Throwing a Lifeline

The current economic difficulties in the United States
generally are associated with job losses and business failures, along with the
associated increase in individual and business bankruptcy filings. However,
difficult economic times also present opportunities for strong businesses to
make strategic acquisitions of troubled assets and businesses at good prices to
expand their market share or acquire a synergistic business line to augment
their current business models. This particular economic down cycle may also
provide some unique opportunities involving financial institutions that wish to
shed assets quickly before the loss of the going concern value of their
customers (i.e., before the banks foreclosure of the assets). Recent anecdotal
information suggests that this type of merger and acquisition (M&A)
activity in the Northwest is just beginning as buyers perceive that the bottom
of the economic downturn is at hand.

When such strategic opportunities become available, it is
important that the acquiring company involve not only its business and M&A
attorneys, but also bankruptcy and restructuring professionals to ensure an
efficient process with maximum protection for the acquiring company. The use of
the traditional purchase and sale agreement and lien releases to ensure free
and clear title to a purchaser usually does not work well when the target is in
distress. Creditors with liens, including judgment lienholders, often refuse to
execute lien releases or use the threat of litigation to leverage payment
beyond their actual economic stake in the assets being sold. Insolvency and
restructuring professionals have numerous tools available in their arsenal to
achieve a successful acquisition of a troubled business or assets.

First, receiverships or assignments for the benefit of
creditors (ABCs) provide the means to preserve the going concern value of a
business while a sale of the business or assets is being procured by the
receiver. In Washington, receiverships and ABCs are now both structured under
the 2004 Washington Receivership Statute that provides for many bankruptcy-like
provisions including an automatic stay to preserve assets against attaching and
foreclosing creditors and a provision for sales of assets free and clear of
liens on notice to creditors. Lane Powell commenced the first receivership on
behalf of a secured lender under this statute, and the receiver and his counsel
were successful in identifying three possible purchasers and selling the
business assets within a relatively short period of time. The key to the
success of this business acquisition strategy is to get the right receiver for
the situation.

Second, bankruptcy sales provide another method to acquire a
business free and clear of liens, including sales of ongoing businesses under
Chapter 11. While there needs to be a legitimate business reason to sell assets
outside of a Chapter 11 plan, the loss of going concern value often provides a
sufficient reason to use the sale process instead of the Chapter 11 plan
process. For example, such Chapter 11 sales were common during the dot-com
liquidations in the 1990s. The recent Chrysler and GM Chapter 11 cases illustrate
that size is not an obstacle to using a sale instead of a Chapter 11 plan.
Bankruptcy also provides a means to assume leases that are in default, so long
as the defaults are cured, allowing the purchaser to continue to operate out of
the targets key business locations and to preserve the key equipment necessary
to ongoing operations.

Finally, in appropriate circumstances, friendly
foreclosures provide a means to acquire a going concern business. Under this
method, the purchaser acquires the position of the first position lienholder
(usually the working capital lender), forecloses out junior lien creditors,
shuts down the business for a brief period and then reopens following the
foreclosure. This type of acquisition generally requires precise lien searches
and the cooperation of the target companys management. Given the financial
difficulty of many financial institutions, acquisitions of debt at pennies on
the dollar may become more common in the near term.

In sum, creative acquisition methods, with the guidance of
skilled restructuring professionals, will permit savvy business operators to
grow their businesses successfully even in a difficult economy.

This is a sponsored legal report from Lane Powell PC. Mary Jo Heston, a shareholder at Lane Powell PC, focuses her
practice on contract and UCC litigation and transactional work, business
bankruptcies, reorganizations and workouts, creditors remedies and
international insolvency matters. She can be reached at 206.223.7015 or
[email protected].