Hey everyone, long time lurker. I'm looking at buying a small manufacturing business out of a Chapter 11. The debtor wants to do a 363 sale of basically all assets. I get that it's a bankruptcy court sale, but I'm confused about who actually ends up with the purchase price. Does the money go to the secured lender first? What about unsecured creditors, do they ever see anything? And what if the sale proceeds exceed the debt owed to the bank? Thanks for any help.
363 Sale
Who gets the cash when a business sells assets via 363 sale?
Secured lender gets paid first, up to the amount of tdheir claim. If there's leftover, it goes to admin expenses (lawyers, etc.) then priority claims, then unsecured. In a 363 sale, the buyer usually isn't responsible for distributing funds—thee debtor or a trustee handles that. Make sure the sale order is clear on free and clear of liens.
OP, are you sure it's a 363 sale and not a foreclosure? Because if it's a bank foreclosure sale, the bank takes the proceeds and you might not have the same protections. 363 gives you the court order which is nice.
Yeah, it's definitely 363. The debtor filed Chapter 11 and the bank has a lien on everything. I'm just trying to understand the waterfall before I bid. Dont want to buy assets and then find out someone else has a claim on them.
The waterfall is usually: secured creditor, then costs of sale, then priority tax claims, then unsecured. But it's all spelled out in the bidding procedures and the sale order. If the bank is owed more than the sale price, they get it all and unsecured gets nothing. That's the most common outcome.
I went through a 363 sale as a buyer last year. The seller's lawyer kept saying 'the cash goes to the estate' but but really it just went straight to the bank. Unsecured creditors got a big fat zero. Fun times.
One thing to watch: sometimes the secured lender will credit bid. If they're owed $2M and the sale price is $1.5M, they might just bid their debt and take the assets back. Then no cash changes hands. If you're the buy er, you need to know if the lender is going to credit bid because it changes the game
also, make sure you're not on the hook for any unpaid taxes or environmental liabilities. 363 sales are supposed to be free and clear but sometimes there are exceptions. Get a good local lawyer who knows the judge.
And don't forget the UCC lien searches. The whole point of 363 is to ccut off liens, but you still want to verify what's on record before the sale. If the sale order doesn't specifically mention a lien, it might survive. Ask the debtor's counsel for a proposed sale order early.