Finality in Auction Sales It Aint Over Till Its Over
Case law confirms at least superficial lip service to this historical standard,2 but adherence to Justice Hand is far from uniform. Indeed, the provocation necessary to entertain late bids, at least prior to confirmation of an auction, is anything but "extreme." Most often the integrity of the auction is ignored in favor of a new, perhaps more modern, standard, best described as "following the money": "The governing principle at a confirmation proceeding is the securing of the highest price for the bankruptcy estate."3
It would be easier to accept this paradigm shift if it was accompanied by uniformity in analysis and, therefore, guideposts by which lawyers can advise clients. Unfortunately, the grounds that have been used to justify accepting post-auction, pre-sale confirmation order bids are without a consistent approach. Constitutional, comparative, equitable, percentage and even psychological bases, individually and in combination, have been used by courts to justify accepting late bids. This lack of clear standards has diminished the integrity of the auction process and created such obvious uncertainty for bidders and their lawyers that one published decision even included the lawyers' entreaty to the court that "we would love to see the court establish what procedures we follow in the future so we don't get into this mess again."4The Grounds for Accepting Late Bids
Courts have the least difficulty reopening auctions when due process rights have been violated. This will arise where a party-in-interest has a legally recognizable interest, such as a right of first refusal, to protect in connection with the assets being sold.5
The cases adopting what can be called a comparative analysis focus not on the procedural aspects of the auction, but rather on comparing bids, and have adopted ill-defined, adjective-laden terms to compare the auction bid with the post-auction bid. Is the original bid "grossly inadequate"?6 Is the late bid "substantially larger"7 or "substantially better"?8 Does the discrepancy "shock the conscience of the court"?9 While there may be finality in such decisions due to the difficulty of upsetting, on appeal, a decision based on a judge's discretionary sense of financial fairness, such decisions set no standards and offer little guidance.
The statistical cases attempt to quantify the adjectives in the comparative cases. An 8.5 percent difference was deemed "relatively small,"10 while 15 percent was "substantially better"11 and 35 percent made the initial bid "grossly inadequate."12 These cases do little to protect the integrity of the original auction, but they do provide some insight to a particular jurisdiction's sense of price point.
Courts using non-economic fairness as a standard vary between an objective view,13 such as whether there was a "level playing field"14 or basing the decision on what would affect the validity of private transactions,"15 and a more subjective standard (e.g., "no bidder complained,"16 "[the bidder] recognized that the perceived finality of a sale does not turn entirely on the formal close of bidding."17).
Finally, at the more arcane psychological level are those decisions in which the courts seek to determine, and not frustrate, that which they decide should have been or was, depending on the evidentiary record, the "reasonable expectations" of the participants.18
The state of the law on the issue of accepting late bids has been so diffuse that the Food Barn court felt the need to state that, with respect to the finality of bankruptcy auctions, "under appropriate circumstances, a complete lack of standards, resulting in chaos, could conceivably give use to an independent claim that the court abused its discretion...."19
The most recent effort to calm this roiling water is that of the Seventh Circuit with Corporated Assets Inc. v. Paloian, 368 F.3d 761 (7th Cir. 2004). Unfortunately, rather than establishing procedures more certain than those set by other courts, the decision disappointingly seems to adopt every approach ever taken to support allowing a post-auction, pre-confirming order bid.
Corporated Assets Inc. v. Paloian
As is typical, the debtors, Goss Holdings Inc. and Goss Graphic Systems Inc. (collectively, "Goss"), sought and obtained court authority to sell certain of their operating assets in accordance with approved bid procedures. Also somewhat typically, bidders were required to qualify for the auction by submitting a bid, a deposit, a signed asset-purchase agreement, and financial data demonstrating, in the debtors' judgment, ability to consummate the purchase.
Goss had the discretion to determine the highest and best offer and present that bid to the court for approval after the auction. Goss also had the discretion to impose additional terms and conditions "prior to the sale hearing" although one could question the impact of post-auction, pre-hearing additional conditions absent a material change in the financial condition of the high bidder post-auction.
Consistent with this discretion, Goss, in response to concerns expressed by several prospective bidders, modified the approved asset-purchase agreement to assure buyers that removal of the purchased assets would not have to take place prior to June 1, 2002. Some potential bidders learned of this prior to the auction and others first learned of this at the auction. This modification was apparently material; after it was announced, bids increased by almost 40 percent.
At the auction, held on a Monday but prior to bidding, in response to a direct question about the finality of the bidding process (i.e., would bids be accepted post-auction at pre-hearing), counsel for Goss accurately but equivocally stated, "So I guess I can't give you 100 percent assurances that someone can't walk into court on Wednesday and try to outbid whoever wins today, but I think that is a very slim possibility."20
The only bidding at the auction was for second place. The pre-auction high bid of $2.25 million by Corporate Assets Inc. (CAI) remained the highest offer. Myron Bolling Auctioneers (MBA) was the second-highest bid at $2.075 million. A closing was scheduled for the day after the court hearing.
The following day, MBA advised Goss that it was willing to bid $2.45 million and that the reason it did not do so at the auction was because it first learned, at the auction, of the change in the Asset Purchase Agreement assuring that removal of the assets could take place at any time up to June 1, 2002. MBA was unable, prior to the close of bidding, to communicate with certain key members of its bidding group. Once it was able to contact those members, consensus was reached on the higher figure.
Based on this higher offer, Goss, backed by its lenders and the committee, sought and obtained a continuance of the sale acceptance hearing, and Goss scheduled a second auction two days later.
The second auction was held and CAI again won, this time at $2.6025 million. The sale hearing the following week produced one of those great moments that are part of bankruptcy lore: CAI, the high bidder, not only objected to acceptance of its own bid, arguing that its earlier high bid should be approved but also sought compensation, as an administrative expense, for its costs in connection with the second auction. The bankruptcy court accepted the results of the second auction and denied compensation. The district court affirmed.
The Integrity Analysis
As was its duty, the circuit court recognized the process as a "judicial sale" and paid homage to the need to uphold the integrity of such sales in the bankruptcy courts. In perhaps its strongest language, the court drew a bright line between the standards that apply after court confirmation of an auction and stated that until confirmation of a sale, "the court enjoys broader discretion to balance the goal of estate maximization against the interest in regularity and finality and the parties' expectations."21
While not directly interposing constitutional considerations into the analysis, the Seventh Circuit did uphold the district court's conclusion that fundamental fairness did not require the winning bidder to be compensated for its legal fees in connection with the second auction.
Comparative and Percentage Analysis
These approaches were combined. The court twice recited the percentage increase in bids post-auction, describing the initial overbid of "roughly nine percent" to be "significant" and the final bid of "approximately 16 percent" more than the auction bid to be "a significant boon" to the estate although "perhaps insufficient to demonstrate gross inadequacy in the original bid."
The reasonable expectation of the parties was a significant factor in Paloian.
Relying on Gil-Bern but with a scant evidentiary record, the court constructed a base of bidder's reasonable expectations based on local custom, the bidding procedures order and the statements of Goss's counsel at the auction. From that, the court concluded that bidders were at least "alerted to the possibility" that the auction bid would not end the bidding process.
So as not to leave any door unclosed, the court adopted equitable reasons as well for affirming the propriety of a second auction. The playing field wasn't "entirely level" because some bidders knew, prior to the auction, of an important modification to the bid terms,...i.e., the deletion of the early-removal provision from the asset-purchase agreement. This term was referred to as "highly material" as reflected by the later increased bid. The second auction "redress[ed] that inequity."
What's a lawyer to do?
The menu of reasons an auction "ain't over till its over" continues to be that extensive. Recent decisions, even at the circuit court level, do little to provide rules other than "bidder beware." Little heed is paid to Justice Hand's statement that "there is no occasion equivalent to an auction whose finality must be preserved if its advantages are to be preserved."22 Also uncertain is the position of the debtor's lawyer with respect to a late bid, considering that the lawyer's duties might run to the debtor,23 but not to its shareholders,24 to the creditors and the court,25 or generally to the estate.26 While there is protection for courts accepting late bids based on bid procedure orders that allow for modification at the discretion of the debtor's counsel, the more room for bid procedure modification at counsel's discretion, the less integrity there is in the process. This could give rise to equitable claims of unfairness.
Certainly, one can safely conclude that a video or stenographic recording of the auction is helpful as are bid procedures and notices that require the presence, at the auction, of bidder principals or agents with full authority. Having a uniformity of approach on the issue of late bids among the debtor, committee and lenders also increases certainty. Whether language in a bid procedures order that contains a deadline for offers will be sufficient to overcome the goal of estate maximization is uncertain. At a minimum, however, it will determine what the expectations should be.
Perhaps Paloian is yet another early chapter in a §363 of the Bankruptcy Code sale book that eventually will point toward a clear resolution. It looks, however, as if there's a long way to go.