You would like to purchase wind turbines in a lease-to-own scenario, that is, you would like to take possession of certain items and pay for the purchase or ownership over time or in a lump-sum at some point in the future. You prefer this mode to an outright cash purchase because of your other cash needs. Opportunity strikes! Wind Turbine, LLC has filed chapter 11 and intends to settle up with its secured creditors by selling substantially all of its assets through a section 363 sale.[i] The debtor proposes to sell substantially all of its assets (i.e., wind turbines) through an auction sale to the highest bidder. You speak to the debtor’s investment banker about making a bid. The investment banker is seeking bids that would pay a lump sum of cash for the assets. Your proposal – to pay a premium for possession, and closing on the outright purchase of the transaction in the future — differs from the proposed bid structure but would net much more money for the debtor’s estate.
What can you do at this point? Contact the secured creditors with the most at stake, and which have agreed to the proposed bidding mode in order to persuade them to support a change in bidding modes? Participate in the auction, perhaps futilely? Object to the motion to approve the sale (after the auction) on the grounds that your way of bidding would have yielded more proceeds than lump sum bids? By all means, you should engage experienced counsel. In the bidding context, the direction you choose at the outset can foreclose other options later.
Before and during its chapter 11 case, New Energy Corp. (“Debtor”) operated an ethanol plant in South Bend, Indiana. Upon filing its chapter 11 case, the Debtor proposed to sell most of its assets for cash paid in a lump sum through a public auction under section 363 of the Bankruptcy Code. The court approved bidding procedures that conditioned a party’s ability to bid and participate in the auction upon that party’s posting of a bond of $250,000. The auction was held on January 31, 2013 and the winning bid of $2.5 million came from a joint venture of Maynards Industries (1991) Inc. and Biditup Auctions Worldwide, Inc. The U.S. Trustee (on behalf of the Debtor’s creditors) and the U.S. Department of Energy (the largest single creditor) supported the Debtor’s motion for court approval of the sale.
Natural Chem Holdings, (“Natural Chem”) wanted to purchase the assets of the Debtor, but not in a lump sum. Natural Chem wanted to lease the plant for a year with an option to buy it for $4 million. Natural Chem’s proposal – arguably superior to the $2.5 million prevailing bid — was incompatible with the cash-up-front structure of the auction set by the bid procedures.
Two facts that will turn out to be key: Natural Chem was not a creditor of the Debtor and did not post the bond per the bid procedures approved by the court. Why did Natural Chem not post the bond? The bond exists to be forfeited (as partial compensation for the creditors’ losses from delay and the need to re-run the auction) if a bidder prevails at auction but fails to timely pay the sale amount (in cash, in this case). Natural Chem worried that it would have to forfeit the substantial bond if it could not come up with, say, $3 million in cash. We note that Natural Chem failed to object to the bid procedures, for example on the grounds that such a steep entry fee to the auction would chill bidding. Instead Natural Chem waited the outcome of the sale and objected to the court’s approval of the sale.
In its objection to the court’s approval of the sale, Natural Chem asserted that the joint venture that prevailed at auction was created by collusion between bidders, which spoiled the competitive nature of the auction sale process. The bankruptcy court overruled Natural Chem’s objection. Natural Chem did not seek a stay in the bankruptcy court, so the sale closed.[ii] On appeal to the district court, Natural Chem argued that the sale should be undone pursuant to section 363(n) of the Bankruptcy Code, on the grounds that “the sale price was controlled by an agreement among potential bidders at a sale.”[iii]
This is a serious allegation. Section 363(n) can undo a section 363 sale if the court finds that there had been an agreement, among potential bidders, that controlled the price at bidding.[iv] If collusion is found a sale may be avoided, and the Debtor (or party bringing the motion) may recover consequential damages, costs, attorneys’ fees and punitive damages.[v] Also, the parties found liable for collusion could be criminally prosecuted.
The district court affirmed the bankruptcy court, and ruled that only the trustee can assert an objection to an auction sale premised upon section 363(n), for that section specifically states that a “trustee” has the power to void a §363(b) sale.[vi] On appeal, the Seventh Circuit Court of Appeals affirmed.[vii]
So Natural Chem asserted a legal theory it did not have the power to assert (for the Bankruptcy Code empowers only the trustee to assert section 363(n) to challenge a sale). More fundamentally, though, Natural Chem had no business asserting any objection to the sale at all. Recall that Natural Chem was not a creditor of the Debtor and that it did not make a bid. The Seventh Circuit held that a party that is not a creditor and that did not bid at an auction sale does not have standing to contest the approval of the sale.
Did Natural Chem figure all along that it could get its way by objecting to a sale approval motion? If so, Natural Chem figured wrongly. Looking at the scenario commonsensically, should any old party with no claim against the debtor (and therefore nothing at stake) and with no bid made in the auction process (and therefore nothing at stake) be accorded standing to object to a sale with so much at stake for the debtor, creditors, and parties that actually bid? The Seventh Circuit said “no.”[viii]
So, if you want to acquire wind turbines and Wind Turbine, LLC wants to sell them in a section 363 sale – but has no interest in your lease-to-own mode of purchase — do not hold your cards to your vest and await the sale approval motion to object. Even if you might have standing as a creditor[ix] or might acquire standing as a bidder, it will often be better to try other means (e.g., persuading secured lenders to change bid procedures, objecting to bid procedures motion) to re-calibrate the auction to include bids such as a lease-to-own scenario. If those attempts fail, you could consider stepping into the fray, complying with bid procedures, placing a bid. You might win and get to purchase the assets. If you do not win, you will at least have standing to object to the order approving the sale.
[i] Please see the definition of Section 363 Sale in the Glossary on this site.
[ii] Section 363 sales are attractive to purchasers in part because section 363(m) provides that a section 363 sale to a party in good faith cannot be undone unless the challenging party secures a stay of the sale approval order. The text of section 363(m) is:
(m) The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.
[iii] Section 363(n) provides a means of negating the finality of a sale under section 363(m) where it is found that “a sale price is controlled by an agreement among potential bidders.” Such a scenario may be said to extinguish the premise of “good faith” that underlies the finality provided by section 363(m).
[iv] Boyer v. Gildea, 475 B.R. 657, 662 (N.D. Ind. 2012).
[v] 11 U.S.C. §363(n)
[vi] The text of section 363(n) is:
(n) The trustee may avoid a sale under this section if the sale price was controlled by an agreement among potential bidders at such sale, or may recover from a party to such agreement any amount by which the value of the property sold exceeds the price at which such sale was consummated, and may recover any costs, attorneys’ fees, or expenses incurred in avoiding such sale or recovering such amount. In addition to any recovery under the preceding sentence, the court may grant judgment for punitive damages in favor of the estate and against any such party that entered into such an agreement in willful disregard of this subsection.
[vii] In re New Energy Corp., Case No. 13-2501 (7th Cir. Jan. 15, 2014).
[viii] Further, a party would be unwise to believe that evidence of collusion is a magic bullet to be used against a sale approval order. The courts in the New Energy Corp. case saw the Code as reserving the magic bullet to a “trustee” under the language of section 363(n).
[ix] By the way, it may be possible for you to create such standing by purchasing a claim from another creditor.
Jonathan T. Brand is a managing attorney at Lakelaw in Chicago, Illinois. Jonathan provides expert advice and counsel in the areas of bankruptcy, chapter 11 reorganizations, commercial litigation, and related transactional matters, and regularly represents debtors, trustees, and creditors in a variety of complex insolvency matters. He also assists clients with out-of-court workouts, assignments for…
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90 Second Lesson: Secured Creditors and Toll Charges
Not Necessarily Free and Clear I: Purchasing Real Estate Property in a Section 363 Sale
90 Second Lesson: To Stalk or Not to Stalk? Why be a Stalking Horse Bidder?
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