As we have noted in number of previous posts, auctions under section 363(b) of the Bankruptcy Code end with the bankruptcy judge’s gavel, not the auctioneer’s. To the dismay of many readers, the delay between concluding an auction and obtaining court approval allows for the possibility of post-auction bids, which may force the debtor/trustee to choose between accepting a higher and/or better offer and preserving the integrity of its auction process. In a recent decision, the United States Bankruptcy Court for the District of New Mexico allowed a higher post-auction bid and re-opened the auction, reasoning that the winning bid at auction could not be approved because the court could not make a finding that a sale pursuant to that bid was in the best interests of the estate.
Prior to commencing a voluntary case under chapter 7 of the Bankruptcy Code, Sunland, Inc. was a leading producer of organic peanut butter, operating a processing plant in Portales, New Mexico. In the months after the bankruptcy filing, the trustee marketed Sunland’s assets and ultimately filed a bid procedures/sale motion that proposed to sell the assets to Ready Roast Nut Company, LLC or, if a competing bid was received, the successful bidder at an auction. Hampton Farms, LLC submitted a competing bid and, shortly thereafter, the bankruptcy court entered an order that authorized the sale of Sunland’s assets and adopted the bidding procedures proposed in the trustee’s motion.
Roughly two weeks after Hampton Farms submitted its competing bid, the trustee conducted an auction at which Hampton Farms and Ready Roast were the only participants. At the conclusion of the auction, Hampton Farms was the winning bidder with an offer of $20,050,000; Ready Roast was designated as the back-up bidder with an offer of $20,000,000.
The following day, the bankruptcy court held a hearing on whether to approve the sale to Hampton Farms. Shortly before that hearing, a representative of Golden Boy Foods, Ltd. called the trustee and offered $25,000,000 for Sunland’s assets. The bankruptcy court heard the arguments of counsel at the scheduled hearing, but ultimately continued the hearing to a date three days later.
At the continued sale hearing, representatives of Golden Boy testified that their interest in the Sunland assets arose shortly after the bankruptcy filing, and that they had visited the processing plant to conduct due diligence when the trustee was marketing the assets. At that time, however, Golden Boy’s parent corporation was in the process of selling its subsidiary and did not wish to pursue the Sunland assets. Four days after Golden Boy had been acquired by its new owner, the trustee provided notice of the Sunland asset sale to the president and CEO of Golden Boy’s new owner (who had been the president and CEO of Golden Boy prior to its acquisition). The notice stated that parties had approximately one month to bid on the Sunland assets. “[T]hings were rather chaotic at Golden Boy” following its acquisition and the notice was overlooked. Additionally, the Golden Boy representative incorrectly believed that the Sunland assets had already been sold. By the time the representative learned that the assets were still for sale and obtained authority to bid on them, the auction was over, therefore, Golden Boy submitted its bid just before the sale hearing.
The bankruptcy court noted the lack of Tenth Circuit precedent on the issue of whether, and under what circumstances, a bankruptcy court may disapprove a section 363 sale pursuant to a properly conducted auction and re-open bidding because of a late upset bid. Accordingly, the bankruptcy court looked to the analysis used by other circuits, observing that courts generally weigh the competing considerations of the best interests of creditors and the integrity of the auction process. Citing a Tenth Circuit decision, the bankruptcy court reiterated the process integrity concern that “[r]efusing to confirm a sale to a high bidder merely because an intervening higher bid has been received is the surest way to destroy confidence in judicial sales.” The bankruptcy court, however, believed it could address this concern by acting consistently with the bidding procedures and complying with the reasonable expectation of bidders.
To that end, the bankruptcy court found that the language in the bidding procedures and the bidding procedures order placed Hampton Farms on reasonable notice that the court could reject the auction results. The bankruptcy court also found that the bidding procedures and the bidding procedures order required the bankruptcy court to determine whether “consummation of the sale contemplated by the successful bid will provide the highest or otherwise best value for the [Sunland assets] and is in the best interests of the estate.” The bankruptcy court next considered (1) the amount of Golden Boy’s overbid (approximately 25%), (2) the effect such bid would have on creditors (most of the overbid proceeds would be distributed to unsecured creditors), (3) Golden Boy’s good faith in making its bid, and (4) the lack of a previous order approving the sale to Hampton Farms, and determined that it could not make a finding that the sale to Hampton Farms was in the best interests of the estate. Accordingly, the bankruptcy court denied the sale to the winning bidder and re-opened the auction, starting with Golden Boy’s $25,000,000 bid.
The Sunland opinion is relevant to would-be purchasers insofar as the bankruptcy court’s reasoning relies on a premise that would permit almost any winning bid to be trumped by a higher post-auction bid.
Specifically, the bankruptcy court’s opinion was based on the premise that a sale to the winning bidder at a properly conducted auction could not be in the best interests of the estate because the court was aware of a materially higher good-faith bid. Although a court must find that a sale is in the best interests of the estate (generally as a component of the seller’s sound business judgment) to approve the sale under section 363, that is not the standard by which a court typically evaluates the appropriateness of a late bid. Under a best interests standard, arguably any higher post-auction bid could be allowed because it would increase the value realized by the estate. The fact that the bidding procedures and bidding procedures order in Sunland required a best interests finding before approval of the sale to the winning bidder does not justify the use of that standard in allowing late bids; the bankruptcy court would have been required to make such a determination regardless of the language in the bidding procedures and bidding procedures order. By conflating the two standards, the bankruptcy court may have established a precedent for the use of a more permissive standard to evaluate late upset bids. That precedent is troubling as it could lead to courts “[r]efusing to confirm a sale to a high bidder merely because an intervening higher bid has been received,” which, as the bankruptcy court acknowledged, “is the surest way to destroy confidence in judicial sales.” Alternatively, the bankruptcy court could have reached the same outcome by finding that the winning bid at auction was grossly inadequate in light of the higher post-auction bid. By applying a more restrictive standard, such a decision would be easier to reconcile with the bankruptcy policy of promoting finality and preserving the integrity of the auction process.
Golden Boy won the re-opened auction with an offer to purchase the Sunland assets for $26,000,000 (topping Hampton Farm’s bid of $25,100,000).
Hampton Farms subsequently filed an emergency motion for (1) reconsideration of the bankruptcy court’s order denying its bid and re-opening the auction, (2) stay pending appeal, (3) leave to file an interlocutory appeal, and (4) “equitable relief” in the form of a $500,000 award from the proceeds of the Golden Boy sale. The bankruptcy court promptly denied the request for reconsideration, denied the request for a stay pending appeal, declined to grant leave to file an interlocutory appeal, as such a request must be directed to the District Court or the Tenth Circuit Bankruptcy Appellate Panel, and declined to grant the requested equitable relief, instructing Hampton Farms to file an application for an administrative expense.