Seventh Circuit’s In re New Energy Corp. and Standing to Object to an Auction Sale
Posted on Feb 12, 2014 in Bankruptcy, Bankruptcy Sales, Business Bankruptcy, Chapter 11
On January 15, 2014, the Seventh Circuit Court of Appeals held that a party, who is not a creditor and did not elect to bid at an auction sale, does not have standing to contest the approval of the sale. In re New Energy Corp., Case No. 13-2501 (Seventh Cir. January 15, 2014). New Energy Corp. (“Debtor”) operated an ethanol plant in South Bend, Indiana. After filing chapter 11 under the Bankruptcy Code, the Debtor proposed to sell most of its assets through a public auction. In order to post a bid and participate in the auction, a potential purchaser was required to post a bond of $250,000. The auction was held on January 31, 2013 and the winning bid of $2.5 million came from a joint venture of Maynards Industries (1991) Inc. and Biditup Auctions Worldwide, Inc. The Debtor, along with the U.S. Trustee’s Office, on behalf of the Debtor’s creditors, and the Department of Energy (the largest single creditor), asked the bankruptcy court to confirm the sale.
Natural Chem Holdings, (“Natural Chem”), was not a creditor and did not post the bond per the Debtor’s bid procedures. Natural Chem opted to not post a bond because, under the terms of the auction, if it had been the high bidder and not come up with at least $3 million as soon as the sale was approved, the bond would have been forfeited as partial compensation for the creditors’ losses from delay and the need to re-run the auction. Natural Chem opposed confirmation of the sale, as it wanted to lease the plant for a year with an option to buy it for $4 million or more. Natural Chem’s proposal was incompatible with the cash-up-front structure of the proposed auction.
Natural Chem asserted the joint venture amounted to collusion between bidders that spoiled the true nature of the auction sale process. The bankruptcy court overruled Natural Chem’s objection. Natural Chem did not seek a stay in the bankruptcy court, so the sale closed. On appeal to the district court, Natural Chem argued, pursuant to section 363(n) of the Bankruptcy Code, that “the sale price was controlled by an agreement among potential bidders at a sale.”
This is a serious allegation. Section 363(n) provides that there must be an agreement, among potential bidders, that controlled the price at bidding. Boyer v. Gildea, 475 B.R. 657, 662 (N.D. Ind. 2012). If collusion is found a sale may be avoided, or the Debtor (or party brining the motion) may recover consequential damages, costs, attorneys’ fees and punitive damages. 11 U.S.C. §363(n). Also, the parties found liable for collusion could also be criminally prosecuted under certain provisions of title 18 of the U.S. Code. Id.
The district court affirmed the bankruptcy court, and provided that only the trustee can assert an objection to an auction sale premised upon section 363(n). Section 363(n) specifically states that a “trustee” has the power to void a §363(b) sale. Natural Chem then filed an appeal to the Seventh Circuit.
The Seventh Circuit upheld the bankruptcy court’s determination. Here, Natural Chem did not preserve its right to object. Further, it confused why collusion among bidders is forbidden. Judge Easterbrook provides, “collusion is a form of monopsony that depresses the price realized at auctions.” Collusion by two bidders would have depressed the price at auction, and made Natural Chem’s offer more attractive – assuming it posted a bond. Simply, a reduction in the high bid would have harmed the Debtor’s creditors, not Natural Chem. This is the trustee (or potentially a creditors’ committee) would be correct party to protest a collusive sale.
Even if Natural Chem had standing to assert collusion under section 363(n), the agreement, or joint venture, between the bidders weighed against a finding of collusion. As with In re Edwards, 228 B.R. 552 (Bankr. E.D. Pa. 1998), the motivation of the collaborating parties is not always to control the price, but rather, can be an attempt to obtain a favorable settlement agreement. In this regard, the Seventh Circuit noted that “joint ventures have the potential to improve productivity as well as the potential to affect prices. . . .”
In short, Natural Chem chose to not play by the auction’s rules. That was its right – but, because it did not bid, it also was not harmed by the outcome. New Energy at p. 3. In order to preserve objections to an auction process, a party must bid, or otherwise be a creditor with standing to object to the proposed sale. While some courts take an expansive view as to the type of parties that can bring an action under §363(n) of the Bankruptcy Code, the Seventh Circuit did not endorse such a perspective. “[T]he trustee rather than the bidder is the right party to protest collusive sales.” Id. at 4. Natural Chem’s proposal that the Seventh Circuit disregard the plain reading, “runs smack into the Supreme Court’s insistence that judges implement the Bankruptcy Code as written, rather than make changes that they see as improvements.” Id. (citing RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012).