By: Donald L Swanson
What happens when a bankruptcy sale is nearly complete . . . and someone presents a substantially-higher bid?
- Must the lower-price deal proceed to completion?
- Or can the higher bid be considered?
The answer is this: maximizing value is the greater good, so the higher bid will be considered.
- That’s according to In re Parkcliffe Development, LLC, Case No. 24-30814 in the Northern Ohio Bankruptcy Court (decided January 28, 2025, Doc. 90).
In re Parkcliffe Facts
The In re Parkcliffe Debtor employs a Court-approved realtor/broker for a bankruptcy sale.
Debtor also enters into a $2.2 million stalking horse bid, complete with bidding procedures, and obtains Bankruptcy Court approval thereof.
Overbids were received beyond the stalking horse amount—but each overbid has one or more defects under the approved bidding procedures. Such defects include:
- absence of a required deposit;
- failure to honor confidentiality requirements;
- inclusion of non-compliant terms, such as inspection rights;
- a typo saying the offer will terminate on a date that precedes the date of the offer; and
- the offeror’s lack of authority to do business in the State of Ohio.
So, the stalking horse bidder files a Motion, once the offer deadline expires, for an order declaring, (i) the sale process is terminated, (ii) the non-compliant bids are rejected, and (iii) the staking horse bid is approved as the successful bid.
The Bankruptcy Court denies such Motion and declares: “the auction sale shall be reset as expeditiously as possible.”
What follows is a summary of the Court’s rationale.
Case Law
Case law strongly supports the auction moving forward.
–First Circuit Court of Appeals
The stalking horse bidder cites this proposition from In re GilBern Ind., Inc., 526 F.2d 627, 629 (1st Cir. 1975):
- “it is an abuse of discretion for a bankruptcy court to refuse to confirm an adequate bid received in a properly and fairly conducted sale merely because a slightly higher offer has been received after the bidding is closed.”
However, the same opinion adds that these competing policies must be weighed: (i) obtaining the highest price, and (ii) creating confidence in bankruptcy sale processes.
Moreover, in two subsequent decisions, the First Circuit Court of Appeals:
- says that, while it won’t upset sale procedures lightly, “the bankruptcy court must be accorded sufficient discretion to decide the truly close cases as best it can in view of these competing considerations”; and
- upholds a bankruptcy court’s order that rejects a highest auction bid, reopens bidding, and accepts the highest subsequent bid.
–Other Courts
Similar views on discretionary flexibility, from other courts, include:
- a bankruptcy court has considerable discretion in approving assets sales and is granted ample latitude to strike a balance between fairness, finality, integrity, and maximization of assets (see, e.g., In re Farmland Ind., Inc., 289 B.R. 122, 126 (8th Cir. BAP 2003));
- competing factors to consider include,
- meeting a bidders’ reasonable expectations (to encourage confidence in the process) and creating finality (to encourage bidders to sincerely extend their best and highest offers); and
- supporting the interests of unsecured creditors and the goal of maximizing the value of the bankruptcy estate;
- so, a bankruptcy court has broad discretion to conduct sales in the manner it deems most appropriate.
One of the leading cases is In re Financial News Network Inc., 980 F.2d 165 (2nd Cir. 1992), which affirms a bankruptcy court’s reopening of an auction for a higher bid. It provides this explanation:
- reopening the bidding is the best way to balance the competing considerations of (i) finality in the bidding process and fairness to bidders, and (ii) the interests of creditors in securing the highest sales price; and
- the bankruptcy court’s discretion must be sufficiently broad to encompass the competing considerations “as best it can.”
Another opinion counsels against a rigid adherence to sale procedures that might elevate those procedures over the principal responsibility of securing for creditors the best possible bid. Such opinion declares:
- “To hold otherwise would seriously compromise the necessarily broad discretion of the bankruptcy court”;
- “If this Court were to believe, for half a second, that the Debtors spurned a better offer to the detriment of their fiduciary duties, this Court would not hesitate to invoke its powers”; and
- “Once another bidder entered the fray with a potentially higher and better offer, the Debtors had to consider the offer; failure to do so would have been a breach of their duties to the estate and its creditors.”
Maximizing Value
Many courts recognize that debtors, in conducting sale processes, have a fiduciary duty to maximize the value of their estates. They say, for example:
- when a debtor desires to sell an asset, its main responsibility, and the primary concern of the bankruptcy court, is the maximization of the value of the asset sold;
- regardless of a debtor’s discretion, debtors, in conducting the sale process, have a fiduciary duty to maximize the value of their estates; and
- when a debtor desires to sell an asset, its main responsibility and the primary concern of the bankruptcy court, is the maximization of the value of the asset sold.
Further, courts assert their authority to ensure that a sale achieves the highest and best price in cases like these:
- bidding is reopened to consider a late bid that is 20% higher than any other bid;
- a late bid 31% higher than the highest timely bid is considered;
- a late bid 16% higher than the winning bid at auction is approved; and
- a timely higher bid is approved, even though it did not conform to bidding procedure requirements—the court did not consider the deficiencies to be equivalent to a failure to submit a bid at all.
A Deadline?
Another court identifies “the entry of a sale order” as the time where a bankruptcy court:
- loses much of its discretion in confirming the results of an auction; and
- “must be able to identify a compelling reason in order to recognize a late bid.”
Late Bids are Common
Late bids are common in bankruptcy sales.
So, the question is whether it is better to handle late bids:
- with harshness—to discourage late bids; or
- with flexibility—to accommodate the messy realities of the bankruptcy marketplace.
And the answer to the question is the latter: with flexibility.
In re Parkcliffe Summary
In the In re Parkcliffe case, the Bankruptcy Court finds that the effect of the stalking horse order was to merely approve a sale process—it did not approve the sale itself:
- although the sale did happen, there is no court approval of the actual sale; and
- since approval of the sale is still required, the higher bids will be considered.
Conclusion
The In re Parkcliffe decision and its rationale make sense: namely, subordinating the technicalities of a sale process to the greater goal of maximizing value.
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