Many potential buyers of assets out of bankruptcy assume that making a deposit gives them an option to walk away from the deal and lose nothing more than the amount they put down. In a recent case in the Southern District of New York, that assumption proved to be unwarranted — and costly to the reneging buyer, who ended up liable for damages equal to the difference between the price it had agreed to pay and the assets’ value as of the time of the purchaser’s breach.
In Berlin & Denmar Distributors Inc. v. Goldstein Development Corp. (In re Berlin & Denmar Distributors Inc.), Adv. No. 13-01315, 2014 WL 2178027 (Bankr. S.D.N.Y. May 23, 2014), Judge Stuart Bernstein held that under New York law, unless the debtor had expressly agreed to accept the deposit as liquidated damages and as its exclusive remedy, the debtor may recover damages in excess of the deposit. The bankruptcy court also held that the appropriate measure of those damages is the difference between the amount of the successful bid at the auction and the value of the assets at the time of the purchaser’s breach (which might not be equal to the difference between the amount of the successful bid and the price for which the assets are eventually sold).
Facts
Debtor Berlin & Denmar Distributors Inc. (the debtor), which had operated a food distribution business, entered into an agreement to sell certain assets to a stalking-horse bidder subject to an auction process. The court-approved “conditions of sale” governing the auction provided that (a) any qualified competing bidder must pay a $50,000 deposit and (b) the deposit paid by the bidder that prevails in the auction would be deemed nonrefundable and “shall be forfeited to the Debtor if such Purchaser fails to close for any reason whatsoever.”
Goldstein Development Corp. prevailed in the auction with a bid of $940,000. However, the debtor and Goldstein never executed an asset-purchase agreement. Shortly after the auction, the debtor’s counsel advised Goldstein’s counsel of certain requirements that a third party intended to impose on the purchaser of the debtor’s assets. Goldstein subsequently repudiated its bid, and the debtor retained Goldstein’s deposit. Ultimately, the debtor sold the assets to another buyer for $315,000 less than Goldstein’s bid.
The debtor commenced an adversary proceeding against Goldstein, seeking damages that included the $315,000 difference between Goldstein’s bid and the price at which the debtor later sold the assets.
The Bankruptcy Court’s Ruling
In an earlier proceeding, the bankruptcy court ruled that Goldstein had repudiated its bid and that the debtor was at least entitled to Goldstein’s initial $50,000 deposit. Thus, the issue for the bankruptcy court in the current adversary proceeding was whether the conditions of sale (which governed the parties’ rights because of the absence of a signed purchase agreement) permitted the debtor to recover damages in excess of Goldstein’s deposit. Ruling on the debtor’s motion for summary judgment, the bankruptcy court concluded that the debtor was permitted to do so in this case, because the conditions of sale did not expressly limit the debtor’s remedy to the retention of Goldstein’s deposit. Under New York law, courts will not imply a limitation on the seller’s damages to the buyer’s deposit in the absence of an express agreement by the seller to such a limitation.
On this issue, the bankruptcy court followed Food Management Group LLC v. Matrix Realty Group Inc. (In re Food Management Group, Inc.), Adv. No. 05-08636, 2007 WL 4352225 (Bankr. S.D.N.Y. Dec. 10, 2007), which held that the damages to which the debtor was entitled were not limited to the bidder’s deposit where the asset-purchase agreement (a) did not contain an express limitation on damages and (b) incorporated the terms of the court-approved bidding procedures, which had stated that the debtor’s damages were not limited to the deposit.
The bankruptcy court also held that the amount of the damages to which the debtor was entitled was the difference between the amount of Goldstein’s bid and the market value of the assets at the time Goldstein repudiated its bid (rather than the price at which the debtor later sold the assets). Those two amounts may be different because the assets’ value could have fluctuated between the time Goldstein repudiated its bid and the time the assets were finally sold. Because the debtor did not provide sufficient evidence of the assets’ value as of the time of Goldstein’s repudiation in its summary judgment motion, the bankruptcy court determined that further proceedings were necessary to establish the amount of the debtor’s damages.
Key Takeaways
This case presents a cautionary tale to bidders in asset sales. First, it illustrates one of the pitfalls of trying to consummate a transaction without a signed purchase agreement. The conditions of sale that ultimately determined Goldstein’s liability were presumably prepared without Goldstein’s input. Second, if a debtor and a bidder agree that damages would be limited to the bidder’s deposit, the purchase agreement should expressly so state.[1] Otherwise, courts will not likely imply such a limitation, and the bidder may find itself on the hook for more than just its deposit.
Debtors should be aware that in order to establish the amount of their damages in the event of a bidder’s breach, they should be prepared to provide evidence of the assets’ value at the time of the breach. The price that the debtor receives in a subsequent sale of the assets could be relevant (particularly if the time elapsed since the breach is not too great and the market conditions are similar), but that subsequent sale price likely will not be sufficient evidence standing alone.
[1] For example, in Wetmore v. Mose-Ark Enters. Inc. (In re Klemen), 22 B.R. 757 (Bankr. N.D. Ill. 1982), the contract provided that the deposit “shall become liquidated damages” if the buyer were to breach. Although the contract had also provided that the seller/trustee was not precluded from “asserting other legal rights which they may have because of [the buyer’s] breach,” the bankruptcy court held that the damages to which the seller/trustee was entitled was limited to the deposit. In so holding, the bankruptcy court stated that the phrase “other legal rights” logically referred to rights other than damages.