United States: So You Want To Sell (Or Buy) A Company Under Section 363? Here’s How

With companies facing significant distress due to vast over-leverage, debtors have increasingly turned to asset sales under Section 363 of the Bankruptcy Code, rather than Chapter 11 plans, to dispose of their assets quickly and begin the process of winding down their estates. According to the UCLALoPucki Bankruptcy Research Database, less than 4 percent of all large, public company bankruptcies were resolved by substantial asset sales from 1990-2000. However, in the period from 2001-2010, that figure rose to nearly 20 percent - peaking in 2011 when 43 percent of large public cases were resolved by an asset sale.1

Why have asset sales gained such prominence? Simply put, they provide benefits and accelerated recoveries to most key constituencies in a Chapter 11 case. Most notably, Section 363 sales (1) permit substantive resolution of the case quickly and free and clear of prepetition obligations; (2) relieve debtors of meeting the complex requirements of a Chapter 11 plan, including cramdown; and (3) protect creditors in the form of credit bidding. However, out of the money creditors, such as unsecured creditors, will often object to bankruptcy sales because they take value from the estate and may not leave those creditors with any potential recovery.

In this article, we take a brief look at the history of asset sales in bankruptcy, the standard for approval of bankruptcy sales under Section 363 of the Bankruptcy Code, the process for Section 363 sales and potential issues of dispute that arise in the context of these sales. Finally, we examine more recent push back from judges limiting the ability to sell free and clear in some situations - that may lead to a decline in the use of 363 sales as parties embrace prepacks and accelerated Chapter 11s as efficient means to restructure.

I. Section 363: A Brief History And Overview

Section 363(b)(1) of the Bankruptcy Code permits a debtor, after notice and a hearing, to 'use, sell, or lease, other than in the ordinary course of business, property of the estate . . . .' While a plain reading of this provision 'appears to permit disposition of any property of the estate of a corporate debtor without resort to the statutory safeguards embodied in chapter 11,'2 courts have looked back on more than 100 years of legislative history to determine the proper standards for asset sales.3

The history stretches back to the Bankruptcy Act of 1867, which permitted a sale of a debtor's property prior to final liquidation. Congress stated: '[W]hen it appears . . . that the estate of the debtor, or any part thereof, is of a perishable nature or liable to deteriorate in value, the court may order the same to be sold, in such manner as may be most expedient . . . .'4

The Bankruptcy Act of 1898 did not include a specific provision permitting pre-adjudication sales of a debtor's property. However, General Order in Bankruptcy No. XVIII maintained the requirements for sales when the property was perishable or liable to deteriorate in value.5 Over the next 40 years, the Second Circuit approved, inter alia, a private, pre-adjudication sale of a debtor's fashionable handkerchiefs at a price above appraised value and at a time when the value of the handkerchiefs would decline greatly at the end of the holiday shopping season. The Second Circuit's decision in this case, and several other cases, established that the concept of 'perishable' included not just physically perishable assets, but also property 'liable to deteriorate in price and value.'6

In 1938, Congress enacted the Chandler Act, permitting Courts to 'authorize a receiver, or a trustee or a debtor in possession, upon such notice as the judge may prescribe and upon cause shown, to lease or sell any property of the debtor . . . .'7 Courts, relying on the 'for cause shown' language in the statute, continued to permit asset sales only in emergencies or when the asset was perishable.8 Other courts, however, permitted preplan sales when the sales were 'in the best interests of the estate.'9

In 1978 Congress approved the Bankruptcy Code, including Section 363(b). Section 363 does not include the 'perishability' or deterioration standards, or any requirement to show 'cause,' thereby providing debtors 'easier access' to Section 363(b) relief.10 This is consistent with some earlier decisions rendered under the Bankruptcy Act. For instance, in Mintzer v. Joseph (In re Sire Plan, Inc.),11 the Second Circuit approved the sale of a partially constructed building owned by the debtor not because it was perishable or deteriorating, but because the sale was a sound business opportunity that the debtor had to seize quickly.12

II. The Modern Standard for Approval of Section 363 Sales

The Bankruptcy Code does not detail any standard by which bankruptcy courts may approve a sale outside the ordinary course of business. However, bankruptcy courts have settled on a 'business judgment' standard for approval. The business judgment standard has been defined as whether there is 'an 'articulated business justification' and a 'good business reason' for proceeding with the sale without awaiting the final confirmation of a plan.'13

The Second Circuit Court of Appeals detailed this standard several years after the enactment of the Bankruptcy Code in Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.).14 In that case, the debtor, at the insistence of the unsecured creditor's committee, sought to sell its equity interest in a non debtor electronics component manufacturer, the debtor's most valuable asset, pursuant to Section 363(b) of the Bankruptcy Code. The opponents of the sale argued that the proposed sale side-stepped the plan confirmation process, and that no business reason supported the sale because the stock's value was not deteriorating and the proposed sale price was inadequate.15 On an expedited appeal, the Second Circuit reversed the bankruptcy court's approval of the sale, holding that the bankruptcy court erred in finding that the creditor committee's insistence and the risk of delay warranted the sale, and that the sale opponents demonstrated that there was no sufficient business reason for sale.16 In this decision, the Second Circuit articulated a number of factors bankruptcy courts should consider in determining whether a sound business justification existed for a sale pursuant to Section 363(b). These factors are:

  • the proportionate value of the asset to the estate as a whole,
  • the amount of elapsed time since the filing,
  • the likelihood that a plan of reorganization will be proposed and confirmed in the near future,
  • the effect of the proposed disposition on future plans of reorganization,
  • the proceeds to be obtained from the disposition vis-a-vis any appraisals of the property,
  • which of the alternatives of use, sale or lease the proposal envisions, and
  • whether the asset is increasing or decreasing in value.17

If courts find the presence of many of these factors, they should find that a business purpose for the sale exists and approve the sale.18 Courts have recently developed factors in addition to the Lionel factors.

Perhaps the most notable, recent asset sale occurred in the General Motors bankruptcy. In that case, the U.S. Bankruptcy Court for the Southern District of New York approved the sale of General Motors' valuable assets to a new government-sponsored purchaser in just 41 days after the petition date.19 In so holding, the General Motors court added several additional factors to the business judgment analysis; specifically whether:

  • the estate has the liquidity to survive until confirmation of a plan,
  • the sale opportunity will still exist as of the time of plan confirmation,
  • it is likely that there will be a satisfactory alternative sale opportunity, or a stand-alone plan alternative that is equally desirable (or better) for creditors, and
  • there is no material risk that by deferring the sale, the patient will die on the operating table.20

Other courts, most notably Judge Shelley Chapman of the U.S. Bankruptcy Court for the Southern District of New York in Boston Generating, have subsequently incorporated the General Motors analysis into their consideration of Section 363 sales.21

III. The Process for Bankruptcy Sales

Section 363(b) does not require that a debtor utilize a specific process. Rule 6004 of the Federal Rules of Bankruptcy Procedure, which implements Section 363(b), states that '[a]ll sales not in the ordinary course of business may be by private sale or by public auction.'22 In general, however, public auctions are the preferred means to carry out a sale of substantially all of a debtor's assets since auctions generally yield a higher value for estate's property and maximize the return to creditors.23 Auctions are typically governed by court-approved bidding procedures, which regulate the solicitation of purchasers, the selection of qualified bids, and the conduct of the auction.24

As an initial step, a debtor will seek court approval of bidding procedures, laying out the terms of the sale process , including key deadlines, qualifications for bidders and proposed terms for any purchase. Bidding procedures typically provide debtors with significant deference to run the auction process in as effective a manner as possible to maximize recoveries. Bidding procedures will often permit creditors (particularly secured creditors) to monitor the process, or even have a role in selecting the highest and best offer. For example, in In re Extended Stay Inc.,25 the bidding procedures required, among other things, that the debtors consult with the unsecured creditors' committee and its senior secured lenders before selecting the highest and best bid at auction.26 Typical auction processes last 45-90 days. But courts have permitted shorter auction processes. The most notable short sale took place in the Lehman Bros. bankruptcy, where the debtors sold substantial assets just two days after the bankruptcy filing.27 More recently, the debtors in the Digital Domain Media Group, Inc. bankruptcy sold their significant assets just 11 days after the petition date.28

In determining bidding procedures, a debtor must determine whether to proceed with a 'stalking horse' bidder or a naked auction (where there is no stalking horse bidder). A stalking horse bidder is a potential purchaser that submits a binding bid for the debtor's assets, which usually takes the form of a court-approved asset purchase agreement. There are certain advantages to selecting a stalking horse bidder, such as (i) establishing a minimum floor bid, thus increasing the chances that the eventual sale price will reflect the true value of the debtor's assets, (ii) minimizing the sale's execution risk through the execution of an asset purchase agreement, (iii) promoting competitive bidding on the debtor's as- sets, and (iv) stabilizing the debtor's business by securing a purchase obligation.29 In addition, the presence of a stalking horse provides security to lenders, vendors, employees and customers, thus helping to maximize the debtor's value as a going concern. The presence of a stalking horse does have its disadvantages, particularly the chilling effect it may have on bidding. In addition, any break up fees, expense reimbursements and other buyer protections the stalking horse may demand create additional expense for the estate, possibly driving down the net gain from the sale.

Naked auctions lack the negative aspects of a stalking horse bid, but run the risk of not realizing the full potential of the sale value (or potentially any value).30 As a result of their potential drawbacks, naked auctions tend to incorporate particular bidding procedures. First, the debtor will establish a minimum bid requirement, and set the highest and best bid received before the auction to serve as the floor bid.31 The debtor will also require a substantial good faith deposit to ensure that all potential bidders are financially capable to close on the contemplated transactions.32

A debtor proceeding with a naked auction will sometimes also reserve the right in its bidding procedures to select a stalking horse after establishing bid procedures.33 Finally, bidding procedures in naked auctions may provide more limited protections for the high bidder entering the auction, as compared with the protections afforded to a stalking horse.34

Prior to the auction, the debtor will qualify bidders and negotiate purchase agreement terms that would be accepted if the debtor selects the bidder as the winning bidder. Debtors typically then work to conform all bids so that the debtors can evaluate bids on an 'apples to apples' basis. Having qualified bidders, the debtor will hold a public auction with ongoing bidding rounds until only one winning bidder remains. Throughout the auction process, the debtor may exercise significant discretion in conducting the auction process (within the approved procedures) and selecting the winning bid. The debtor will then seek court approval of the winning bid at which time various parties may litigate certain issues, such as those detailed below.

IV. Potential Points of Dispute

A. Highest and Best Bid

The Bankruptcy Code mandates no criteria for selecting a winning bidder at an auction. However, debtors have long selected what is referred to as 'the highest and best bid' - typically adopting this standard in court-approved bidding procedures.35 Bankruptcy courts will generally defer to a debtor's decision regarding the highest or best offer unless the decision is inconsistent with sound business judgment.36 In this context, the business judgment standard is extremely deferential to the debtor.37

In selecting the highest and best bid, the debtor, and ultimately the bankruptcy court, will view the value the bid provides to the estate as the most important factor.38 Other related considerations may come into play, such as the timing of the sale's closing and certainty of consummation of the sale,39 and whether the purchaser can fund the purchase price adequately.40 At least one court has, however, rejected the consideration of factors not directly related to the estate's benefit, such as the jobs a bid will create in the local community, the effect of a bid on the community, the environmental issues a bid presents, and the local government's preference for a certain bid.41

B. Disputing Auction Results

To protect the finality of and public confidence in bankruptcy sales, courts rarely reopen an auction when an unsuccessful bidder attempts to submit a new offer after the auction has closed.42 Indeed, a losing bidder generally lacks standing to object to a sale.43 In two recent cases, the Bankruptcy Court for the Southern District of New York refused to reopen auctions to allow disgruntled bidders to submit higher or better bids where the bidders voluntarily ceased bidding at the auction and failed to demonstrate that the debtors had violated court-ordered auction procedures.44

In In re Finlay Enterprises, Inc.,45 the debtors held an auction pursuant to bidding procedures approved by the Bankruptcy Court.46 After the debtors filed a notice of successful bids, a losing bidder objected to the sale, arguing, inter alia, that the Debtors did not comply with the bidding procedures and that it was willing to submit a higher bid for a certain pool of the debtor's assets.47

At the hearing to approve the sale, the Bankruptcy Court noted that the scope of its review was limited to whether the parties violated the court-approved bidding procedures, and stressed the importance of finality in bankruptcy actions.48 Ultimately, the Bankruptcy Court approved the debtor's selection of successful bids, and overruled the objections of the objecting, unsuccessful bidders.49

A similar auction dispute arose in In re Extended Stay Inc.50 In that case, two bidders participated in an auction for the debtors' assets, with the losing bidder withdrawing from the contest after nearly nineteen hours of bidding.51 Two weeks later, the losing bidder objected to the proposed sale to the winning bidder, arguing that violations of the court-approved bidding procedures denied the bidder the opportunity to make a higher or better offer during the auction.52 As was the case in Finlay, the Bankruptcy Court in Extended Stay noted that its concern was whether there were legitimate violations of the bidding procedures, and ultimately finding that no such violations occurred and that the losing bidder could have fashioned a higher and better bid during the auction.53

In contrast, in In re Foamex Int'l Inc.,54 the Bankruptcy Court for the District of Delaware reopened an auction after finding that further bidding would yield greater value to the estate.55 In that case, the debtors selected an all-cash bid that was $5 million lower than the all-cash bid of the stalking horse, due to the stalking horse applying a condition to its bid that would allow it to credit bid if the auction continued past the then present round.56 The Bankruptcy Court found that, al though the debtors had complied with the court approved bidding procedures, the debtors should have accepted the stalking horse's bid as the highest and best offer.57 After the Bankruptcy Court reopened the auction and directed the debtors to allow the stalking horse to bid, the Debtors selected the new credit bid of the stalking horse, and the Bankruptcy Court subsequently denied the prior winning bidder's objection to the sale.58

C. Sales May Not Be Sub Rosa Plans

Debtors and potential purchasers must also be cognizant of the sub rosa plan doctrine. An impermissible sub rosa plan exists where 'it is clear that the terms of a section 363(b) sale would pre-empt or dictate the terms of a Chapter 11 plan.'59 The Fifth Circuit developed the sub rosa concept in Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.),60 where the Fifth Circuit found that the terms of a proposed sale under Section 363(b) had the effect of (i) dictating any future reorganization plan, (ii) disenfranchising creditors from their right to vote on a reorganization plan, and (iii) releasing the claims of all parties against the debtor.61

Bankruptcy courts have accepted sub rosa arguments rarely and typically permit sales consistent with the Debtors' sound business judgment and for a valid business reason. In In re Boston Generating, LLC,62 the Bankruptcy Court for the Southern District of New York dismissed a secured lender's sub rosa argument, finding that 'the proposed Sale Transaction has a proper business justification and is not calculated to evade the plan confirmation process.'63 The Boston Generating court also found that the transaction was not a sub rosa plan because it involved only the sale, and not the distribution, of the debtors' assets; the proceeds of the sale would be distributed to the first position secured lenders in accordance with their seniority; and the remaining sale proceeds would be distributed pursuant to a future plan of reorganization.64

D. Bifurcation of Administrative Expense Claims

Parties contemplating a Section 363 sale must also consider how to fund the expenses a debtor must pay in order to operate for a long enough period to complete a sale. This concern is essential when a debtor's financial situation is particularly precarious, it cannot obtain the credit it needs to operate further, and a Chapter 7 liquidation appears to be the only viable alternative to a sale. In such situations, debtors may seek super priority status for administrative expenses incurred during the sale process pursuant to Section 364 of the Bankruptcy Code, such that the sale process expenses would be paid ahead of other, pre-sale process administrative expenses.

This essentially bifurcates the debtor's administrative expenses and provides certain administrative expense claimants an incentive to continue doing business with the debtor, thus allowing the debtor to operate and consummate the sale and avoid the loss of value that would occur in a Chapter 7 liquidation. Section 364(c)(1) of the Bankruptcy Code provides that, if the debtor cannot otherwise obtain unsecured credit, the bankruptcy court 'after notice and a hearing, may authorize the obtaining of credit or the incurring of debt (1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title . . . .' Bankruptcy Courts have utilized this authority to grant super priority status to administrative expenses incurred during sale and wind-down periods in order to protect those parties that continue doing business with the debtor during a sale process.65 In the Caldor bankruptcy case, for example, the Bankruptcy Court for the Southern District of New York reasoned that the bifurcation of administrative expenses was warranted because 'it is unreasonable to expect persons who supply goods and services during the Chapter 11 wind-down to do so without granting them a super priority status,' and would place these administrative expense claimants 'in the same position as if the case were converted [into a Chapter 7 liquidation], without the disruption, the additional expense, and the loss of value generally accompanying a conversion.'66

More recently, in the Blockbuster bankruptcy the order approving the sale process provided bifurcated recoveries to administrative claims arising prior to the start of the sale process and those arising after the start of the sale process. The later claimants were paid in full, while the holders of pre-sale administrative claims received limited recoveries from a special administrative claims carve-out.67 The Debtors justified this treatment as the only means to 'avoid immediate and irreparable harm to these estates' and continue during the sale period to obtain goods and services, use cash collateral, and retain the services of the debtors' management.68

The use of Section 364 of the Bankruptcy Code thus provides struggling debtors with a useful tool to secure continued business from vendors and other parties while it seeks to maximize the value of the bankruptcy estate through a sale process.

V. Courts Push Back?

While debtors value Section 363 sales for the flexibility they provide (which maximizes value for the assets in times of great distress), courts have begun to find the limit of a debtor's ability to sell 'free and clear.' The push back may have begun in, surprisingly, the sales of GM and Chrysler to new entities backed by the government. The sales - criticized by some as an abuse of the 363 process69 - probably marked the most prominent 363 sales. But they also included a bit of push back from the judges approving the sale.

In Chrysler, the Second Circuit demurred on the question of whether 'claimants who, although presently unknown and unidentified, might have claims in the future arising from Old Chrysler's production of vehicles' were bound by the sale order.70 Subsequently, in the General Motors sale, Bankruptcy Judge Robert E. Gerber approved the sale as free and clear of future claims 'to the fullest extent constitutionally permissible During the hearings, he expressed due process concerns for unknown future claimants.71

Subsequently, the U.S. District Court for the Southern District of New York addressed the issue more definitively in Morgan Olson L.L.C. v. Frederico (In re Grumman Olson Indus. Inc.).72 In Morgan, the District Court held expressly that a party was not barred from asserting successor liability claims against the purchaser of assets in a 363 sale, where the claims at issue arose after the conclusion of a bankruptcy case. In that case, the District Court found that certain creditors had not received adequate notice of their potential claim in a prior bankruptcy (because they did not know it existed at the time of the bankruptcy. 'Enforcing the Sale Order against the Fredericos to take away their right to seek redress under a state law theory of successor liability when they did not have notice or an opportunity to participate in the proceedings that resulted in that order would deprive them of due process.'73

VI. Conclusion

As demonstrated in many asset sales, a company with overwhelming leverage can dispose of its assets and liquidate the proceeds to creditors efficiently. However, numerous bars and restrictions require the debtor to coordinate closely with creditors, and generally obtain their consent to critical aspects of the sale. Effective legal representation, with vast experience in Section 363 sales, can help guide debtors, potential bidders and creditors alike through the pitfalls inherent in the 363 sale process.

Footnotes

1 UCLA-LoPucki Bankruptcy Research Database, 363 Sales of All or Substantially All Assets in Large, Public Bankruptcies, as a Percentage of all Cases Disposed, by Year of Case Disposition, available at http://lopucki.law.ucla.edu/tables_and_ graphs/363_sale_percentage_graph_4-6-2011.pdf .

2 Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1066 (2d Cir. 1983).

3 See, e.g., id. at 1066-69.

4 Id. at 1066 (quoting Bankruptcy Act of 1867, § 25 (Act of March 2, 1967, 14 Stat. 517)).

5 Id.

6 Id. at 1067 (citing In re Pedlow, 209 F. 841, 842 (2d Cir. 1913)).

7 Id. (quoting Chandler Act of 1938, § 116(3), 11 U.S.C. § 516(3), as applicable to ch. X and § 313(2), 11 U.S.C. § 713(2) as applicable to ch. XI (repealed 1978)).

8 Id. at 1068 (citing Patent Cereals v. Flynn, 149 F.2d 711 (2d Cir. 1945); Flynn v. Brewery Mgmt. Corp. (In re V. Loewer's Gambrinus Brewery Co.), 141 F.2d 747, 748 (2d Cir. 1944)).

9 Id. (citing Fin. Assocs. v. Loeffler (In re Equity Funding Corp. of Am.), 492 F.2d 793, 794 (9th Cir. 1974); Int'l Bank of Miami v. Brock (In re Dania Corp.), 400 F.2d 833, 835-37 (5th Cir. 1968); Marathon Foundry & Mach. Co. v. Schwartz (In re Marathon Foundry & Mach. Co.), 228 F.2d 594 (7th Cir. 1955)).

10 Id. at 1069.

11 332 F.2d 497 (2d Cir. 1964).

12 Lionel, 722 F.2d at 1069.

13 In re Boston Generating, LLC, 440 B.R. 302, 322 (Bankr. S.D.N.Y. 2010) (quoting In re Gen. Motors Corp., 407 B.R. 463, 490 (Bankr. S.D.N.Y. 2009)).

14 722 F.2d 1063 (2d Cir. 1983).

15 Id. at 1066, 1071-72.

16 Id. at 1065-66, 1071-72.

17 Id. at 1071.

18 While other courts apply somewhat different standards, ultimately they will permit sales if the Debtors can provide a valid business justification. See, e.g., GBL Holding Co. v. Blackburn/Travis/Cole, Ltd. (In re State Park Bldg. Group, Ltd.), 331 B.R. 251, 254-55 (N.D. Tex. 2005); In re Daufuskie Island Props., LLC, 431 B.R. 626, 637-38 (Bankr. D.S.C. 2010); In re Nicole Energy Servs., Inc., 385 B.R. 201, 231-37 (Bankr. S.D. Ohio 2008).

19 In re Gen. Motors Corp., 407 B.R. 463, 475 (Bankr. S.D.N.Y. 2009).

20 Id. at 490.

21 See, e.g., In re CPJFK, LLC, No. 10-50566-CEC, 2011 BL 83901, at *11-12 (Bankr. E.D.N.Y. Mar. 30, 2011); Boston Generating, 440 B.R. at 322.

22 Fed. R. Bankr. P. 6004(f)(1).

23 See, e.g., Simantob v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 288-89 (B.A.P. 9th Cir. 2005) ('The court's obligation in § 363(b) sales is to assure that optimal value is realized by the estate under the circumstances. . . . The price achieved by an auction is ordinarily assumed to approximate market value when there is competition by an appropriate number of bidders. When competition is constrained, however, the price is less likely to be reliable and should be examined more carefully.'); In re Angelika Films 57th, Inc., No. 97 Civ. 2239(MBM) (S.D.N.Y. May 29, 1997) ('[T]o maximize the value of the lease, the sale was subject to an auction sale . . . .').

24 See, e.g., In re Gen. Growth Props., No. 09-11977 (ALG), 2010 BL 321245, at *1, 2 (Bankr. S.D.N.Y. Aug. 27, 2010); In re First Republic Group Realty, LLC, No. 09-13983 (MG), 2010 BL 321246, at *1 (Bankr. S.D.N.Y. Aug. 18, 2010).

25 No. 09-13764 (JMP) (Bankr. S.D.N.Y.).

26 See Order Pursuant to Sections 105(a), 363 and 503(b) of the Bankruptcy Code and Bankruptcy Rule 6004(h) Approving Bidding Procedures and Notice of the Auction Relating Thereto and Granting Related Relief, at 13, In re Extended Stay Inc., No. 09-13764 (JMP) (Bankr. S.D.N.Y. Apr. 23, 2010) [Docket No. 975].

27 See Order (I) Approving the Break-Up Fee and Expense Reimbursement, (II) Certain Matters Relating to Competing Bids, If Any, (III) Approving the Form and Manner of Sale Notices and (IV) Setting the Sale Hearing Date in Connection with the Sale of Certain of the Debtors' Assets, In re Lehman Bros. Holders Inc., No. 08-13555 (JMP) (Bankr. S.D.N.Y. Sept. 17, 2008) [Docket No. 88].

28 See Order (A) Approving Purchase Agreement Among Debtors and Buyer, (B) Authorizing and Approving the Sale of Certain Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests, (C) Authorizing and Approving the Assumption and Assignment of Executory Contracts and Unexpired Leases in Connection Therewith, (D) Authorizing and Approving Entry Into the Patent License; and (E) Granting Related Relief, In re Digital Domain Media Group, Inc., No. 12- 12568 (BLS) (Bankr. D. Del. Sept. 25, 2012) [Docket No. 223]. Although Judge Shannon allowed the Debtors in Digital Domain to proceed with a highly expedited sale process and ultimately approved the resulting sale of the debtors' assets, at the hearing approving the sale, Judge Shannon emphasized that he regretted allowing the sale process to proceed so quickly and cautioned that neither he nor his colleagues in the Delaware Bankruptcy Court would likely allow such a process to occur in the future. See Jacqueline Palank, Judge Begrudgingly Oks Digital Domain Sale, Bankruptcy Beat, Sept. 24, 2012, http://blogs.wsj.com/bankruptcy/2012/09/24/judgebegrudgingly- oks-digital-domain-sale/ .

29 See, e.g., Comm. of Subordinated Bondholders v. Integrated Res., Inc. ( In re Integrated Res., Inc.), 147 B.R. 650, 661-62 (S.D.N.Y. 1992), appeal dismissed, 3 F.3d 49 (2d Cir. 1993).

30 Recent cases where debtors utilized naked auctions include: In re Caribbean Petroleum, No. 10-12553 (Bankr. D. Del. 2010); In re Alterra Healthcare Corp., No. 03-10254 (Bankr. D. Del. 2003); and In re DESA Holdings Corp., No. 02- 11672 (Bankr. D. Del. 2002).

31 See Sale Procedures Order, DESA Holdings, No. 02- 11672; Bidding Procedures Order, Exhibit A, Alterra Healthcare, No 03-10254.

32 See Sale Motion ¶ 36, DESA Holdings, No. 02-11672.

33 See Sale Procedures Order, Exhibit A, Caribbean Petroleum, No. 10-12553; Sale Procedures Motion ¶ 36, Alterra Healthcare, No 03-10254.

34 See Exhibit A to Sale Procedures Order ¶ D, In re Alterra Healthcare Corp., No 03-10254 (Bankr. D. Del. 2003).

35 See., e.g., Contrarian Funds, LLC v. Aretex, LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231, 242 (2d Cir. 2010) (noting that bankruptcy court entered order confirming that 'the winning bid presented 'the highest and best bid at the Auction' '); In re SCO Group, Inc., No. 07-11337 (KG), 2011 BL 335792 , at *3 (Bankr. D. Del. Mar. 7, 2011) ('The offer of the Buyer to purchase the Acquired Assets is the highest and best offer received by the Debtors and the Chapter 11 Trustee . . . .'); Cello Bag Co. v. Champion Int'l Corp. (In re Atlanta Packaging Prods., Inc.), 99 B.R. 124, 130 (Bankr. N.D. Ga. 1988) ('It is a well-established principle of bankruptcy law that the objective of bankruptcy sales and the trustee's duty with respect to such sales is to obtain the highest price or greatest overall benefit possible for the estate.'); see also Toibb v. Radloff, 501 U.S. 157, 163 (1991) (stating that the general policy of the Bankruptcy Code is to 'maximiz[e] the value of the bankruptcy estate').

36 See, e.g., In re Verified Identity Pass, Inc., No. 09-17086 (SMB), 2010 BL 321247, at *2 (Bankr. S.D.N.Y. Apr. 16, 2010) ('The Debtor has properly exercised its reasonable business judgment in determining to sell substantially all of the Debtor's Acquired Assets and in determining that the Buyer's offer represents the highest and best offer for the Acquired Assets.'); In re Urban Telecomms., Inc., No. 09-10487, 2009 BL 294437, at *3 (Bankr. S.D.N.Y. July 10, 2009) ('The Debtor's determination that the APA constitutes the highest or best offer for the Assets constitutes a valid and sound exercise of the Debtor's discretion and business judgment.').

37 See DiStefano v. Stern (In re JFD Enters., Inc.), No. 99- 2034 (1st Cir. May 1, 2000) ('Courts have much discretion on whether to approve proposed sales, but the trustee's business judgment is subject to great judicial deference.' (quoting In re WPRV-TV, Inc., 143 B.R. 315, 319 (D.P.R. 1991), vacated on other grounds, 165 B.R. 1 (D.P.R. 1992), aff'd in part, rev'd in part, 983 F.2d 336 (1st Cir. 1993)); GBL Holding Co. v. Blackburn/Travis/Cole, Ltd. (In re State Park Bldg. Group, Ltd.), 331 B.R. 251, 254 (N.D. Tex. 2005) ('Great judicial deference is given to the Trustee's exercise of business judgment.' (citing In re Gulf States Steel Inc. of Ala., 285 B.R. 497, 516 (Bankr. N.D. Ala. 2002)).

38 See, e.g., Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 263 (5th Cir. 2010) ('A trustee has the duty to maximize the value of the estate.'); see also 3 Collier on Bankruptcy ¶ 363.02 (stating that the trustee is normally expected to sell to the highest bidder and that the 'ultimate purpose will be to obtain the highest aggregate bid').

39 Gulf States Steel, 285 B.R. at 517.

40 See Moore, 608 F.3d at 263; see also Lithograph Legends, LLC v. U.S. Trustee, No. 09-CV-943 (JMR), 2009 BL 93630, at *3 (D. Minn. Apr. 30, 2009) ('And, when considering whether a transaction will be in the estate's best interest, it is equally within a bankruptcy court's discretion to consider factors other than the dollar amount.' (citing G-K Dev. Co v. Broadmoor Place Invs., L.P. (In re Broadmoor Place Invs., L.P.), 994 F.2d 744, 745 (10th Cir. 1993))).

41 Gulf States Steel, 285 B.R. at 517.

42 See In re Gil-Bern Indus., Inc., 526 F.2d 627, 628, 629 (1st Cir. 1975) ('[I]t is an abuse of discretion for a bankruptcy court to refuse to confirm an adequate bid received in a fairly conducted sale merely because a slightly higher offer has been received after the bidding has closed.'); In re Bigler, LP, 443 B.R. 101, 112 (Bankr. S.D. Tex. 2010) ('To reopen the bidding process to allow [a losing bidder] to make its late bid would be an abuse of this Court's discretion. Accordingly, this Court will not reopen bidding.'). Courts have held that an auction may be reopened for further bidding 'only if 'there was fraud, unfairness or mistake in the conduct of the sale . . . or . . . the price brought at the sale was so grossly inadequate as to shock the conscience of the court.' ' Four B. Corp. v. Food Barn Stores, Inc., (In re Food Barn Stores, Inc.), 107 F.3d 558, 564 (8th Cir. 1997) (quoting In re Stanley Eng'g Corp., 164 F.2d 316, 318 (3d Cir. 1947)).

43 See In re Trans World Airlines, Inc., No. 01-00056 (PJW) (Bankr. D. Del. Apr. 2, 2001); In re Quanalyze Oil & Gas Corp., 250 B.R. 83, 89 (Bankr. W.D. Tex. 2000). A losing bidder may, however, have standing if the debtor fails to comply with the bidding procedures or if the losing bidder is also a creditor - and thus has standing independent of the auction process. See Calpine Corp. v. O'Brien Envtl. Energy Inc. (In re O'Brien Envtl. Energy, Inc.), 181 F.3d 527, 531 (3d Cir. 1999) ('Courts that have considered appellate standing in the context of the sale or other disposition of estate assets have generally held that creditors have standing to appeal, but disappointed prospective purchasers do not.'); Trans World Airlines, supra; see also Kabro Assocs of West Islip, LLC v. Colony Hill Assocs. (In re Colony Hill Assocs.), 111 F.3d 269, 273-74, 30 (2d Cir. 1997) (concluding that a bidder had standing to challenge the intrinsic fairness of a sale when the bidder asserted that the debtor and its creditors unlawfully sought to ensure that no auction took place).

44 See Transcript of Record, In re Extended Stay Inc., No. 09-13764 (JMP) (Bankr. S.D.N.Y. June 17, 2010) [Docket No. 1102]; Transcript of Record, In re Finlay Enters., Inc., No. 09- 14873 (Bankr. S.D.N.Y. Nov. 12, 2009) [Docket No. 378].

45 No. 09-14873 (JMP) (Bankr. S.D.N.Y.).

46 Notice of Selection of Successful Bids at Auction, In re Finlay Enters., Inc., No. 09-14873 (Bankr. S.D.N.Y. Nov. 10, 2009) [Docket No. 357].

47 Limited Objection by Zale Corporation to the Debtors' Notice of Selection of Successful Bids at Auction ¶ 7-12, In re Finlay Enters., Inc., No. 09-14873 (Bankr. S.D.N.Y. Nov. 11, 2009) [Docket No. 362].

48 Transcript of Record, at 44-45, In re Finlay Enters., Inc., No. 09-14873 (Bankr. S.D.N.Y. Nov. 12, 2009) [Docket No. 378].

49 Order Pursuant to Sections 105(a), 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 6004, 6006 and 9014 Authorizing (A) the Sale of Assets, Free and Clear of Liens, Claims, Encumbrances and Other Interests and (B) Assumption and Assignment of Nonresidential Leases of Real Property, In re Finlay Enters., Inc., No. 09-14873 (Bankr. S.D.N.Y. Nov. 25, 2009) [Docket No. 399].

50 No. 09-13764 (JMP) (Bankr. S.D.N.Y.).

51 Transcript of Record at 22, In re Extended Stay Inc., No. 09-13764 (JMP) (Bankr. S.D.N.Y. June 17, 2010) [Docket No. 1102].

52 Starwood's Objection to Debtors' Motion to Approved Investment Agreement and Disclosure Statement, In re Extended Stay Inc., No. 09-13764 (JMP) (Bankr. S.D.N.Y. June 14, 2010) [Docket No. 1051].

53 Transcript of Record, at 27-28, 33, 34, In re Extended Stay Inc., No. 09-13764 (JMP) (Bankr. S.D.N.Y. June 17, 2010) [Docket No. 1102].

54 No. 09-10560 (KJC) (Bankr. D. Del.)

55 See Transcript of Record, In re Foamex Int'l Inc., No. 09- 10560 (KJC) (Bankr. D. Del. May 21, 2009) [Docket No. 485]; see also Lithograph Legends, LLC v. U.S. Trustee, No. 09-CV- 943 (JMR), 2009 BL 93630, at *3 (D. Minn. Apr. 30, 2009) ('A bankruptcy court may disapprove a proposed sale recommended by a debtor-in-possession 'if it has an awareness there is another proposal in hand which, from the estate's point of view, is better or more acceptable.' ' (quoting G-K Dev. Co v. Broadmoor Place Invs., L.P. (In re Broadmoor Place Invs., L.P.), 994 F.2d 744, 746 (10th Cir. 1993))).

56 Debtors' Omnibus Response to Objections to Debtors' Motion for Entry of, Among Other Things, An Order (A) Approving the Proposed Sale, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (C) Granting Certain Related Relief, In re Foamex Int'l Inc., No. 09-10560 (KJC) (Bankr. D. Del. May 21, 2009) [Docket No. 451]; Objection of the Majority First Lien Lenders to Debtors' Motion to Approve the Sale of Substantially All of Their Assets, In re Foamex Int'l Inc., No. 09-10560 (KJC) (Bankr. D. Del. May 21, 2009) [Docket No. 446].

57 Transcript of Record, at 75, 77, In re Foamex Int'l Inc., No. 09-10560 (KJC) (Bankr. D. Del. May 21, 2009) [Docket No. 485].

58 Id. at 77; Transcript of Record, at 32, 111-12, 113, In re Foamex Int'l Inc., No. 09-10560 (KJC) (Bankr. D. Del. May 26, 2009) [Docket No. 493]; Objection of Wayzata Investment Partners LLC, Wayzata Opportunities Fund II, L.P., and Foam Holdings, LLC to Debtors' Motion to Approve Sale of Substantially All of Their Assets, In re Foamex Int'l Inc., No. 09-10560 (KJC) (Bankr. D. Del. May 26, 2009) [Docket No. 465].

59 Contrarian Funds v. Westpoint Stevens, Inc. (In re West- Point Stevens, Inc.), 333 B.R. 30, 52 (S.D.N.Y. 2005), rev'd on other grounds sub nom. Contrarian Funds v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231 (2d Cir. 2010).

60 700 F.2d 935 (5th Cir. 1983).

61 Id. at 939-40.

62 440 B.R. 302, 331 (Bankr. S.D.N.Y. 2010).

63 Id. at 331.

64 Id.

65 See, e.g., In re PLVTZ, Inc., No. 07-13532 (Bankr. S.D.N.Y. Jan. 8, 2008); In re Caldor Inc., No. 95 B 44080 (Bankr. S.D.N.Y. Jan. 22, 1999), aff'd, Pearl-Phil GMT (Far East) Ltd. v. Caldor Corp., 266 B.R. 575 (S.D.N.Y. 2001); In re Klein Sleep Prods., Inc., No. 91 B 12577 (Bankr. S.D.N.Y. Jan. 4, 1993); In re The Lionel Corp., Nos. 91 B 12704 & 91 B 12705 (Bankr. S.D.N.Y. June 28, 1993).

66 Transcript of Record, at 18:5-19:9, In re Caldor Inc., No. 95 B 44080 (Bankr. S.D.N.Y. Feb. 8, 1999).

67 See Bid Procedures Order ¶¶ 14, 18.

68 See Sale Motion ¶ 15

69 See, e.g., Barry E. Adler, A Reassessment of Bankruptcy Reorganization After Chrysler and General Motors, 18 Am. Bankr. Inst. L. Rev. 305 (2010); Ralph Brubaker & Charles Jordan Tabb, Bankruptcy Reorganizations and the Troubling Legacy of Chrysler and GM, 2010 U. Ill. L. Rev. 1375 (2010); Mark J. Roe & David Skeel, Assessing the Chrysler Bankruptcy, 108 Mich. L. Rev. 727 (2010).

70 In re Chrysler LLC, 576 F.3d 108, 123 (2d Cir. 2009).

71 In re Gen. Motors Corp., 407 B.R. 463, 507 (Bankr. S.D.N.Y. 2009).

72 467 B.R. 694 (S.D.N.Y. 2012).

73 Id. at 708.

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