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8th Circuit Affirms Dismissal of Lawsuit Attacking Approved Bankruptcy Sale
Sales of substantially all of a debtor's assets are commonplace in corporate Chapter 11 bankruptcies. In many cases, the proposed sale is the primary reason the case is filed. The sale is supervised and approved by the Bankruptcy Court. Purchasers desire to know that if the sale is consummated, they will be protected from subsequent attacks on the sale and the sale process. If court-approved bankruptcy sales are protected from subsequent attacks, presumably more bidders will participate, resulting in greater returns for the estates and creditors. Issues surrounding the finality of a bankruptcy sale were recently reviewed by the U.S. Court of Appeals for the Eighth Circuit in In re Veg Liquidation, (f/k/a Allens, Inc.), Case No. 18-1786 (July 26, 2019).
The Sale and the Side Deal
The debtor in this case was Allens, Inc., an Arkansas food canning enterprise. Allens filed a Chapter 11 case in October 2013. After obtaining bankruptcy court approval for bidding and sale procedures for sale of substantially all of Allens' assets, the debtor named Seneca Foods Corp. as the stalking horse bidder. A stalking horse bid acts as an opening bid. If additional bids are submitted, an auction is held. If not, the stalking horse bid is submitted to the court for approval. The debtor accepts the highest or otherwise best bid for the assets being sold, usually after consultation with its professional advisers and the creditors' committee, lenders and others.
According to the opinion, the debtor and its advisers valued the Seneca bid at $117 million. Sager Creek Acquisition Corp., an entity formed by a group of Allens' second lienholders, submitted a bid. The final adjusted sale price of the Sager Creek bid was "just under $125 million." The debtor selected Sager Creek as the winning bidder, and the Bankruptcy Court entered an order approving the sale. The order was not appealed and the sale closed.
Within a few months following the sale, the case was converted to a Chapter 7 liquidation case. The Chapter 7 trustee thereafter filed a complaint asserting claims regarding the conduct of the sale against more than 20 defendants, including members of the official creditors' committee, Allens' financial advisers, and entities related to Sager Creek. The complaint alleged that one of the largest creditors (and a creditors' committee member) entered into a secret side agreement with Sager Creek. Under the agreement, if the new entity created by Sager Creek successfully acquired Allens' business in the bankruptcy sale, the creditor would receive a lucrative contract with Sager Creek. The trustee alleged that the financial advisers were aware of the side agreement and manipulated the valuations of the bids so that Sager Creek's bid was deemed the highest bid. The trustee also alleged that as a result, the estate lost up to $32.9 million in real and personal property, and at least $74 million in avoidance claims (including claims against creditors' committee members), that were included in the assets sold to Sager Creek and which Sager Creek agreed not to pursue against the creditors' committee members and others. The complaint alleged the side agreement was never disclosed to the Bankruptcy Court.
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