A public auction of real property and facilities can, in appropriate circumstances, maximize the return to creditors, even against the odds.

One success story began when a nursing home in Wisconsin had its license revoked by state regulators. The nursing home oper-ators determined that, in order to best preserve the sales potential while con-tinuing to provide care and protection for the dozens of patients still residing at the home, a chapter 7 petition would be filed. The goal of the debtor was to preserve the license for potential sale along with the assets of the debtor, which included the personalty located within the premises. Additionally, a related entity of the debtor owned the real property in a real estate partnership. The real property was encumbered by a mortgage that was personally guaranteed by the principals of the debtor.

The debtor filed a complaint in bankruptcy court seeking injunctive relief against the state of Wisconsin to restrain the termination of the license. A potential purchaser was waiting in the wings if the debtor could assure that the license was transferable.

After protracted litigation, transfer to a different judge, the drop-out of one of the potential purchasers and the emergence of another purchaser, the issue of whether the state of Wisconsin had a right to terminate the debtor’s license was finally heard. The court ruled that the state had an absolute right to terminate the license and had done so appropriately in these circumstances. Given the debtor’s limited assets, an appeal was not pursued.

Determining the Exit Strategy

Following the ruling, the related entity partnership that owned the real estate engaged a real estate auction company to liquidate the property for the benefit of the lender. The property was a one-story, 350-bed nursing home on a 20-acre site that had been closed for more than two years. It suffered from extensive deferred maintenance during the bankruptcy. The utilities had been turned off, and the property suffered the effects of extensive peeling paint, fallen ceiling tiles, burst pipes and the like, which reduced the curb appeal of the property. The license revocation meant that any new party acquiring the facility would not succeed in relicensing the facility in short order.

The proposition, therefore, was to find a buyer for the property that would retrofit it for an alternative use, bearing in mind that any costs incurred during a prolonged rehabilitation and marketing time would not be recouped in the form of a higher selling price. The challenge was design-ing a program that would effectuate a sale of the property on a timely basis to a bona fide purchaser for this unusual property.

Counsel for the debtors calculated the minimum bid, an amount sufficient to close the transaction, including delinquent taxes, utility costs and other incidental expenses. Upon review of the case, the real estate auction company recommended a stand-alone, open-outcry auction program for the property. The features of the selected program included:

1) The sale of the property would occur within 75 days, minimizing carrying costs and further physical deterioration of the property;

2) The sale would be "as-is, where-is," with no post-auction due diligence contingency;

3) Widespread notice of the auction in The Wall Street Journal, in addition to a 5,000-piece direct mail campaign and a plethora of pre-auction newspaper and magazine articles heralding the availability of the property;

4) A tune-up of the property in preparation of five weeks of inspection by interested parties; and

5) A call to closure in that the property was slated to be sold at a definite place and time.

During the pre-auction marketing program, the real estate auction company received inquiries by more than 100 parties spanning five states. The property was shown to more than 20 parties prior to the auction. At the auction, the property sold for close to twice the minimum bid to a local county correctional authority with the intention of converting it into a minimum-security juvenile detention center.

Successfully Closing the Deal

Following the engagement of the real estate auction company, one of the partners filed a chapter 7 petition. The title company required the partner’s signature in order to close the transaction. Due to the filing of bankruptcy, the interest of that partner was now controlled by the trustee in bankruptcy. The lender was undersecured to the extent of approximately $3 million, and the property had no value for the benefit of the creditors of the estate of the partner who had filed chapter 7.

Representatives of the partnership contacted the trustee and requested that the trustee take whatever steps were required to abandon the property of the estate, as there was a tax redemption deadline that was outstanding that would not allow for the consummation of the sale if that redemption deadline passed. The trustee and his counsel agreed to file a motion to abandon the assets pursuant to §554(a), which states: "After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate."

After a number of days and weeks passed without any drafted motion by the trustee, the partnership and one of the partners of the partnership filed a motion under §544(b).¹ requesting shortened notice due to the failure of the trustee to take action. The court granted the motion, and the sale of the asset closed thereafter, prior to the redemption deadline.

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Footnotes

¹On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any of the property of the estate that is burdensome to the estate, or that is of inconsequential value and benefit to the estate.Return to text.