After a bankruptcy auction to sell a peanut manufacturing plant concluded, but before a court hearing to approve the sale, a chapter 7 trustee received a substantially higher bid from a party that had not participated in the auction. Under the circumstances, the court declined to approve a sale to the highest bidder at the auction.
The chapter 7 trustee had entered into a purchase agreement with a stalking horse purchaser (Ready Roast) and obtained court approval for typical sale procedures that included holding an auction if there were other qualified bidders interested in purchasing the property. A competing qualified bid was submitted by a potential purchaser (Hampton), so an auction was held.
The bidding opened at $17,475,000. After a total of 14 bids, Hampton was the highest bidder at $20,050,000, with Ready Roast as the backup bidder at $20 million. They each amended their purchase agreements to reflect the increased price, and the trustee sought court approval of the sale to Hampton at a hearing scheduled for the following afternoon.
However, the morning after the auction a company that had not participated in the auction (Golden Boy) attempted to contact the trustee and left a voicemail message that it was submitting a bid for almost $5 million more than the winning auction bid. Finding himself torn between his obligation to follow the sale procedures and a desire to maximize proceeds available for distribution to creditors, the trustee sought court guidance.
The court acknowledged that it did not have the power to choose the winning bidder. However, it did have the power to disapprove a purchaser based on best interests of the estate. The decision required weighing the competing interests of (1) the integrity and finality of the judicial auction process against (2) the best interests of creditors.
On the first point, the court noted that the bidding procedures made it clear that any sale would be contingent on court approval. It commented that there could be no sale contract without court approval, so that in reality the purchase agreement was just a binding bid.
On the second point, the court noted that the $20 million auction bid would probably be sufficient only to cover secured claims, administrative expenses, and priority claims – leaving little if anything for other unsecured creditors. So, a $5 million increase in the price would provide a significant benefit to unsecured creditors.
The court’s decision was also influenced by its conviction that Golden Boy was not “lying in the weeds” in order to obtain a tactical advantage. Although Golden Boy was aware of the sale process and had expressed interest, its owners were in the process of selling Golden Boy and did not approve submitting a bid. The sale of Golden Boy closed about a month prior to the bankruptcy auction.
At some point an e-mail regarding the auction was sent to the former CEO of Golden Boy, but the person at Golden Boy who championed submitting a bid erroneously believed that Ready Roast had already completed the acquisition (as opposed to just signing a purchase to be a stalking horse). However, two days before the auction he learned that this was incorrect, and sought corporate approval to submit a bid on an expedited basis.
The approval did not come in time to allow participation in the auction, but did allow Golden Boy to communicate its bid to the trustee before the auction results were approved by the court. To demonstrate its commitment, Golden Boy wired a $25 million non-refundable deposit to a local title company and flew people in from Canada to present its case to the bankruptcy court.
While it is clear that the court was comforted by the fact that it could point to the requirement for court approval as a condition of sale in the bidding procedures and by its conviction that Golden Boy acted in good faith, it is also clear that the determining factor was the significant increase in proceeds for the bankruptcy estate.
In reviewing case law, the court pointed to a case finding that a bankruptcy court abused its discretion in approving an outside bid that was only “slightly higher” than the offer received in the auction and contrasted it to cases upholding decisions approving bids that were 21%, 31% and 16% higher than the winning auction bids.
In this case, the late upset bid was almost 25% higher and meant the difference between a negligible and a more substantial distribution to unsecured creditors (which the court noted would have the greatest impact on local farmers and small business owners). Consequently, the court concluded it could not find that the sale to Hampton was in the best interest of the estate, and denied the trustee’s motion to approve the sale to Hampton. Instead the court reopened bidding with Golden Boy’s $25 million bid as the opening bid.
At the reopened auction Golden Boy was the highest bidder at $26 million, exceeding Hampton’s bid at $25.1 million. In ruling on Hampton’s motion for various relief, including stay of the order approving the sale to Golden Boy, the court concluded that “at a minimum, it is more likely than not the decision will be upheld on appeal” based in large part on questions about whether Hampton had standing.
While acknowledging the injury to Hampton if the sale proceeded without a stay, the court was more persuaded by (1) the injury to others resulting from the delay (including a decline in value due to the fact that part of the assets being sold consisted of perishable peanuts) and (2) the strong public interest in paying creditors as much as possible. So on balance, the stay request was denied.
Typically the successful bidder at a bankruptcy auction will not be vulnerable to outside upset bids. However, that may not be the case if the stakes are high enough.
Vicki R. Harding, Esq.