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After a heated bidding war and difficult asset purchase, a bankruptcy lawyer might assume he can relax. After all, his client now is the new owner of a bankrupt competitor’s local division. However, one telephone call can unravel the sale. If the losing bidder submits a new bid for more than the winning bid, the judge may set aside the auction and announce a new one, with the prior winning bid serving as the new starting bid. An impossible scenario? Not in bankruptcy court. A court may set aside its own order if a significantly higher bidder surfaces. For example, in 2004′s Corporate Assets Inc. v. Paloian, the 7th U.S. Circuit Court of Appeals upheld the bankruptcy court’s decision to hold a second auction after the second-place bidder increased its offer to exceed the winning bid by 10 percent. In that case, the bankruptcy court had not confirmed the results of the initial auction, nor had it entered an order confirming the sale when it decided to modify its sales procedure order and allow a second auction. To understand how this can happen, lawyers must understand the rules governing different kinds of asset sales. Section 363 of the U.S. Bankruptcy Code and Bankruptcy Rule 6004 govern sales of assets out of a bankruptcy estate accomplished by motion (versus through a plan of reorganization). Rule 9014 makes sale motions contested matters as opposed to adversary proceedings. Rule 2002(a)(2) requires 20 days’ notice to creditors of the motion, unless the sale involves substantially all the debtor’s assets. In that case, Rule 2002(d)(3) requires notice to all equity security holders. Under Rule 6004(b), those unhappy with the proposed sale must file an objection to the motion to approve the sale at least five days before the hearing. The only practical objection to a proposed sale, assuming the debtor gave proper notice, is that it does not bring enough value to the estate. In that case, the court or party conducting the sale usually will ask if the objector will outbid the existing offer. Here’s a timeline for a sale process: 1) the movant files a sale procedures motion, which the bankruptcy court approves in an order setting out, among other items, due-diligence process, the bidding terms and time of auction, if any; 2) an auction is held, either before a hearing to approve the sale or the same day; 3) the court holds a hearing to approve the results of the auction; 4) the judge signs the order approving the auction results; 5) the judge issues the order approving the sale; 6) the clerk enters the order on the docket; and 7) the sale order becomes final 10 days later — assuming the court does not stay the order and/or a nonwinning bidder does not file an appeal. This process can be confusing for several reasons. For example, the movant is not required to prepare and to file a sales procedure motion. A “hallway auction” can occur with no pre-approved rules on the day of the hearing to approve a sale. Likewise, all of these time-line events may be delayed. The advent of electronic court filing has altered this procedural landscape. Local rules and practices may alter the sales procedure. When deciding whether to reopen bidding, the courts must consider the benefit to the estate versus the expectation of finality in a judicial sale. The timing of when a court is presented with these issues is important. After entry of an order confirming a sale, the expectation of finality in judicial sales is the prevailing interest. Courts will reopen bidding only when compelling equities warrant it. Examples of compelling equities include: major changes in the terms of the sale following entry of the order, such as what happened in Golfland Entertainment Centers Inc. v. Peak Investment Inc., a 1997 decision from the 10th U.S. Circuit Court of Appeals; lack of notice of the sale, as found in Cedar Island Builders Inc. v. South County Sand & Gravel Co., a 1993 U.S. District Court for the District of Rhode Island case, and Mason v. Ashback, a 1967 10th Circuit opinion; and uncertainty in the winning bidder’s financial position, such as what happened in In Re: WPRV-TV Inc., a 1993 decision from the 1st U.S. Circuit Court of Appeals. After an auction but before entry of an order confirming a sale, a court has even greater discretion to reopen the bidding to maximize the value to the estate. For example, the 8th U.S. Circuit Court of Appeals held in 2002′s Brink v. Payless Cashways Inc. that the interest in benefit to the estate outweighed the buyer’s interest in the finality of the sale before sale confirmation. However, the news isn’t all bad for buyers and their lawyers. Courts have upheld the auction results or sale even in the presence of a new and higher bid, particularly when the final sale price is not grossly inadequate, there is not evidence of fraud or mistake, or when the plaintiff’s motion to vacate the order wasn’t filed within a reasonable time. PRACTICAL POINTS What is a lawyer for a buyer to do? An attorney successfully wins the auction on behalf of the client, clears the judge’s questions, overcomes any objections to the client’s ability to perform in the future on assumed contracts, but still must worry that the losing bidder simply will wait and significantly increase its bid after the court rules. The best way to thwart that possibility is to “scramble the egg” as soon as possible. A scrambled egg cannot be returned to its shell, and the 5th U.S. Circuit Court of Appeals has issued several decisions on mootness — 1994′s Manges v. Seattle First National Bank and 1999′s Christopher Village L.P. v. Retsinas — which reveal that, like the scrambled egg, a sale that already has been made will not be set aside. Here’s how to protect the sale. First, have an order approving the sale ready to submit to the court, knowing changes may occur at the sale hearing. Debtor’s counsel may use a form order applicable to any winning bidder. Some courts also will allow litigants to submit a paper order even if the court is on electronic filing. This alternate method of submission alone may speed the process. Next, ask the court to enter the order approving the sale right away to avoid a delay between the time the bankruptcy judge rules and when he actually signs the order. Time also can pass before the clerk enters the order on the docket (which starts the 10-day appellate clock running). An attorney for a winning bidder also should include a provision in the order approving the sale that affirmatively finds the buyer acted in good faith. This will invoke the protections of 363(m). The order also should provide that the court will waive the 10-day period for the order to become final and that the buyer may immediately fund some or all the purchase price. If allowed, the buyer should be able to perform by paying at least part of the purchase price, thereby scrambling the egg to prevent the court from overturning the sale order. Michael McBride is a partner in and Ray Ivey is an associate with the Fort Worth, Texas, office of the bankruptcy boutique firm of J. Michael McBride, which is playing an active role in bankruptcy cases in 20 states. McBride has spoken on bankruptcy subjects nationwide and has authored and co-authored many articles and books. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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