Courts may be faced with post-bankruptcy auction challenges from losing bidders (sometimes also joined by aggrieved individual creditors or committees) to either the manner in which the sale was conducted or the outcome of the auction. In deciding whether to approve a sale, courts are necessarily required to balance assuring finality of process with maximizing value for the estate. Courts are generally reluctant to deny sale approval or reopen an auction after bidding has concluded simply to allow for a slightly higher bid or to permit a new bidder to participate. However, courts have also demonstrated a willingness to reopen auctions if the circumstances justify doing so—typically situations where the auction suffered from a procedural issue or resulted in inadequate bids as compared to the value of the property being sold.
A recent decision by the Bankruptcy Court for the District of Delaware in In re Allied Sys. Holdings,1 illustrates the difficult balancing act that a court must undertake in the face of a post-bankruptcy auction objection. The Allied court, in deferring primarily to the debtors’ need to uphold its fiduciary duties, may also have laid the foundation for expanding the previously limited circumstances in which a court will allow an auction to be reopened.
Bankruptcy courts have long recognized the existence of two principal yet competing interests in deciding whether to approve a sale, or instead reopen an auction to allow for a higher bid (sometimes called an “upset bid”). Undoubtedly, securing the highest value is of paramount importance.2 However, finality and the preservation of the integrity of the auction process are also critical.3 While some courts have reopened an auction after a winning bidder has been selected (and in certain cases, after a sale order has been entered), other courts have declined to entertain such post-auction bids.4
In many of the cases where courts denied sale approval and/or reopened an auction so that a debtor could receive and evaluate higher bids, the fact that an upset bid would provide more value to the estate was not, by itself, dispositive.5 Rather, courts appear to have been most often persuaded to take such action where: (i) there was some infirmity in the process (e.g., failure to give adequate notice of the sale, insufficient or inequitable information dissemination to bidders, or failure to adhere to bidding procedures); or (ii) the bid was of significantly insufficient value relative to the property sold or there was no clear winner at the conclusion of the auction.
In Corporate Assets v. Paloian,6 for example, where not all bidders were informed of a material change to the asset purchase agreement prior to the start of the original auction, the Seventh Circuit found that the Bankruptcy Court had not abused its discretion when it allowed a debtor to conduct a second auction. The change, when discovered, prompted a losing bidder to submit a higher bid post-auction.7 Moreover, in In re Hart’s Manufacturing,8 the Bankruptcy Court for the Western District of Tennessee declined to approve a sale of the debtor’s property to the highest bidder because the price was grossly inadequate and did not maximize value for all creditors.
However, courts will also carefully consider the competing factors of finality and regularity of process, even when faced with the opportunity to realize enhanced value for the estate. In In re Finlay Enter.,9 certain unsuccessful bidders objected to the sale of the debtors’ assets on various grounds, including that the debtors failed to comply with their bidding procedures and that the auction had never officially closed.10 The Bankruptcy Court for the Southern District of New York focused its analysis on whether the debtors had violated the bidding procedures, and chose not to let the prospect of enhanced value for the estate guide its analysis.11 In addition to finding that certain disgruntled bidders lacked standing to even object, the Bankruptcy Court approved the sale to the original winning bidder at auction, stating that “the only way that auctions of assets can be conducted fairly…is if the parties who participated [at] the auction recognize that it really matters whether they choose to bid or not….”12
The ‘Allied’ Decision
Unlike previous decisions, the Allied decision demonstrates a willingness of a bankruptcy court to approve a motion to reopen an auction after bidding has concluded, even purportedly in the absence of a deficient auction process or an insufficient winning bid.
In Allied, the debtors held a two-day auction for the majority of their assets in accordance with their bidding procedures.13 At the conclusion of the auction, the debtors chose New Allied Acquisition, an entity established by their first lien lenders, as the “highest and best” bid of $105 million ($40.5 million in cash and a $64.5 million credit bid).14 The next day, the debtors publicly declared New Allied as the auction winner, and subsequently filed the relevant sale documentation with the Bankruptcy Court.15
Shortly after the sale documentation was filed with the Bankruptcy Court, the Creditors’ Committee (and others) objected to the determination that the New Allied bid was the winning bid.16 The objectors asserted, along with various procedural and fairness arguments, that the New Allied bid presented “significant transaction (and litigation)” risk that was not present in a $100 million bid made by another potential purchaser at the auction, Jack Cooper Transport.17 The Creditors’ Committee also moved to reopen the auction,18 and simultaneously therewith, Jack Cooper presented a new bid for $135 million, comprised of $125 million in cash and $10 million in cash or notes.19 The Creditors’ Committee argued that the new Jack Cooper bid was safer and “higher and better” than the New Allied bid.20
Following what the debtors described as a “comprehensive review” of the new Jack Cooper bid, and taking into account the numerous objections to the sale that would be rendered moot as a result of reopening the auction, a special committee of the debtors’ board of directors determined that it would be in the best interest of the debtors’ estates to reopen the auction and (significantly) joined the Creditors’ Committee’s motion.21
During the telephonic conference to decide whether to reopen the auction, the Bankruptcy Court did not address the objections brought by the Creditors’ Committee regarding any alleged problems with the auction process.22 Instead, the Bankruptcy Court, in noting that it is “certainly…unusual to reopen an auction, especially when a bidder that’s come back [has] had a full and fair opportunity to participate the first time,”23 simply deferred to the debtors’ determination that they needed to reopen the auction to fulfill their fiduciary duties to maximize value to the estate.24 Accordingly, the Bankruptcy Court “reluctantly” honored the debtors’ request to do so.25
Ultimately, the new Jack Cooper bid was determined to be the winning bid (including over an increased bid by New Allied), and the Bankruptcy Court approved the sale.26
Courts, in overseeing bankruptcy auctions, will undoubtedly continue to grapple with the tension that arises when trying to maximize value for creditors while also preserving the integrity of the sale process. Indeed, if courts were to deny sale approval or permit upset bids whenever a bidder offered additional value to the estate post-auction, auctions would be rendered meaningless because potential buyers would no longer have any incentive to extend their “highest and best” offers until the debtor reaches the courthouse steps seeking approval of another offer. Nevertheless, the Bankruptcy Court’s deference to the debtors’ position in Allied arguably expands the fairly well-developed circumstances under which courts will entertain upset bids. Despite the possible existence of infirmities in the auction process and the fact that Jack Cooper had previously participated in the auction—factors that historically have weighed heavily in the decision of courts to reopen auctions and/or deny sale approval—the Allied court ultimately did not address such issues, and instead yielded mainly to the debtors’ determination that they had a fiduciary obligation to maximize estate value and arguably to the objection challenging whether the selected bid was “better” even though it allegedly presented real closing risk. What remains to be seen is whether other courts will follow the Allied decision and permit an auction to be reopened in situations where a higher offer is subsequently received.
Kristopher M. Hansen is the chair of Stroock & Stroock & Lavan’s nationwide financial restructuring group, in which Jayme T. Goldstein is a partner and Jonathan D. Canfield is an associate. Joshua J. Kutticherry, an associate, assisted in the preparation of this article.
1. Case No. 12-11564 (Bankr. D. Del. Sept. 9, 2013).
2. See, e.g., Four B. v. Food Barn Stores (In re Food Barn Stores), 107 F.3d 558, 564-65 (8th Cir. 1997) (noting that bankruptcy courts must remain mindful that “a primary objective of the Code [is] to enhance the value of the estate at hand”).
3. See Corporate Assets v. Paloian, 368 F.3d 761, 767 (7th Cir. 2004) (stating that “[i]f parties are to be encouraged to bid at judicial sales, there must be stability in such sales and a time must come when a fair bid is accepted and the proceedings are ended.”); see also In re Fin. News Network, 980 F.2d 165, 166 (2d Cir. 1992) (noting that a bankruptcy court must perform a “difficult balancing act…when it conducts an auction of a debtor’s assets. It walks a tightrope between, on the one hand, providing for an orderly bidding process, recognizing the danger that absent such a fixed and fair process bidders may decline to participate in the auction; and, on the other hand, retaining the liberty to respond to differing circumstances so as to obtain the greatest return for the bankrupt estate”).
4. See, e.g., In re Chung King, 753 F.2d 547, 554 (7th Cir. 1985) (stating that “[p]arties must be encouraged to make their highest bids at judicial sales. In the long run this policy benefits creditors as well as the bankruptcy estate by ensuring that the highest bids always are made in a timely fashion and are properly considered by the bankruptcy court”).
5. See, e.g., In re Gil-Bern Indus., 526 F.2d 627, 629 (1st Cir. 1975) (holding that where there is no local custom to the contrary, “it is an abuse of discretion for a bankruptcy court to refuse to confirm an adequate bid received in a properly and fairly conducted sale merely because a slightly higher offer has been received after the bidding is closed”). But see In re Fin. News Network, 980 F.2d 165 (2d Cir. 1992). In Fin. News Network, the ultimate winning bidder at a debtor’s auction appealed the sale approval, arguing that it was forced to increase its bid because the Bankruptcy Court had improperly reopened the auction. The Second Circuit affirmed the District Court ruling, which found that the Bankruptcy Court had not abused its discretion in evaluating a cash offer for a certain portion of the debtor’s future revenue stream after bidding had concluded. Id. at 170. The Second Circuit noted that Gil-Bern and its progeny “should not be blindly applied so as to reduce the broad discretion and flexibility a bankruptcy court must necessarily have to enhance the value of the estates before it.” Id. at 169. The fact that no clear winner emerged at the end of the auction, the nature of the assets sold, the difficulties in valuing the assets and the complex (and arguably convoluted) bidding procedures supported the Second Circuit’s conclusion that its decision was not in direct conflict with Gil-Bern, which had relatively straight-forward cash bids. Id. at 170.
6. 368 F.3d 761 (7th Cir. 2004).
7. Id. at 765.
8. 383 B.R. 720 (Bankr. W.D. Tenn. 2008).
9. Case No. 09-14873 (Bankr. S.D.N.Y. 2009).
10. Limited Objection by Zale Corporation to the Debtors’ Notice of Selection of Successful Bids at Auction ¶¶7-11, In re Finlay Enter., Case No. 09-14873 (Bankr. S.D.N.Y. Nov. 11, 2009) (Docket No. 362).
11. Transcript of Record at 44, In re Finlay Enters., No. 09-14873 (Bankr. S.D.N.Y. Nov. 12, 2009) (Docket No. 378).
12. Id. See also In re Bigler, 443 B.R. 101, 110 (Bankr. S.D. Tex. 2010) (determining that where “an auction is conducted in a manner that is beyond reproach and the bidding procedures are both simple and clear, the integrity of the judicial system should take precedence over ensuring more dollars to the estate by allowing a late bid that is a higher offer”).
13. See Motion of the Official Committee of Unsecured Creditors to Reopen the Auction Relating to the Sale of Substantially All of the Debtors’ Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests (the Auction Motion) ¶3, In re Allied Sys. Holdings, No. 12-11564 (CSS) (Bankr. D. Del. Sept. 6, 2013) (Docket No. 1769).
14. Id. ¶¶3,7.
15. Id. ¶4.
16. Id. ¶5. The debtors also filed revised sale documentation with the Bankruptcy Court the day after the objections were filed.
17. See Objection of the Official Committee of Unsecured Creditors to the Entry of an Order (i) Approving Asset Purchase Agreement and Authorizing the Sale of Certain Assets of Debtors Outside the Ordinary Course of Business; (ii) Authorizing the sale of Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests; (iii) Authorizing the Assumption, Sale, and Assignment of Certain Executory Contracts and Unexpired Leases; and (iv) Granting Related Relief ¶¶2-11, In re Allied Sys. Holdings, No. 12-11564 (CSS) (Bankr. D. Del. Sept. 4, 2013) (Docket No. 1731).
18. See generally Auction Motion. The Creditors’ Committee relied on the Fin. News Network and Paloian decisions, among others, to support the assertion that reopening the auction is appropriate, especially where there were defects in the auction process. See id. ¶13.
19. Id. ¶¶6-7.
20. Id. ¶¶10-11.
21. Debtors’ Response and Joinder to Motion of the Official Committee of Unsecured Creditors to Reopen the Auction Relating to the Sale of Substantially All of the Debtors’ Assets Free and Clear of All Liens, Claims and Encumbrances ¶4, In re Allied Sys. Holdings, No. 12-11564 (CSS) (Bankr. D. Del. Sept. 8, 2013) (Docket No. 1772). The debtors did, however, disagree with the Creditors’ Committee’s characterization of the auction process and the manner in which the New Allied bid was selected as the highest and best offer. Id. ¶¶1-4
22. Transcript of Record at 25, 36, In re Allied Sys. Holdings, No. 12-11564 (CSS) (Bankr. D. Del. Sept. 9, 2013).
23. Id. at 26.
24. Id. at 26-27.
25. Id. at 27.
26. See generally Order (A) Approving Asset Purchase Agreement and Authorizing the Sale of Assets of the Debtors Outside the Ordinary Course of Business (B) Authorizing the Sale of Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, (C) Authorizing the Assumption and Sale and Assignment of Certain Executory Contracts and Unexpired Leases, and (D) Granting Related Relief, In re Allied Sys. Holdings, No. 12-11564 (CSS) (Bankr. D. Del. Sept. 17, 2013) (Docket No. 1837).