2017 Salt Lake City, Utah–– OCTOBER 2017––

NAFER 6th Annual ConferenceOctober 18-20, 2017 Four Seasons Hotel

Miami, FL–– APRIL 2018––

2nd Annual Offshore Conference April 5-6, 2018

Second Annual NAFER Offshore Conference

The NAFER International Committee is pleased to announce that our Second Annual Offshore Conference will be held April 5-6,

2018. Our focus this year will be on the British Virgin Islands. Despite the devastation of two hurricane

hits this year, the BVI’s are open for business and remain an important

economic offshore hub. Please save the date and watch

for more details!

October 2017 | Issue 5 • Page 7