When a business faces bankruptcy, questions arise regarding how to handle wasting assets. In general, a business may operate per its regular course of business while being overseen by a Bankruptcy Court. That is to say, a business generally need not motion the Court to approve an action when that action fits in the parameters of its business as usual context.

However, there are circumstances in which a business must obtain a Bankruptcy Court’s approval and that is usually when the business wants to act outside the ordinary course of business. The United States Bankruptcy Code, or the Code, contemplates such scenarios. One particularly emergent issue appears when the business is holding wasting assets.

Grocery Store

Suppose a grocery store finds itself struggling and decides to utilize Chapter 11 Bankruptcy protection. Prior to the bankruptcy filing, the grocery store purchased a large quantity of produce. Due to slow sales, the produce did not sell. What is more, the grocery store is trying to move away from large scale produce sales and needs cash to pay for the administration of the bankruptcy process.

To that end, the grocery store motions for the Bankruptcy Court to sell the produce immediately. The grocery store tells the Bankruptcy Court that it found a buyer for all the produce and it can use the cash. While selling bulk produce at little or no profit is not the grocery store’s normal course of business, a Bankruptcy Court would likely approve the sale because the produce is a wasting asset and there is a buyer for it now.

The GM and Chrysler bankruptcies tested how far the concept of wasting assets goes.

GM and Chrysler Bankruptcies

The world was hit with a shock during the Great Recession when iconic automakers GM and Chrysler filed for Chapter 11 bankruptcy protection under the Code. Both were very large bankruptcy filings and the GM filing, in terms of overall company value, was the largest bankruptcy filing in US history at the time. The bankruptcies lasted approximately six weeks, after which time the automakers emerged.

In bankruptcy parlance, an improper bankruptcy plan is called a sub rosa plan. Large scale bankruptcies tend to last for years before the bankrupt debtor emerges. Yet the GM and Chrysler bankruptcies lasted a mere six weeks. This triggered a discussion amongst experts and observors whether approving those bankruptcy plans constituted the approval of sub rosa plans.

Counsel for both GM and Chrysler invoked the emergent need of a wasting asset to be sold as part of the bankruptcy plan. The Bankruptcy Courts in both cases pointed to precedence wherein an emergency sale of assets need not be a typical wasting asset like produce; even a company that is wasting can be granted an emergent sale.

As a result, the Bankruptcy Courts approved of the sale of GM and Chrysler to new entities. The US government owned  a significant portion of those new companies. Consequently, the old GM and Chrysler remained in a bankruptcy wind-up phase while the new GM and Chrysler emerged debt-free.Is your business facing financial distress? Bankruptcy may be right for your business. Contact the Chapter 11 Oakland law firm of Melanie Tavare.