Rejecting Late Bids For The Integrity Of The Process

Picture the typical bankruptcy case. The decision is made to sell the assets, and debtor’s counsel drafts bidding procedures to create a framework to generate the highest and best bid for a particular estate asset. The committee and the secured creditors make comments and the court approves the bidding procedures. Potential purchasers review the bidding procedures and line up to make their bids. Auction day arrives, bidding begins and subsequently ends with the naming of the successful bidder. Next stop: court approval. But wait! A late bid has been received, offering to pay more than the successful bidder. At the hearing, debtor’s counsel informs the court that a losing bidder has now offered more money than the successful bidder. The secured creditor and the committee ask the court to consider the last-minute bid. 

The successful bidder protests, arguing that it relied on the bid procedures order, which did not provide for late bidding. The successful bidder maintains that it has already spent money, arranging to obtain insurance and other necessary documents for the transfer of assets of the estate. Allowing this last-minute bid would amount to the reopening of the auction. 

What should a court do? In the Bigler matter, [1] this very situation arose. Since it is the estate’s duty to maximize the value of its assets, for whose purpose are the bidding procedures and for whose benefit is the ultimate sale of the assets? The purpose of the bidding procedures is to establish a framework to generate the highest and best bid for the sale of assets. Since the goal of bankruptcy is to maximize value to the estate, the creditors are the beneficiaries of the proceeds of the sale. Is it a dereliction of the court’s duty to fail to consider a last-minute bid, even though the bidding procedures were silent on late bids, all parties followed the bidding procedures, and no sweetheart deals are at play? [2] The Biglercourt answered “no,” holding that the integrity of the process must be maintained at all costs, even at the expense of maximizing value to the estate. [3] To do otherwise would be an abuse of discretion. 

Sliding Scale: Is There a Threshold Amount that a Late Bid Must Meet?
In Bigler, the losing bidder offered to pay $500,000 more than the winning bidder. Debtor’s counsel indicated to the court that a $100,000 increase over the winning bid of $20.5 million would not have been sufficient for the debtor to consider a late bid. The court admitted that there was a good likelihood that the $500,000 was just the beginning, and likely there would be even more money brought into the estate. [4] The court commented that if the losing bidder had offered $40 million, it still would not have considered the late bid. [5] The court admitted that the circumstances caused it heartburn, but the late bid ultimately was not considered.

Integrity of the Sale Process vs. Benefit to the Estate
Did the parties in Bigler expect that there could be late bids? Except for the successful bidder, all other parties argued that no sale was final until the court approved such sale. The bidding procedures included language that the “[d]ebtors will be deemed to have accepted a bid only when the bid has been approved by the Bankruptcy Court at the sale hearing.” [6] At that point, all parties’ expectations are crystallized. This is the nature of 363 sales in chapter 11, where anything can happen feels like the Wild West at times. [7] The court noted that the “culture of the Chapter 11…practice has developed into a world where rules are made and then broken, at least bent to a fair degree.” [8] Though the justification for bending the rules is to retrade deals to generate the maximum value for the estate, such actions do a disservice to the integrity of the process. [9] 

Under the facts of this case, which included detailed bidding procedures, the court answered that the successful bidder’s expectations were set the moment it was declared the winner at the end of the auction. [10] The purpose of the sale hearing was to make sure that (1) the bidding procedures were followed, (2) no sweetheart deal was being made at the expense of the bankruptcy estate and (3) the successful bidder had the financial wherewithal to close the sale. [11] The purpose of the sale hearing was not to reopen the bidding and allow a losing bidder to get another opportunity to increase its bid. Would the court’s answer have been different if the executed asset purchase agreement allowed the debtor to accept a higher and better offer prior to close? Though this case had such a provision, the Bigler court was not persuaded.[12] The court explained that this language was intended to allow the Successful Bidder to terminate the asset purchase agreement only if the debtor failed to obtain court approval of the successful bidder’s bid. [13] Because the bid procedures were unambiguous, there was no room to argue that a reasonable person would interpret the bid procedures as allowing for higher bids to be made after the auction in court at the sale hearing. [14]

The Bigler court concluded that “[r]eneging on clearly established and properly conducted procedures in order to generate some additional dollars for the estate undermines the integrity of the judicial process; indeed, it can undermine the integrity and reputations of the individual litigants and lawyers.” [15] Unless the bidding procedures allow for late bids, the losing bidder will not be given a second opportunity at the sale hearing. The court held that the highest priority should be placed on the integrity of the process “when the bid procedures are clear, the bid procedures are not complex, the parties are sophisticated, there is no collusion or fraud and the auction price is not grossly inadequate.” [16] Allowing a higher bid would be an abuse of the court’s discretion. [17] The Bigler court recognized that there are tensions between maximizing value and maintaining the integrity of the process. The court’s solution to lessening or eliminating such tensions was to conduct courtroom auctions. Thiscase takes the stand that the integrity of the process will not be subordinated to achieving maximum value for the estate, even if it means that creditors will receive less.