“‘Two roads diverged in the woods and I took the road less traveled’ [sic] … and it hurt, man! Not cool, Robert Frost! … But what if there really were two paths? I want to be on the one that leads to awesome.”
– Kid President (Robby Novak)
A recent decision from the United States Bankruptcy Court for the Southern District of West Virginia is a useful case study of the current debate in bankruptcy courts regarding the sanctity of the asset sale process in chapter 11 and the competing goals inherent in administering bankruptcy cases. Let’s see what happened, shall we?
TLH Investments LLC owned two parcels of land – a one-acre, developed parcel and a five-acre, undeveloped parcel. TLH filed a chapter 11 petition in August 2014. Over a year later, in October 2015, TLH agreed to sell the one-acre parcel to Happy Coe Investments LLC for $450,000. TLH accordingly filed a motion with the bankruptcy court, seeking approval of that sale. The United States Trustee had concurrently moved the court to convert the case to chapter 7, on the grounds that a chapter 7 trustee would better maximize the value of the debtor’s estate.
After TLH filed its motion to approve the sale to Happy Coe, but before a hearing could be held on that motion, MarkWest Energy Partners objected to the sale, proposing its own bid for both the one-acre property and the five-acre (undeveloped) property, for an aggregate bid in the amount of $565,000, plus a commitment to pay TLH’s outstanding sewage bill. MarkWest had not executed a proposed purchase agreement, but it did remit the full amount of the purchase price to TLH, along with a written “interest in and intention of bidding on and purchasing” both properties.
The bankruptcy court, then, was faced with whether to approve the sale to Happy Coe or to reopen the sale process to allow MarkWest and TLH to finalize the sale of both properties.
The bankruptcy court, though compelled by MarkWest’s proposal, declined to proceed with the sale to Happy Coe or to authorize the debtor to proceed to sell the properties to MarkWest. Instead, the bankruptcy court decided to grant the United States Trustee’s motion to convert the case (along with a companion case) to chapter 7 and allow the sale process to continue on, under the auspices of a chapter 7 trustee. Even though TLH and Happy Coe had spent time and effort reaching a deal that was, presumably, consistent with the debtor’s business judgement, the court cited a recent commentator for the proposition that “[b]ankruptcy judges are particularly concerned that property be sold on the best possible terms and have broad discretion” in determining whether to approve sales of a debtor’s property.
The bankruptcy court then acknowledged that a number of other courts have denied sale motions when a better offer had arisen since the initial sale motion was filed. It noted that MarkWest’s offer was especially intriguing because it promised “far more cash” and a disposition of all of the debtor’s real property, including land that could otherwise remain unsold and undeveloped. The bankruptcy court was reluctant to approve the sale of the one-acre parcel to Happy Coe, reasoning that MarkWest’s offer was potentially a better one – or at least, that it might spark further offers that would be higher and better than the initial deal with Happy Coe.
With words of cold comfort, the court recognized that Happy Coe had “done everything right” and that the realtor who produced Happy Coe might lose his fee for the work performed in producing the initial “successful” purchaser. However, the court noted that it could not be swayed by questions of fairness for Happy Coe. Instead, the court must be guided by the “pole star” of “value maximization” for the debtor’s estate. And even though the MarkWest proposal was better for the debtor, the court reasoned that the greatest opportunity to maximize value would follow from the appointment of a chapter 7 trustee to oversee the sale process, including the collection of any additional offers.
It is not common for bankruptcy courts to second-guess debtors’ business judgment in deciding to sell property to third parties as a part of an arms’ length deal. But in this case, over a year had elapsed and the debtor had yet to propose a viable plan of reorganization or liquidation. And even though the bankruptcy court’s analysis was brief, it seems that the court may have been swayed by the fact that the very existence of a late bidder pointed to the fact that there were viable sales to be had with respect to a disposition of estate assets, which the debtor had not been able to effectively solicit or negotiate in the course of seeking buyers for its properties.
Without the benefit of seeing the full context of the chapter 11 case, it is impossible to know all of the circumstances that led the bankruptcy court to convert the case and to direct the appointment of a chapter 7 trustee. The court’s decision, however, does point to the tension inherent in assessing the extent to which a bankruptcy court should defer to the debtor’s business judgment in proposing a sale of its property. (Prospective buyers and brokers, if they do not have the benefit of a break-up fee and/or expense reimbursement, may simply be collateral damage.)
It is this tension that has led to significant difference of opinion in bankruptcy courts regarding the reopening of auctions and/or sale processes even after they have concluded according to their terms, so as to allow a late overbid or competing offer to be considered. On the one hand, reopening the sale process can help to maximize value for a particular debtor’s estate. On the other hand, the ability to reopen an auction or sale process by virtue of the existence of a late bidder may create a problematic incentive for bidders to withhold their highest and best offers in the official sale and auction process, so long as they continue to have the option (or a perceived option) to come in with a late offer. Should bankruptcy judges put systemic considerations ahead of the interests of any given debtor? Or is “value maximization” such a “pole star” as to warrant potentially damaging ripple effects in the administration of bankruptcy sales more broadly? Where should the line be drawn?