For numerous corporate Chapter 11 debtors, the sale of some or all of the company’s assets may be the only way to reorganize the company’s debt. Section 363 of the Bankruptcy Code sets forth a specific procedure wherein the debtor offers its assets for sale, negotiates with a “stalking horse” bidder, and ultimately offers the assets at a public auction. Failure to follow these procedures may result in the bankruptcy court setting aside the sale or the inability of a party to challenge the sale’s confirmation.
A recent case out of the Seventh Circuit offers a cautionary tale to creditors and other potential bidders to a 363 sale. After filing its petition for Chapter 11 bankruptcy, a corporation that owned an ethanol plant in Indiana proposed to sell substantially all of its assets at auction. The winning bid of $2.5 million was submitted by a joint venture. The debtor asked the bankruptcy court to confirm the sale, as did the U.S. Trustee and the largest secured creditor. Indeed only one party, Natural Chem Holdings, opposed confirmation of the sale on the basis of collusion between the members of the joint venture. Unfortunately “Natural Chem chose not to play by the auction’s rules,” and their appeal fell on deaf ears at the bankruptcy, district and appellate court levels.
At the very outset of the 363 sale, Natural Chem indicated that it was interested in purchasing the ethanol plant; however, it did not post the $250,000 bond required to bid on the assets. Because Natural Chem was not a potential bidder, the appellate court reasoned that it could not have been injured as a bidder by the auction’s outcome. Natural Chem argued that it was afraid that the bond would have been forfeited if Natural Chem did not produce the value of the winning as soon as the sale was approved.
Not only was Natural Chem not a “potential bidder” for the purposes of challenging the sale prior to its confirmation, it also failed to ask for a stay pending the result of the appeal, and as such, the sale closed. Section 363 specifically provides that after closing, only a protest by the trustee may permit the sale to be undone.
It is surprising that such a black and white case made it to the 7th Circuit, but its lessons are clear. Simply wanting to bid does not confer standing. When a bond is required to participate in the auction, a party must post it in order to have any standing to challenge the sale. Further, if the party wishes to challenge the 363 sale, that party must immediately request a stay of confirmative of the sale until a final decision regarding the validity of the sale. Failure to do so estops any future remedy for the bidder (unless the action to undo the sale is brought by the trustee).