Two weeks ago, we discussed asset sales under Bankruptcy Code section 363. As that post noted, section 363 requires court approval for asset sales outside the ordinary course of business, with courts ensuring that sales reflect a reasonable business judgment and have an articulated business justification. Debtors may choose to sell assets via a public auction or through a private sale. In our last post, we considered a case where a debtor initially arranged for a public auction and then decided to sell the property via a private sale. What about the reverse case—what if a debtor agrees to sell property to a particular entity via a private sale, but then changes course and decides to hold a public auction instead? On Wednesday, the Fifth Circuit Court of Appeals considered such a case in In re VCR I, LLC, No. 18-60368 (May 1, 2019). The Fifth Circuit held that the prior agreement did not bar the change of course.

VCR I, LLC (“VCR”) filed for bankruptcy under chapter 11 in June 2012. Initially, VCR was a debtor in possession, continuing to operate its business. In March 2013, VCR settled litigation with some of its creditors. The settlement agreement required VCR to sell a tract of land to Gluckstadt Holdings, LLC (“Gluckstadt”) for $612,500, and to move for an order authorizing such sale. In October 2013, without any such motion having been filed, the bankruptcy court granted a motion by the United States Trustee to convert the bankruptcy case to a case under chapter 7 and appointed a chapter 7 trustee (the “Trustee”). In November 2016, the Trustee filed a motion to sell four tracts of land, including the tract at issue, via a public auction. Gluckstadt objected, arguing that the Trustee was bound by the settlement agreement to seek a private sale. The bankruptcy court and the district court sided with the Trustee and approved the sale by auction. Gluckstadt appealed to the Fifth Circuit.[1]

Gluckstadt argued that the settlement agreement was binding and required the Trustee to file a motion for authorization of the private sale, subject only to objections from creditors not bound by the settlement agreement, and not subject to the objections by the Trustee (which was bound by the settlement agreement as the successor-in-interest to VCR). Gluckstadt argued that the Trustee’s decision to seek authorization to conduct a public auction breached the settlement agreement and sought damages.[2]

The Fifth Circuit rejected Gluckstadt’s position. Relying on In re Moore, 608 F.3d 253 (5th Cir. 2010), and In re Mickey Thompson, 292 B.R. 415 (B.A.P. 9th Cir. 2003), the appeals court held that a settlement agreement involving the sale of a debtor’s property triggers the requirements of section 363: a finding that the Trustee’s business judgment was sound and court approval.

The Fifth Circuit relied particularly on In re Mickey Thompson, which involved a request for approval of a settlement agreement in the face of an offer from a third party to purchase the claims for more than the settlement’s value. In that case, the Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court’s approval of the settlement agreement, emphasizing among other things the trustee’s fiduciary duty to maximize the value of the estate, and holding that this fiduciary duty trumped any contractual obligation a trustee may incur in the course of making an agreement subject to court approval (such as the settlement agreement at issue). Following Mickey Thompson, the Fifth Circuit reasoned that here, where the Trustee had concluded that the fair market value of the land substantially exceeded the $612,500 sale price in the settlement agreement, the Trustee was free to pursue a public auction instead of a private sale.

The Fifth Circuit’s ruling underscores that persons dealing with a bankruptcy trustee in a transaction not in the ordinary course of business are charged with the knowledge that any agreement may require court approval and the trustee is obligated to present all relevant facts to the court. An agreement that doesn’t maximize value of the estate may, absent court approval, be overridden by a better deal.