Two concepts are at the core of sales pursuant to §363 of the Bankruptcy Code. First, a sale process should be designed and should operate to select and facilitate the highest and best offer. Second, the determination of which offer is the highest and best is not determined by price alone, but is also influenced by factors such as the certainty of closing. In the recent case of A123 Systems, there was strong evidence that the highest price bid was part of an offer that, although not certain to close, was structured to protect the Chapter 11 debtors’ estate from risk of loss if the purchaser failed to close. Accordingly, without closer examination, one might assume that the bankruptcy sale process had met the goals set out under §363, and further inquiry should end.
Yet Bankruptcy Judge Kevin Carey was confronted with allegations, which, if proven, suggested that the extraordinary efforts of the parties to achieve a price almost double the originally selected bid would also enable the disgruntled, losing bidder to take advantage of the sale structure, claim its break-up fee, and still gain the assets at a lesser price. Not surprisingly, the stalking-horse bidder argued that it had served its role of stimulating a higher bid and thus benefitted the estate, eliminating any further questions regarding its entitlement to the break-up fee. After all, the deal structure protected the Chapter 11 debtors from loss, arguably ending the authority of the bankruptcy court. Yet, Carey directed the break-up fee to be held pending further order. 1
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