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A Beginner's Guide to Selling Out: Selected Strategies to Maximize Return on Distressed Collateral
Ian T. Peck, Jordan Bailey
Generally, a secured lender faced with a defaulting borrower must move quickly to maximize the value of its collateral. One option available to the secured lender is simply to foreclose on its lien and sell the collateral at a foreclosure sale. While this may be the cheapest remedy, especially in non-judicial foreclosure states, many lenders do not like the idea of taking title to the property and being forced to market it in a relatively short time period. The purpose of this article is to discuss the pros and cons of two remedies available to the secured lender as an alternative to foreclosure: the “363 sale” and the receivership under state law.
Many lenders have a tried and true playbook for dealing with distressed real estate – after the borrower defaults, the lender pushes the borrower into bankruptcy and pursues a sale of the property pursuant to 11 U.S.C. § 363. Many of these bankruptcy cases are referred to as “pre-packs” in that the lender and borrower have negotiated and agreed to a plan of action before the bankruptcy has been filed. These types of bankruptcy filings, resulting in the ultimate sale of property under section 363, afford numerous benefits to the secured lender, including the availability of adequate protection, ability of the secured creditor to credit bid, availability of a process to market and auction the property, and often the presence of a stalking horse bidder to assure a minimum purchase price for the property. Additionally, in most instances, secured lenders are able to generate some interest in the market due to the protections afforded purchasers under section 363.
While 363 sales remain a viable option (and in some instances, the best option) to dispose of distressed real estate, some of the benefits provided by section 363 have been called into question through some recent bankruptcy appellate opinions. Additionally, sending a borrower through bankruptcy is not without cost and comes with the constant oversight of the bankruptcy judge and counsel for the numerous parties involved. Because of these potential drawbacks, one alternative method of disposing of distressed real estate that appears to be gathering some steam is the state court receivership. The receivership is gaining popularity among secured creditors because of the apparent ability to get the same results– i.e., dispose of collateral without actually taking possession of the collateral – in less time and with less expense than a bankruptcy filing followed by a sale under the Bankruptcy Code. In the right situation, the state-court receivership may provide a secured creditor a cost-effective strategy to deal with distressed real estate.
Presented at the South Texas College of Law 26th Annual Real Estate Law Conference, June 2-3, 2011. To read the full article click on the PDF linked below.
PDF - Strategies_Maximize_Return_Distressed_Collateral.pdf