In recent months, bankruptcy auctions went forward in two different bankruptcy proceedings that illustrate the extent to which auctions can vary both procedurally and substantively. One auction involved the sale of a single asset and lasted less than an hour, while the second auction involved the sale of the debtor's entire business and lasted over the course of several days. This post is intended to provide a brief "compare and contrast" of these two auctions in an effort to provide insight into a process that is a common component of corporate bankruptcies.
Two Different Auctions
For the sake of clarity, the auctions referenced in this post will be named "Short Auction" and "Long Auction," referring to time required to complete each auction. Short Auction was part of a chapter 11 bankruptcy of a multi-national corporation with assets valued in the hundreds of millions of dollars. Short Auction involved the sale of a large piece of commercial real estate, whereas Long Auction involved the sale of the debtor's entire business. The debtor selling assets in the Long Auction also filed under Chapter 11, however, its total assets were a fraction of the size of the debtor involved in the Short Auction.
Short Auction began at 8:00 in the morning at the Delaware offices of the debtor's attorney. Several parties were present at the auction, including representatives for the two bidders for the debtor's asset and counsel for the debtor. A court reporter was also present to make a record of the auction process. Long Auction, in contrast, started at 8:00 p.m. and included counsel for the creditors' committee, debtors and counsel for the bidders. In Short Auction, a successful bidder emerged within 30 minutes of the commencement of the auction. Long Auction, on the other hand, went late in the night and was adjourned for several days while bidders explored additional financing.
Take Aways from Both Auctions
Why was Short Auction short and Long Auction long? The answer is rather straight forward - Short Auction involved the sale of a small component of the debtor's overall business, whereas Long Auction sought to sell all of debtor's business. Further, the buyers in Short Auction came to the table with cash compared to the Long Auction that included credit bids and other contingencies that complicated the process.
In Short Auction, there was only one "break out session" where a bidder sought higher authority from a decision maker who was available by phone. Long Auction, on the other hand, had several break out sessions, some lasting close to an hour. The point of all this is that auctions in bankruptcy vary as to duration and result, however, at the end of the day parties will want to make sure the auction was fair and the result of arms-length negotiations (as was the case in both Short and Long Auctions). And although the debtor's decision to sell its assets outside the ordinary course of business fall under the broad discretion of the business judgment rule, the Bankruptcy Court will nevertheless scrutinize the successful bid to insure that it is in the best interest of the bankruptcy estate and the result of a good faith negotiations by the parties.
Jason Cornell is a bankruptcy attorney in the Wilmington, Delaware office of Fox Rothschild LLP. If you have questions regarding a chapter 7 or 11 bankruptcy proceeding, you are welcome to contact Jason at 302 427-5512, or Jcornell@foxrothschild.com.