The Essential Resource for Today’s Busy Insolvency Professional
What’s Your Bid?
By Elie J. Worenklein1
Seventh Circuit: Would-Be Bidders
Lack Standing to Object to a Sale
O
Elie J. Worenklein
Lowenstein Sandler
LLP; New York
Elie Worenklein
is an associate in
Lowenstein Sandler
LLP’s Bankruptcy,
Financial
Reorganization and
Creditors’ Rights
Group in New York.
ne of the more recent trends in chapter 11
cases is the increased use and reliance on asset
sales pursuant to § 363 of the Bankruptcy
Code.2 In a § 363 sale, the debtor generally files for
bankruptcy with a deal to sell all or substantially all
of its assets to a stalking-horse bidder3 that is willing
to pay cash or make a credit-bid. Quick asset sales
appeal to debtors in order to minimize the duration
and cost of the bankruptcy case, as well as to preserve
the debtor’s going-concern value. The Seventh Circuit
Court of Appeals in In re New Energy Corp.4 recently
issued an opinion that may have a significant impact
on a non-bidder’s right to object to a § 363 sale.
The Seventh Circuit Court of Appeals held that a
party who considered, but ultimately did not bid on
the debtor’s assets, lacked standing to argue that the
proposed sale was the product of collusive bidding
in violation of § 363‌(n).5 More specifically, the court
found that because the bidder did not ultimately bid
on the debtor’s assets and was not otherwise a creditor of the debtor, it lacked standing to object to the
sale as it was not harmed or impaired by the proposed
sale. Rather, the court found that the would-be bidder was more akin to a “public-inspired observer.”
Accordingly, while § 363‌(n) provides the ability to
avoid a sale when there is collusion between bidders,
such a right is not available to would-be bidders.
1 The opinions expressed herein are those of the author and do not necessarily reflect the
views of the firm or its clients.
2 As the Second Circuit Court of Appeals noted in Ind. State Police Pension Trust v. Chrysler
LLC (In re Chrysler LLC), 576 F.3d 108, 115 (2d Cir. 2009), “§ 363‌(b) asset sales have
become common practice in large-scale corporate bankruptcies” and that “[t]‌he side
door of § 363‌(b) may well ‘replace the main route of Chapter 11 reorganization plans.’”
3 “A ‘stalking-horse’ contract is a first [and] favorable bid [that is] strategically solicited by
the bankrupt company to prevent low-ball offers.” Contrarian Funds LLC v. Aretex LLC (In
re WestPoint Stevens Inc.), 600 F.3d 231, 239 n.3 (2d Cir. 2010).
4 In re New Energy Corp., 739 F.3d 1077 (7th Cir. 2014).
5 Section 363(n) provides that “[t]‌he trustee may avoid a sale under this section if the
sale price was controlled by an agreement among [the] potential bidders at such sale,
or may recover from a party to such agreement any amount by which the value of the
property sold exceeds the price at which such sale was consummated, and may recover
any costs, attorneys’ fees, or expenses incurred in avoiding such sale or recovering such
amount.” 11 U.S.C. § 363‌(n).
Factual Background
The debtor, New Energy Corp., operated an ethanol plant in South Bend, Ind.6 New Energy filed for
bankruptcy protection on Nov. 9, 2012, and on Nov.
14, 2012, the debtor filed a motion seeking to establish bidding procedures to sell substantially all of
its assets pursuant to § 363. Pursuant to the bidding
procedures approved by the bankruptcy court, all
qualified bidders were required, among other things,
to post a bond of $250,000.7
A public auction was held on Jan. 31, 2013, 8
and the winning bid of $2.5 million was made by
a joint venture of Maynards Industries (1991) Inc.
and Biditup Auctions Worldwide Inc.9 The debtor
requested bankruptcy court approval of the sale.
The U.S. Trustee and the Department of Energy (the
debtor’s largest creditor) supported approval of the
sale.10 The only party to oppose the proposed sale was
Natural Chem Holdings, which considered, but ultimately did not bid on, the debtor’s assets.11 Natural
Chem Holdings argued that the sale should not be
approved because the winning bid was the result of
collusion on behalf of the parties to the joint venture.12
The bankruptcy court overruled Natural Chem
Holdings’s objection and entered an order approving the sale.13 The court also denied a motion filed
by Natural Chem Holdings to reconsider the sale
order.14 The bankruptcy court found, inter alia, that
because Natural Chem Holdings did not ultimately
bid at the auction, it could not have been harmed
by any alleged collusion by the winning bidders.15
6 In re New Energy Corp., 739 F.3d at 1078.
7 Id.
8 Id.
9 Id.
10Id.
11Id.
12Id.
13Id.
14Id.
15Id.
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Natural Chem Holdings did not seek a stay of the sale order
that was issued by the bankruptcy court.16 As a result, the sale
of the debtor’s assets was closed.17
The district court affirmed the entry of the sale order,
noting that “after the closing, only a protest by the trustee
permits a sale to be undone on the grounds that ‘the sale price
was controlled by an agreement among potential bidders at
such a sale.’”18 However, the trustee supported the sale and
was satisfied with the outcome of the auction in this case.
The Seventh Circuit’s Decision
The Seventh Circuit noted that Natural Chem Holdings’s
appeal was seeking to have the court “proceed as ombudsmen, fixing problems brought to [the court’s] attention by
a public-spirited observer.”19 However, according to the
Constitution, as well as the Bankruptcy Code, a court is not
permitted to proceed under such circumstances. As such, the
Seventh Circuit found that Natural Chem Holdings lacked
standing for two independent reasons.
First, Natural Chem Holdings did not post the required bond
in order to participate in the auction as a qualified bidder; as
such, it could not have been injured as a bidder by the auction’s
outcome because “it was not going to prevail no matter what
the other bidders did.”20 As the Seventh Circuit noted, “Natural
Chem chose not to play by the auction’s rules. That was its
right — but because it did not bid, it was also not harmed by
the outcome.”21 The Seventh Circuit also observed that Natural
Chem Holdings could not have been injured as a creditor of the
debtor because it was not a creditor of the debtor.22
Second, the Seventh Circuit found that even if Natural
Chem Holdings would have bid at the auction, it still would
not have been harmed by the alleged collusive activity. 23
Noting that Natural Chem Holdings misunderstood why
collusion is prohibited, the Seventh Circuit stated that
“[c]‌ollusion is a form of monopsony that depresses the price
realized at auctions. Collusion by two bidders would have
made it easier for Natural Chem to secure the property.”24
Thus, even if Natural Chem Holdings had bid at the auction, it would not have been harmed by the alleged collusion.
Rather, Natural Chem Holdings would have only benefited
from the collusion at the expense of the debtor’s creditors by
being able to bid on the debtor’s assets at a lower price.
Accordingly, the Seventh Circuit opined that this is precisely why the debtor — rather than a non-winning bidder —
is the appropriate person to object to a proposed sale pursuant
to § 363‌(n).25 The language of § 363‌(n) specifically refers to a
trustee avoiding a sale on account of collusion by the winning
bidder. While Natural Chem Holdings argued that this literal
interpretation of the statute should be disregarded, such a reading would run smack into the U.S. Supreme Court’s insistence
that the Bankruptcy Code should be interpreted as written.26
16Id.
17Id.
18Id.
19Id.
20Id.
21Id. at 1079.
22Id. at 1078.
23Id. at 1079.
24Id. (emphasis in original).
25Id.
26See RadLAX Gateway Hotel LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2073 (2012) (“The Bankruptcy
Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret
the Code clearly and predictably using well established principles of statutory construction.”).
Moreover, since Natural Chem Holdings failed to obtain a
stay of the sale order, the sale to any potential good-faith purchaser would not be affected due to § 363‌(m), even if Natural
Chem Holdings had proper standing.27 Section 363‌(m) provides
that reversal of a sale order “does not affect the validity of a sale
or lease under such authorization to an entity that purchased or
leased such property in good faith, whether or not such entity
knew of the pendency of the appeal.” As a result, because the
sale order was not stayed and the bankruptcy judge found that
the winning joint venture acted in good faith, any appeal would
not affect the validity of the sale order, even if Natural Chem
Holdings had standing to object to the sale order.28
Possible Implications
The Seventh Circuit’s decision is a wake-up call to any
party that is considering bidding at a § 363 auction. While
other circuit courts have previously held that an unsuccessful or non-bidder does not have standing to object to a proposed sale if the bidder was not otherwise a creditor,29 those
cases generally provide an exception for objections that go
to the intrinsic fairness of the sale process, either pursuant
to § 363‌(n) or otherwise.30 However, unlike these prior decisions, the Seventh Circuit held that a non-bidder or potential
bidder also lacks the standing to object to the intrinsic fairness and integrity of the sale process pursuant to § 363‌(n).
The Seventh Circuit’s decision would likely apply to both
public and private sales.31 As a result, the only parties that
can satisfy the “person-aggrieved” standard for standing and
object pursuant to § 363‌(n) are those who participated in
the auction or the debtor.32 However, as the Seventh Circuit
pointed out, if an unsuccessful or non-bidder is also a creditor of the debtor, it would satisfy the requisite standing to
object to the sale pursuant to its status as a creditor that is
impacted by the improper auction process. abi
Editor’s Note: For more on this topic, purchase A
Comparison Shopping Guide for 363 Sales (ABI, 2009),
available in the ABI Bookstore (bookstore.abi.org).
Reprinted with permission from the ABI Journal, Vol. XXXIII,
No. 6, June 2014.
The American Bankruptcy Institute is a multi-disciplinary, nonpartisan organization devoted to bankruptcy issues. ABI has
more than 13,000 members, representing all facets of the insolvency field. For more information, visit abi.org.
27In re New Energy Corp., 739 F.3d at 1079-80.
28Id.
29Squire v. Scher (In re Squire), 282 F. App’x. 413, 416 (6th Cir. 2008) (“Frustrated bidders do not have
standing to object to sale of property.”); 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.”); Licensing by Paolo v. Sinatra (In re Gucci),
126 F.3d 380, 388 (2d Cir. 1997) (“[U]‌nsuccessful bidders usually lack standing to challenge a bankruptcy court’s approval of a sale.”).
30In re Moran, 566 F.3d 676, 681-82 (6th Cir. 2009) (“Generally, frustrated bidders do not have [the]
standing to object to the sale of property. An exception to this general rule may exist where an unsuccessful bidder challenges the intrinsic structure of the sale because it is tainted by fraud, mistake, or
unfairness.”); In re Colony Hill Assocs., 11 F.3d 269, 274 (2d Cir. 1997) (finding that unsuccessful bidder
“has standing to the extent it alleges that [the winning bidder’s] actions destroyed the ‘intrinsic fairness’
of the sale transaction so that it was not a good faith purchaser”).
31See Ramsay v. Vogel, 970 F.2d 471, 472 (8th Cir. 1992) (finding that § 363‌(n) applies to both public and
private sales pursuant to § 363‌(b)).
32In a chapter 7 proceeding, only the trustee, and not the debtor, would have standing to object to the
proposed sale. See In re Mark Bell Furniture Warehouse Inc., 992 F.2d 7, 10 (1st Cir. 1993) (“[I]‌t is well
established that a chapter 7 debtor generally lacks [the] ‘standing’ to challenge a bankruptcy court‌[’s]
judgment confirming a sale of property of the chapter 7 estate.”).
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