Bankruptcy Sales: Highest Is Not Always Best

In re 160 Royal Palm, LLC, 600 B.R. 119 (S.D. Fla. 2019) –

A bankruptcy court granted the debtor’s motion to withdraw a public auction sale procedure that it had already approved and to instead to approve a private sale of the debtor’s property. A former owner that would no longer be allowed to bid appealed to the district court.

The debtor’s sole asset was a partially constructed hotel/condominium project with a “tortured history” that was “dormant and neglected.” Immediately after filing bankruptcy the debtor retained Cushman and Wakefield to begin marketing the property. Two months later it obtained court approval to sell the property through a public auction with an opening stalking horse bid of $32 million.

Although the sale was scheduled for a fast track, the process was interrupted by litigation involving a creditor (KKPB) that was owned by a local developer and former owner of the hotel. Among other things, the debtor sought to limit KKPB’s ability to credit bid in the auction and KKPB sought to estimate its claim.

In the meantime, the debtor settled a town’s $4 million secured claim for $250,000 subject to certain conditions and deadlines, which created an additional sense of urgency. Following continued delays the debtor negotiated a proposed settlement and sale of the property to KKPB. However, the deal fell through when KKPB failed to tender a required deposit.

The debtor then requested court approval of a new buyer. The offer was for $39.6 million and was conditioned on withdrawing the public auction and proceeding with a private sale subject only to an overbid by the stalking horse bidder. The court approved the sale over the objection of KKPB, which claimed that in a public auction it would bid at least $1 million more than the new offer.

KKPB appealed the sale order and related orders to the district court, claiming the bankruptcy court abused its discretion in allowing the debtor to withdraw the public auction procedures, permitting the private sale, and approving the sale to the new buyer. The debtor contended that KKPB did not have standing and that it failed to establish that the bankruptcy court abused its discretion. The district court chose to address the appeal on its merits and did not reach the issue of standing.

The court identified the general standard for approving a debtor’s proposed use or sale of property as whether “the debtor has used reasonable business judgment and articulated a business justification for such use.” Management of the bidding and sale process was “ultimately a matter of discretion that depends upon the dynamics of the particular situation.” In noting that a debtor may exercise its judgment to accept a lower monetary bid, the court quoted with approval:

A debtor’s business decision should be approved by the court unless it is shown to be so manifestly unreasonable that it could not be based upon sound business judgment, but only on bad faith, or whim or caprice.

Against this background, the court addressed KKPB’s challenge to the change in sale procedures, concluding that the debtor was within its discretion in determining that the public auction was no longer in the best interests of its creditors. The court noted a continuing theme of trying to sell the hotel as quickly as possible and selecting “a bird in hand” that was appropriate in the context.

KKPB also objected to eliminating other potential bidders, including itself. However, the new deal – which offered finality, certainty, and a significant increase in price above the stalking horse bid – was conditioned on the private sale. The district court agreed with other decisions that “the sale of a debtor’s assets should not be narrowed by technical rules mindlessly followed,” and “first and foremost is the notion that a bankruptcy judge must not be shackled with unnecessarily rigid rules when exercising undoubtedly broad administrative power granted him under the [Bankruptcy] Code.”

As for approval of the sale itself, after concluding that the decision to sell satisfies the business judgment test, a court must “determine whether (i) the debtor has provided all interested parties with adequate and reasonable notice, (ii) the sale price is fair and reasonable, and (iii) the purchaser is proceeding in good faith.”

In analyzing the bankruptcy court’s decision, a critical issue was whether it was appropriate to choose the private sale offer instead of KKPB’s nominally higher offer. The district court emphasized that the obligation to maximize return requires choosing the “highest and best” bid, which is not necessarily the highest monetary bid.

KKPB alleged that its offer was rejected out of personal animus towards its owner. However, testimony of the debtor’s manager, which the bankruptcy court found entirely credible, was that the potential for an additional $1 million was not worth the risk of increased costs to the estate. The manager pointed to their specific experience in this case to support the view that the potential increase in price was far outweighed by the risk of additional litigation. This was in contrast to the strength of the buyer’s offer, which offered finality, stability, and expeditious resolution. The district court was sympathetic to this assessment.

Accordingly, the district court affirmed the bankruptcy court orders.

A public auction is typically viewed as an essential means for testing whether the bankruptcy estate is receiving the best price. So, a debtor is usually going to be reluctant to agree to a private sale of a major asset. It is also hard to back a proposal when it looks like money is being left on the table. However, as this case illustrates, if the debtor can come up with a good story why a deal is in the best interest of creditors, it may be able to persuade the court to approve.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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