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Kentucky Auctioneers Association – Continuing Education - 2013

Kentucky Auctioneers Association – Continuing Education - 2013. Bankruptcy Sales for the Auctioneer The Nuts and Bolts of Current Bankruptcy Code & Observations from the Trenches. Introduction – History of Bankruptcy?.

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Kentucky Auctioneers Association – Continuing Education - 2013

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  1. Kentucky Auctioneers Association – Continuing Education - 2013 Bankruptcy Sales for the Auctioneer The Nuts and Bolts of Current Bankruptcy Code & Observations from the Trenches

  2. Introduction – History of Bankruptcy? • Prior to early 20th Century – State Laws and some Federal Laws allowed individuals to declare insolvency • Very Cumbersome • Required Creditor Consent • Unfair Application • Lead to the Current United States Code allowing for only Federal Oversight of Bankruptcy & Established Federal Bankruptcy Court/Procedures • 1980’s Panel Trustee System Instituted

  3. Presentation Synopsis • What is Bankruptcy? • Federal Law vs State Law • Protection from Creditors • Who can utilize Bankruptcy & How often? • What tools exist to research Bankruptcy filings? • Pacer – Official Court Website • US Administrative Office of the Courts • American Bankruptcy Institute • Bloomberg & Local Business Newspapers

  4. Current Filing Overview • Bankruptcy Filings 2005 – 2012 • 2005: 2,078,415 • 2006: 617,660 • 2007: 850,912 • 2008: 1,117,771 • 2009: 1,473,675 • 2010: 1,593,081 • 2011: 1,410,653 • 2012: 946,980 – thru 3rd Q (1.2M estimated) • 2013: could be highest filing year ever due to “8 Year Rule” Source: ABI & Administrative Office of the Courts

  5. Bankruptcy Chapters & Uses • Most Commonly Utilized Chapters for Filing Bankruptcy • Chapter 7 – Liquidation (Personal & Business) • Chapter 13 – Personal Reorganization • Chapter 12 – Farmer Reorganization • Chapter 11 – Business & High Asset Individual (Personal) Reorganization and/or Liquidation

  6. Trustee Involvement In Filings • Bankruptcy Panel Trustees are not always appointed to oversee cases • Chapter 7 – Trustee Always Appointed • Chapter 13 – Trustee Always Appointed • Chapter 12 – Trustee rarely appointed (DIP) • Chapter 11 – Trustee only appointed in misappropriation or fraud instances (DIP)

  7. Automatic Stay in Bankruptcy 11 USC 363 – Bankruptcy Code • Allows for Automatic Stay of Creditor Actions • No collection actions can be undertaken until Stay is lifted • NOTE: Foreclosure ongoing – Notice of BK filing – Halt the Sale immediately

  8. How Does Bankruptcy Work? • Pertinent Statutes related to Bankruptcy • 11 USC 363: Bankruptcy Code governing virtually all rules and regulations of all Chapters, Debtors, Filings and National Rules pertaining to Bankruptcy Court • Trustee Authority to Sell, Use or Lease…Property of the Estate – with or without Notice & Hearing depending on “ordinary course of business” or outside ordinary course of business {ss: b-1} • Trustee may sell property under subsection (b) or (c) of this section FREE AND CLEAR of any interest in such property… {ss: f) • Sale may occur over objections of creditors, other joint property owners (wife, partner, etc); with other entity being COMPELLED…to accept a monetary satisfaction of their interest. {ss: f-5 & h-1-4} • NOTE: “FREE AND CLEAR” does not mean that restrictive covenants, governmental consent decrees, condominium associations or easements can be stripped from the property or title. “FREE AND CLEAR” is a distinction that provides for ‘monetary interests’ only and must be a benefit to the estate. {SB opinion}

  9. How Does Bankruptcy Work? • 11 USC 363 – Sale Procedures & Credit Bidding in Bankruptcy • Creditors have nearly an absolute right to credit bid at a sale – Agreed Orders work best to have all parties on the same page and get paid • Court should order the liens to “attach” to the proceeds of sale (cash) thus freeing the property from encumbrance & clearing title issues • Court may “modify” lien and or subordinate lien positions if it so chooses • First Mortgage can become the Third Mortgage…

  10. How Does Bankruptcy Work? • Pertinent Statutes related to Bankruptcy • 18 USC 158 – The Penal/Criminal Code of the U.S. Government • Attorney General & US Attorneys in conjunction with the US Trustee’s office and Federal Bureau of Investigation are authorized, empowered and ACTIVELY searching for Bankruptcy Fraud for Prosecution • FBI MUST assign at least one agent for EACH FIELD OFFICE for the sole purpose of investigation and proactive examination of Bankruptcy filings for fraudulent behavior. Agent will be looking at the conduct of Debtors, Trustees, Attorneys, Professionals (Brokers, Accountants, Auctioneers, etc) and Vendors to ascertain if fraudulent behavior is occurring. • 18USC158 d: “The Bankruptcy Courts shall establish procedures for referring ANY case that MAY contain a materially fraudulent statement in a bankruptcy schedule to the individuals (FBI/US Attorney) designated under this section.”

  11. How Does Bankruptcy Work? • 11 USC 105: Power of the Bankruptcy Court • Pecking order of the Universe 1. God 2. Bankruptcy Judge 3. Everybody Else “The Court may issue ANY order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking ay action or making any determination necessary or appropriate to enforce or implement court orders or rules or to prevent an abuse of process…” • The Bankruptcy Court can do virtually ANYTHING it wants to do!

  12. Who are the Players in Bankruptcy? • Debtors – Individual or Corporation • Significant differences between individuals and corporations in BK • Individuals are granted “Exemptions” to allow debtor to keep or retain the equity in certain valuable real estate or personal property • Individuals may completely exempt some items in their estate such as retirement accounts. • Corporations may not claim any exemptions under 11USC363 • Debtors are attracted to auction sales under Section 363 due to the ability to convert assets to cash quickly while being able to clear the title to the property (Free and Clear) • NOTE: On occasion in complex transactional structured sales significant investigation and due diligence on the part of the auctioneer is normally required prior to taking an assignment. Normally the auctioneer is not paid for this service as it is considered a part of their initial review of the asset. • Virtually all Bankruptcy Sale activities will require the auctioneer or other third party place at least a value range on the asset in order to proceed to proposal stage and court approval.

  13. Who are the Players? Debtor In Possession – Chapter 11 & 12 Cases where Debtor is acting in the trustee’s capacity including reporting, payment of fees, adequate protection (loan payments), filing of plan and liquidating assets. Panel Trustee – Chapters 7 & 13 cases Trustee is automatically appointed to oversee the liquidation and administration of the case. • Most Trustees are attorneys but not all. • Trustees must request court approval to hire, sell property and pay professionals – accountants, brokers, auctioneers, managers, etc. • Trustee will also review case to make sure mortgages were filed correctly and if not to request court declare the lien void or “unperfected” (strong arm tactic)

  14. Who are the Players? United States Trustee • Bankruptcy Court Policeman • Oversees the administration of the system and all Panel Trustees • Dictates what Trustees are reappointed and assignment of cases • Refers investigations of fraud or mismanagement of cases to U.S. Attorney and FBI • Approves Professionals and holds Bonds for Auctioneers/Brokers

  15. Who are the Players? Secured Creditors • Most commonly lender with a mortgage on real estate • Other secured creditors include judgment liens, tax liens, Home Owner Association liens • How can an auctioneer help solve the Secured Creditor’s issues? • Sell the property to create cash • Let the parties fight over cash vs a deteriorating asset • Provide full and ongoing reports to all parties – debtor, trustee, secured creditor, etc.

  16. Who are the Players? • Bankruptcy Judges • They determine whether to sell and asset or confirm a Chapter 11 plan or not sell • Judges are given great latitude in determining the course of action in a bankruptcy • Judges can be strict interpreters of the law or can find ways to further a transaction… Get to know the attitude of your judges.

  17. Who are the Players? • Unsecured Creditors • Very limited role in Chapters 7, 12 and 13 • Very Active Role in Chapter 11 Cases • Unsecured Committee many times is the determining factor for permitting a sale of assets in Chapter 11 – their counsel is a very important part of the equation • US Trustee appoints the “official committee of unsecured creditors” with their attorney being paid from the bankrupt corporation

  18. Who are the Players? • Various Insolvency Professionals and Consultants • Turn-around firms, investment bankers, accounting firms, auctioneers & management companies can all be players in bankruptcy cases. Finding alliances with some or all of these professionals can lead to business opportunities for the Tranzon team. Many are members of the American Bankruptcy Institute. • Purchasers: • Some bankruptcy purchasers are professional buyers – i.e. corporate turn-around firms with significant capital reserves or large asset buyers for real estate. • Determining the depth and skill of the buyer pool for assets in bankruptcy is critical and understanding the thought process and discount factor for their purchases can assist the auctioneer in evaluating the assets up front. GET TO KNOW YOUR BUYERS!

  19. What is Required of the Auctioneer to work in Bankruptcy Court? • Bonding – Auctioneers must have a bond (normally a permanent one that is renewed every year) on file with the U.S. Trustee in the jurisdiction you are working. • Evaluation Experience – Auctioneers need to have the tools to evaluate assets and provide professional opinions as to what they will “reasonably” yield at auction or through a brokered sale

  20. How and Who to See for BK work… • Build Contacts with Attorneys, Trustees and Insolvency Professionals • Go to Court and meet the attorneys • Join ABI and get a list of attorneys in your area – schedule to meet them • Join NABT and attend meetings to learn more about the issues facing trustees • Set up an account and Log onto PACER and obtain the list of trustees in each jurisdiction you are looking to work

  21. How to Get in the Door… • Solicitation Letters with Tranzon Info • Cold Calls • Go to Court • Review Cases and connect the dots with Secured Creditors – offer to solve their problems • Meet the Trustees and U.S. Trustee • Create Value Added to all parties and they will seek you out.

  22. Operational Issues & Watch List • Do Not Advertise until all court approvals/orders are issued • Get to know the local rules governing BK sales, commissions, etc. • Beware of Notice of Sale – Help the Debtor’s Counsel and Trustee by reminding them of the notice date (normally 21 to 30 days prior to sale) – draft the notice with all terms, dates, etc.

  23. Operational Issues and Watch List • Virtually all Bankruptcy Sales require marketing costs to be fronted by auctioneer (folks the debtor is bankrupt and the trustee doesn’t have any cash) • Have a good Bankruptcy Attorney available to you for counsel and/or appearances if needed – a few hundred dollars in fees beats being cut out of a $20,000 commission • One size does not fit all – some jurisdictions do not allow auctioneer to also appraise the property (conflict of interest), some don’t allow all expenses to be turned in for reimbursement…know the Local Rules (Pacer)

  24. For More Information: *Pacer.gov – Electronic Filing System for Federal Court System*American Bankruptcy Institute – ABI Edward D. Durnil, CAI, CES 270-769-0284 edurnil@tranzon.com

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