By: J. Ellsworth Summers and Scott St. Amand
For numerous corporate Chapter 11 debtors, the sale of some or all of the company’s assets may be the only way to reorganize the company’s debt. Section 363 of the Bankruptcy Code provides the authority for a debtor to sell estate assets outside the normal course of the debtor’s business. Oftentimes, a court establishes specific bidding and/or sale procedures for the sale of the debtor’s assets. Failure to follow these procedures may result in the bankruptcy court setting aside the sale or the inability of a party to challenge the sale’s confirmation.
A recent case out of the Seventh Circuit offers a cautionary tale to creditors and other potential bidders to a 363 sale. After filing its petition for Chapter 11 bankruptcy, a corporation that owned an ethanol plant in Indiana proposed to sell substantially all of its assets at auction. The winning bid of $2.5 million was submitted by a joint venture. The debtor asked the bankruptcy court to confirm the sale, as did the U.S. Trustee and the largest secured creditor. Only one party, Natural Chem Holdings, opposed confirmation of the sale on the basis of collusion between the members of the joint venture. Unfortunately “Natural Chem chose not to play by the [bankruptcy court’s sale procedures],” and their appeal fell on deaf ears at the bankruptcy, district and appellate court levels.