An Advertorial Presented by Frost Brown Todd LLC
Written by: Kyle R Grubbs
I'm interested in purchasing a parcel of Real Estate, but the property owner just filed for bankruptcy? Can I still purchase the property? Is there anything special I need to do?
Yes and Yes. The Bankruptcy Code permits a debtor-in-possession to sell its real estate and other assets based on its reasonable business judgment. As with other purchases of real estate, as a potential purchaser, you should conduct standard due diligence including title, survey, environmental, zoning, and building inspections prior to purchasing the property. In fact, since there will be virtually no representations or warranties made by the seller, the purchaser's due diligence is even more important in the bankruptcy context. In addition, because the property owner is in bankruptcy, additional precautions are warranted.
First, the sale of the real estate must be authorized by the bankruptcy court if the sale of the real estate is outside of the debtor's ordinary course of business. In almost all cases, sales of real state will be outside of a debtor's ordinary course of business. To ensure the debtor obtains prompt bankruptcy court approval of the sale, the purchase contract should require the debtor to immediately file a motion seeking the bankruptcy court's approval of the sale.
Second, the sale of the real estate should be free and clear of any interest or lien of the debtor's creditors. Because the seller of the real estate is in bankruptcy, the property is likely encumbered by mortgages, mechanic's liens, judgment liens, and other encumbrances. Unlike a typical real estate transaction, liens and other monetary encumbrances are not necessarily paid at closing. To ensure your purchase is free from the claims of the debtor's creditors, the order authorizing the sale of real estate should provide, among other things, that the (a) sale is free and clear of all liens, claims, encumbrances, and interests and that any liens will attach to the sale proceeds only; (b) purchaser is a "good faith purchaser" under the Bankruptcy Code so that the validity of the sale is not affected by an appeal of the sale order; and (c) ten-day stay set forth in the Bankruptcy Code is waived and the sale order is effective immediately to avoid any post-closing challenges to the sale. You should work closely with your title company to ensure that the sale order is sufficient in all respects for the title company to issue you a clean title policy at closing.
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