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LJN NewslettersNewsSectionsThe Bankruptcy Strategist

Bankruptcy Auctions

BY Steven B. Smith
February 25, 2011

Bankruptcy practitioners are all well aware that one of the key fundamental principles underlying any bankruptcy case is the maximization of estate value for the benefit of each of a debtor's creditor constituents. Debtors will often attempt to achieve such value maximization through a sale of its assets. But what happens to the sale process ' usually conducted pursuant to very strict, court approved bidding procedures and protections ' if another bidder rides its white horse into the limelight after the 11th hour expressing its willingness and ability to pay more for the assets? Unless and until this issue is resolved by the United States Supreme Court, the answer may very well depend upon which bankruptcy court is overseeing the sale process in question. This article highlights the tension courts face between recognizing the finality of a sale and reopening a sale process if potentially greater value for the creditors exists, and compares how bankruptcy courts in the Southern District of New York and in Delaware have addressed the issue.

The Auction Process

As noted above, the sale of a debtor's assets in a Chapter 11 case will often occur through an auction process typically governed by court approved bidding procedures. Bidding procedures ' which are designed to attract serious prospective purchasers ' will typically will require such purchasers to, among other things, submit an irrevocable offer at an amount above the stalking horse price, submit a form asset purchase agreement (or at least the terms of such agreement), submit evidence of the purchaser's financial wherewithal, and pay a good-faith deposit. In addition, bidding procedures could also contain certain protections for a “stalking-horse” bidder (if there is one), such as a “break-up” fee. If there is a “stalking-horse” bidder, the debtor and the stalking-horse bidder will usually negotiate the terms of the initial bid, memorialize those terms in a signed asset purchase agreement (APA), and may also negotiate the terms of the overbid process. The debtor will at that point seek court approval of the APA and the overbid process.

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