United States: Bankruptcy Sale Offers: Highest Is Not Always Best

Last Updated: January 17 2013
Article by Vicki Harding

In re Diplomat Construction, Inc., 481 B.R. 215 (Bankr. N.D. Ga. 2012) –

Is there an obligation to sell to the highest bidder in a bankruptcy sale?  In Diplomat Construction, the court approved a sale to a bidder that offered less than half of the offer of the highest bidder.  Under normal circumstances, cash is king and the highest bidder is automatically selected as the winning purchaser.  However, as illustrated by this case, occasionally there are exceptions.

A Chapter 7 trustee proposed to sell a debtor's interest under a ground lease to Khushal Hospitality, LLP (Khushal) for $22,500.  At the hearing on the proposed sale, two additional parties made higher offers.  In particular, World Debt Acquisition, LLC (World Debt) made a final offer of $125,000, which purported to be a cash offer with no contingencies on an "as is where is" basis.  The hearing was adjourned to allow World Debt to deposit $125,000 into the trustee's escrow account and to allow the trustee to prepare evidence that the World Debt offer was the highest and best offer.  However, at the adjourned hearing, the trustee again proposed to sell to Khushal, this time at a price of $55,000.

As background:

  • The debtor owned and operated a Red Roof Inn near the Atlanta Airport.  It leased the real estate from the City of Atlanta under a long-term lease.  The court previously approved the debtor's assumption of the ground lease, which included four parcels.
  • The debtor's interests were subject to liens of the State Bank of Texas.  The bank obtained relief from the automatic stay and foreclosed on two of the four parcels under the ground lease.  Khushal purchased the two foreclosed parcels, which it operated as a hotel with some parking.  The bank, which asserted a five million dollar deficiency claim, was only willing to consent to a sale of the remaining two parcels to Khushal.
  • Ruby Tuesday, Inc. asserted an interest in the sale based on the fact that the court had previously approved a settlement allowing it to use the parking lot governed by the ground lease, which initially it contended would not be adequately protected under the proposed sale.
  • The City of Atlanta also chimed in, arguing that the ground lease covering the four parcels was an agreement with one lessee.  It claimed that performance under the ground lease for the remaining two parcels was impossible unless the hotel owner (now Khushal) was the party that assumed the ground lease.

The trustee argued that the sale to Khushal provided the best result for the bankruptcy estate since it would minimize further litigation with both the City regarding its contention that the lease agreement could not be split and with Ruby Tuesday regarding the parking issue.

In addition, since the bank would consent to allowing the sale free and clear of liens only if Khushal was the buyer, the higher offer would be subject to the bank's liens and would not realize any net benefit to the other creditors.

As a procedural matter, the court ruled that the unsuccessful competing bidders were not parties in interest, and thus did not have standing to oppose the trustee's motion to sell to Khushal.

With respect to the proposed sale, the court held that it should be evaluated using the business judgment test.  The trustee was required to establish that there were sound business reasons for the proposal.  But once the trustee met this burden, his judgment was "entitled to respect and deference from the Court."  The court went on to reiterate that, although the trustee's discretion is not without limit, his judgment as to which bid to accept was to be "afforded great judicial deference."  In this case, the court was persuaded by the trustee's arguments and approved the sale.

As noted above, there is a lot of pressure on a debtor or trustee to maximize value for the estate – typically meaning as much cash as possible.  As this case illustrates, the highest dollar bid may not necessarily be the best offer.  However, notwithstanding the language in this case to the effect that a decision to go with a lower offer will be given "great" deference, as a general rule the expectation is that there will have to be compelling reasons to select a lower offer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki Harding
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions