A recent decision by the Wisconsin Supreme Court confirms the preference of many Wisconsin lenders that collateralized assets be sold in a Chapter 128 proceeding under the Wisconsin Statutes, rather than in a federal bankruptcy case under Section 363 of the U.S. Bankruptcy Code. BNP Paribas v. Olsen's Mill, Inc., Case No. 2009AP1007 (Wis. July 8, 2011), holds that a Wisconsin court cannot sell a lender's collateral free and clear of the lender's lien absent the lender's consent when the purchase price is insufficient to pay the lender's secured claim in full and the value of the lender's collateral has not been determined.
The Supreme Court overturned a decision by the Circuit Court for Green Lake County which had ordered a sale of collateral over the objection of BNP Paribas (“BNP”), a senior secured lender to the debtor, Olsen’s Mill, Inc. The sale ordered by the Circuit Court paid BNP less than the full amount of its claim while selected unsecured creditors received full payment, by virtue of the buyer’s assumption of selected trade debts. The Supreme Court held this was inappropriate because, as a general rule, a secured creditor’s collateral cannot be sold in a Chapter 128 proceeding without its consent and because a bid that included assumption of unsecured debt, rather than cash on the barrelhead, circumvents the claim priorities established under Chapter 128.
The case is good news for Wisconsin lenders whose borrowers resort to the less expensive, state insolvency proceeding. Wisconsin lenders have long favored Chapter 128 as a cost-effective method of obtaining going-concern value for a borrower’s assets. Unlike Chapter 11 under the federal Bankruptcy Code, Chapter 128 does not stay the lender’s collection efforts nor compel the lender to finance what may be unrealistic plans of the borrower’s management to reorganize. Had the Supreme Court not overruled the trial court's decision in Olsen's Mill, many of the advantages of Chapter 128 would have been jeopardized.
While there are circumstances where selling assets under the U.S. Bankruptcy Code may be preferable to a lender (including the need to preserve a borrower’s important on-going contracts), in most circumstances the expenses of a federal bankruptcy case will greatly exceed those under Chapter 128 of the Wisconsin Statutes. By eliminating uncertainty regarding the power of a state court to sell a lender’s collateral without its consent, the Supreme Court's decision will make Chapter 128 more predictable and even less expensive.