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Recovery of Damages By Bankruptcy Bidders

By Adam C. Rogoff and Noah Falk
January 26, 2006

The sale of a debtor's assets through a bankruptcy court supervised auction process has become more commonplace and, some theorize, under the amended law, may increase in popularity. Often, the process includes the use of a “stalking horse” agreement establishing a baseline of price and other terms for the sale of the assets. In return, the stalking horse bidder obtains certain bid protections (ie, break-up fees and/or expense reimbursements). At the close of the auction, either the stalking horse bidder either places the highest initial (or competing) bid or is outbid, maintaining a claim for the bid protections.

Although it is not common, circumstances can arise where, after the conclusion of an auction and court approval but prior to completion of the sale, the auction may be reopened due to, among other factors, a newly discovered impropriety casting doubt on the validity of the auction. If a court thereafter invalidates the results of the initial auction, what happens to the original highest bidder, which may have incurred certain expenses in preparing to consummate the previously approved sale? At least one court recently ruled that the estate may be held responsible to the initial “winner” for certain closing costs as administrative expenses.

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