Shop Rights – Court Imposes Notice and Due Process Rights for Even the Smallest of Transactions

Contributed by Conray C. Tseng
In his recent decision in In re Borders Group, Inc., Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York sua sponte modified certain de minimis asset sale procedures on the basis that certain aspects of the procedures violated creditor’s due process rights. 
The Borders debtors proposed to implement asset sale procedures to streamline the process under section 363(f) of the Bankruptcy Code for selling assets free and clear of any liens or encumbrances where the aggregate purchase price is less than $1 million by having such sales “pre-approved” by the bankruptcy court so long as the debtors followed the procedures.  Such de minimis asset sale procedures are not unusual in large chapter 11 cases.  The Borders debtors sought authority to sell any item for less than $300,000 free and clear of any liens or encumbrances without further order of the court or notice to any party other than the debtors’ postpetition lenders.  The debtors also proposed that any transactions between $300,000 and $1 million would be authorized without further order of the court after five days’ notice to all parties with a potential interest in the asset to be sold assuming no objections from any party during that window.  The bankruptcy court order authorizing these de minimis asset sale procedures would contain a finding that any purchaser in a qualifying de minimis asset sale purchased the assets in good faith, and, in turn, such sale is entitled to the protections of section 363(m) of the Bankruptcy Code.
Judge Glenn nixed the proposed procedures for transactions under $300,000 because of the lack of adequate notice.  Judge Glenn took issue with the fact that no other party other than the postpetition lenders – including the unsecured creditors’ committee and any known lienholders – would receive notice.  To sell the assets free and clear of liens, Judge Glenn mandated that the debtors would need to provide broader notice to all appropriate parties in interest.
Judge Glenn also put the kibosh on any forward looking findings of good faith to obtain the protections of section 363(m) of the Bankruptcy Code.  Judge Glenn reasoned it is impossible to determine if a purchaser acted in good faith before any transaction has occurred or any purchaser has been identified.  Recognizing the importance of such protections to facilitate sales, Judge Glenn offered a solution in that the debtors could file a declaration or present other evidence of good faith before or immediately after any particular sale closes and obtain the necessary good faith finding.
On a side note, in their pleadings, the debtors noted that they intended to hire professionals to liquidate their de minimis assets without the filing of any retention applications.  Judge Glenn held that the relatively small value of the propose asset sales did not excuse the debtors from compliance with sections 327 and 328 of the Bankruptcy Code (which govern the retention and payment of non-ordinary course professionals) and mandated the debtors to complete the appropriate filings.