More U.S. companies filed bankruptcies with liabilities exceeding $1 billion in 2020 than in any year since 2009.[1] Bankruptcy courts are often left with difficult decisions in these complex bankruptcies, including whether to approve the winning bid in an asset sale under § 363. Part of the difficulty is applying the standard for approving a winning bid. Bankruptcy courts have recently questioned whether they are allowed to consider public interests in approving § 363 sales, especially when a lower cash value bid incorporates public interests and a higher cash value bid does not.[2] Although it is not a clear path to openly consider public interests, the “highest or best” standard may provide the groundwork for bankruptcy courts to approve bids that take public interests into account.
Under § 363(b)(1), a debtor in possession[3] may use, sell or lease property of the estate after notice and a hearing.[4] Once a bankruptcy court determines that a sound business justification exists for the proposed sale of estate property,[5] the court must ensure that the debtor has provided all interested parties with adequate and reasonable notice, the sale price is fair and reasonable, and the purchaser will sell in good faith.[6] If there are objections to the proposed sale, the debtor must seek approval of the proposed sale from the bankruptcy court.[7]
In selling assets under § 363 in chapter 11 cases, courts give debtors some deference to accept a bid other than the bid with the highest dollar amount.[8] It is well established that the debtor’s duty in § 363 sales is to obtain the highest price or the greatest overall benefit for the estate.[9] Therefore, the standard for selecting the winning bid in § 363 sales of estate property is the “highest or best” bid.[10] The standard of “highest or best” indicates that “highest” is not the only consideration, or else “highest” would swallow up “best.”[11] While a bidder with the highest bid can typically expect to win, that is not always the case: “The inclusion of ‘best’ in that conjunction is not mere surplusage.”[12] Choosing a bid other than the highest bidder is acceptable when the debtor has a legitimate reason for doing so, such as a valid business decision,[13] distinguishing dissimilar bids[14] or avoiding risk.[15]
Bankruptcy courts generally respect debtors’ valid business decisions to determine the winning bid.[16] Although bankruptcy courts ultimately decide whether business decisions are valid, courts grant debtors flexibility in making initial decisions[17] and have been reluctant to supplant debtors’ views of optimum business decisions.[18] Generally, a court will not overturn a debtor’s business judgment to accept a bid unless the sale fails to maximize value (especially in liquidation cases),[19] incurs undue risk with money of the estate,[20] or is based on bad faith, whim or caprice.[21] Maximizing returns to creditors, though a primary interest, is not a bankruptcy court’s sole interest in approving a bid.[22] Notably, some bankruptcy courts have considered public interests, such as job retention or corporate mission, as factors in what makes a bid better in close cases.[23] Through the ability to accept the best bid instead of mechanically choosing the highest, bankruptcy courts allow debtors some say in how creditors are repaid and may approve a lower value bid in a chapter 11 sale when other factors make it the best.[24]
The highest or best standard is significant because it grants bankruptcy courts discretion. Bankruptcy courts may consider whether a lower bid is, for other reasons, a better bid in a particular case. That determination requires consideration of factors other than the bottom line, because bankruptcy courts would otherwise always approve the highest bid. For example, if a lower bid incorporates a commitment to preserve jobs, a court may rule that the bid is a better bid[25] or may strike a higher credit bid without such a commitment for cause.[26] Therefore, the highest or best standard provides bankruptcy courts discretion to consider factors other than the face value of a bid.
Although bankruptcy courts have the discretion to consider other factors, it is not altogether clear that they have the power to consider public interests. Bankruptcy courts derive their powers from the Bankruptcy Code.[27] To justify the consideration of public interests in discretionary situations such as § 363 sales, bankruptcy courts need the actual authority to consider them. Either a new Code provision openly granting bankruptcy courts this authority,[28] or an argument that a proper understanding of business management requires a consideration of public interests, would vest bankruptcy courts with the authority to consider public interests in approving § 363 sales. The highest or best standard in conjunction with the stakeholder theory of business management[29] provides a strong argument for bankruptcy courts to consider public interests in § 363 sales when giving deference to a debtor in possession’s selection of a lower cash value bid. The authors have separately argued that the stakeholder theory provides bankruptcy courts with this power.[30]
We expect that bankruptcy courts will continue to grapple with these difficult decisions in approving § 363 sales. In these sales, bankruptcy courts are not beholden to accept the highest bid. Though a stronger argument for openly considering public interests in § 363 sales entails a more direct grant of authority, the highest or best standard is pivotal for the flexibility of bankruptcy courts.
[1] Tayyeba Irum & Ronamil Portes, “Billion-dollar bankruptcies hit record in 2020 as COVID-19 takes toll,” S&P Global Market Intelligence (Jan. 25, 2021), available at https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/billion-dollar-bankruptcies-hit-record-in-2020-as-covid-19-takes-toll-62267412.
[2] See, e.g., Transcript of Sale Hearing at 93, In re BJ Services LLC, et al., Case No. 20-33627 (Bankr. S.D. Tex. Aug. 21, 2020) (“If cause lets me take into account public policy considerations, I think I should not allow the credit bid, and approve the [lower cash value] bid.”).
[3] Although 11 U.S.C. § 363(b)(1) says “trustee,” 11 U.S.C. § 1107(a) gives a debtor in possession all the rights and powers of the trustee.
[4] 11 U.S.C. § 363(b)(1) (2018).
[5] See In re HHH Choices Health Plan LLC, 554 B.R. 697, 704 (Bankr. S.D.N.Y. 2016) (noting business judgment standard that normally applies to § 363 sales).
[6] In re MF Global Inc., 467 B.R. 726, 730 (Bankr. S.D.N.Y. 2012); In re Bos. Generating LLC, 440 B.R. 302, 330 (Bankr. S.D.N.Y. 2010).
[7] In re Bakalis, 220 B.R. 525, 531 (Bankr. E.D.N.Y. 1998).
[8] See In re Tresha-Mob LLC, 2019 Bankr. LEXIS 1333, at *5, 2019 WL 1785431 (W.D. Tex. Apr. 3, 2019) (holding that reviewing courts do not have to mechanically accept bid with higher dollar amount and can accept bid that is not highest dollar amount).
[9] In re Atlanta Packaging Prods. Inc., 99 B.R. 124, 130 (Bankr. N.D. Ga. 1988) (“It is a well-established principle of bankruptcy law that the objective of bankruptcy rules and the trustee’s duty with respect to such sales is to obtain the highest price or greatest overall benefit possible for the estate.”).
[10] In re Metro. Mortg. & Sec. Co. Inc., 2019 WL 7018891, at *3 (Bankr. E.D. Wash. Dec. 17, 2019).
[11] See Tresha-Mob, 2019 Bankr. LEXIS 1333, at *5 (“While the bid that brings in the most cash often wins, it is ‘common knowledge’ that the ‘highest bid is not always the best bid,’ especially if there are ‘conditions sufficient to overbalance the difference between the two.’”); In re Family Christian LLC, 533 B.R. 600, 627 (Bankr. W.D. Mich. 2015) (“As this court has consistently stated, a debtor must demonstrate that the proposed purchase price is not only the highest offer, but the highest and best offer”); In re Diplomat Const. Inc., 481 B.R. 215, 219 (Bankr. N.D. Ga. 2012); (“The highest bid does not always equate to the best bid for the estate.”); In re Gulf States Steel Inc. of Ala., 285 B.R. 497, 517 (Bankr. N.D. Ala. 2002) (“The highest bid is not always the best bid.”); In re Embrace Sys. Corp., 178 B.R. 112, 123 (Bankr. W.D. Mich. 1995).
[12] Bakalis, 220 B.R. at 533.
[13] See Family Christian, 533 B.R. at 622 (confirming that debtor is encouraged to evaluate factors such as contingencies, conditions, timing or other uncertainties).
[14] See In re Broadmoor Place Investments L.P., 994 F.2d 744, 745 (10th Cir. 1993) (bankruptcy court awarded sale to a purchaser who offered $5.5 million in cash and contained no material contingencies over an offer for $5.7 million subject to financing and other contingencies); In re Landscape Properties Inc., 100 B.R. 445, 447 (Bankr. E.D. Ark. 1988) (“[I]n a liquidation case it is ‘legally essential’ to approve the highest offer, although this assumes that the offers and offerors are in all other respects comparable.”).
[15] Bakalis, 220 B.R. at 530–31 (“The Trustee carefully weighed the competing bids rather than mechanistically recommending the facially higher bid. Not only has the Trustee used reasonable business judgment in selecting the [second-highest] bid, he convincingly articulated the reasons for recommending the bid of [the second-highest bidder] and supported his reasoning at the subsequent evidentiary hearings. A bankruptcy trustee is a conservator of the estate and must, to the extent possible, be risk averse. The Trustee declined the temptation of jeopardizing virtually assured benefits by supporting a bid that exposes the estate to a much greater risk ... of being left with a devalued asset.”).
[16] See In re Global Crossing Ltd., 295 B.R. 726, 744 n.58 (Bankr. S.D.N.Y. 2003) (finding that courts do not dictate the means to achieve the objective of maximizing value).
[17] In re Diplomat Const. Inc., 481 B.R. 215, 220 (Bankr. N.D. Ga. 2012); In re GSC Inc., 453 B.R. 132, 171 (Bankr. S.D.N.Y. 2011); In re Castre Inc., 312 B.R. 426, 430–31 (Bankr. D. Colo. 2004); In re Gulf States Steel Inc. of Ala., 285 B.R. 497, 516 (Bankr. N.D. Ala. 2002).
[18] See GSC, 453 B.R. at 171 (quoting In re Global Crossing Ltd., 295 B.R. at 729) (“The ‘bankruptcy court has neither the role nor the expertise ... to substitute its own views as to the optimum business decision for the views of the Debtors’ Board of Directors....’”).
[19] See, e.g., In re S.N.A. Nut Co., 186 B.R. 98, 104 (Bankr. N.D. Ill. 1995) (“When a debtor or trustee conducts a sale under § 363(b), it has an obligation to maximize revenues for the estate.”); In re Mondie Forge Inc., 148 B.R. 499, 502 (Bankr. N.D. Ohio 1992); In re After Six Inc., 154 B.R. 876, 882 (Bankr. E.D. Pa. 1993) (“This case is clearly a liquidating Chapter 11 case and that factor justifies some greater deference to the Committee’s viewpoints than were it a reorganization case.”); In re Flannery, 11 B.R. 974, 977 (Bankr. E.D. Pa. 1981) (“In a liquidation case, the sale to the highest bidder is legally essential....”).
[20] Bakalis, 220 B.R. at 532 (“A trustee must also seek to avoid undue risk, particularly when dealing with money of the estate.”).
[21] In re SW Bos. Hotel Venture LLC, No. 10-14535-JNF, 2010 WL 3396863, at *3 (Bankr. D. Mass. Aug. 27, 2010).
[22] In re Family Christian LLC, 533 B.R. 600, 627 (Bankr. W.D. Mich. 2015) (“When considering offers for the purchase of assets, the debtor’s duty, and the primary concern of the bankruptcy court, is to ensure that the sale maximizes the value of the asset sold.”). The description of the interest as “primary” instead of “sole” evidences other interests at play.
[23] After Six, 154 B.R. at 882 (“We therefore have no doubt that, in an appropriate setting, a bankruptcy court ... could appropriately award a bid to a lower bidder, when that lower bidder had other factors, including even an element as lacking in direct economic impact as ‘societal needs,’ in its favor. The Bankruptcy Code, like any law, must be read in its context as a tool of mankind, not a body of edicts to which mankind is a slave irrespective of its interests to the contrary.”). See also In re HHH Choices Health Plan LLC, 554 B.R. 697, 701 (Bankr. S.D.N.Y. 2016) (ruling that under New York law, the purpose of the corporation is a factor to be considered. In bankruptcy of a charitable organization, court balanced maximizing returns to creditors with serving mission of corporation “in a reasonable way, and with no other requirement or particular weight to be applied.” Court approved bid that was more consistent with mission of corporation and better served stakeholder interests when other financial interests were not significantly different from competing bid).
[24] In re Von Behren Elec. Inc., Bankr. LEXIS 1232, at *3 (C.D. Ill. Nov. 5, 2002); see also After Six, 154 B.R. at 882 (explaining that reasoning behind business judgment rule is that debtor in possession is “entitled to some free reign in fulfilling its perceived mission of aiding the economy (and, ironically, the job market) by keeping an ongoing business afloat”).
[25] See After Six, 154 B.R. at 882; Nathalie Martin, “Noneconomic Interests in Bankruptcy: Standing on the Outside Looking In,” 59 Ohio St. L.J. 429, 468–470 (1998) (arguing that higher bid should not be automatically accepted when lower bid has significant impact on job retention).
[26] Transcript of Sale Hearing at 93, In re BJ Services, LLC, et al., Case No. 20-33627 (Bankr. S.D. Tex. Aug. 21, 2020) (“If cause lets me take into account public policy considerations, I think I should not allow the credit bid, and approve the [lower cash value] bid.”).
[27] See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (“[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”).
[28] See generally Jay L. Westbrook, “Equity in Bankruptcy Courts: Public Priorities,” 94 Am. Bankr. L. J. 203 (2020).
[29] H. Jeff Smith, “The Shareholders vs. Stakeholders Debate,” Mit Sloan Mgmt. Rev. (2003) (“[S]takeholder theory … says that a manager’s duty is to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community, even if it reduces shareholder returns....”).
[30] Matthew W. Waldrep & Christopher T. Greco, “Can Bankruptcy Courts Consider Public Interests in Section 363 Sales? An Argument for Stakeholders,” 50 UCC L.J. (forthcoming 2021).