Don’t Compromise on the Sacrosanct Nature of Bankruptcy Auctions

Increasing the value of an estate can’t justify violating a sale procedures order in a bankruptcy proceeding, as the integrity of the auction process and adherence to established procedures are vital.

The burden placed on late or noncompliant bidders should be heavy. Courts should uphold sale procedures orders to ensure fairness and transparency, even if deviations could yield a higher sale price.

An auction is designed to be final and binding, and courts shouldn’t alter the outcome of a properly conducted auction unless circumstances such as fraud or collusion raise doubts about its fairness. While a debtor has significant discretion in selecting the best bid, that discretion must have limits.

Setting Precedent

In In re MTE Holdings, et al., the US Bankruptcy Court for the District of Delaware stressed the importance of maintaining the integrity of the auction process. The court asserted that reopening the auction after clearly established procedures had been followed would erode confidence in the system—even if it could yield more for the estate.

Similarly, in In re Dorothy R. Palmer, the court emphasized that upholding established auction procedures serves the public interest and that deviating from them to generate additional funds undermines the judicial process.

In In re Parkcliffe Development LLC, the US Bankruptcy Court for the Northern District of Ohio denied a motion to disregard competing bids submitted after the bid deadline set in a sale procedures order and where there hadn’t been an auction. However, the court noted, “The question is whether it is better to address late bids with harshness, to discourage them, or with flexibility, to accommodate the messy realities of the bankruptcy marketplace.”

The Parkcliffe court also highlighted the need to balance finality in the bidding process with fairness to bidders while securing the highest possible bid. It noted that adherence to bidding procedures shouldn’t override the bankruptcy court’s principal responsibility—which is to ensure the best possible bid for creditors.

In In re Financial News Network Inc., the US Court of Appeals for the Second Circuit cautioned that courts shouldn’t follow “such a rigid adherence to the procedures that govern the sale as to elevate them over the substance of a bankruptcy court’s principal responsibility, which is to secure for the benefit of creditors the best possible bid.”

The US Bankruptcy Court for the Southern District of New York later quoted the decision in In re Metaldyne Corp. To hold otherwise would seriously compromise the necessarily broad discretion of the bankruptcy court.

The court has a principal responsibility to maximize the value of estate assets, but that alone shouldn’t readily justify violating sale procedures order absent extraordinary circumstances. Adhering to rules isn’t harsh, but necessary and appropriate.

Excusable Neglect

Excusable neglect allows a court to permit actions after a deadline if the failure to meet it was due to circumstances considered excusable. Factors influencing this determination include:

• Whether allowing the late action would unfairly disadvantage the opposing party
• The significance of the delay
• The reasons for missing the deadline
• Whether the neglect stemmed from carelessness or misunderstanding of the rules.

Courts have underscored that not all neglect is excusable, especially if it results from a misunderstanding of the law or procedural rules.

The Second Circuit takes a stringent approach to excusable neglect, focusing on the reasons for the delay and whether they were within the moving party’s reasonable control. The moving party bears the responsibility of proving their case. In In r re Enron Corp., the court stated that equities rarely favor those who don’t adhere to clear court rules—a sale procedures order establishes rules.

In competitive bidding, a noncompliant bid may be acceptable if deemed a mere irregularity—one that doesn’t unfairly advantage a bidder or jeopardize the bidding process’s integrity.

Violating a sale procedures order to maximize estate value is justified only if it involves bypassing competitive bidding or failing to adequately notify creditors and interested parties. Courts should prioritize procedural integrity over potential financial benefits unless the procedures were unclear, compromised fairness, or unjustly affected stakeholders.

Incompetent counsel generally isn’t grounds for excusable neglect. The US Supreme Court in Pioneer Investment Services Co. v. Brunswick Associates LP granted certiorari in a Sixth Circuit decision related to the company’s bankruptcy establishing that whether neglect is excusable is an equitable determination based on all relevant circumstances.

Parties are accountable for their attorneys’ conduct; clients can’t seek relief for missed deadlines unless the attorney’s neglect is excusable. Courts have ruled that counsel errors don’t constitute grounds for excusable neglect relief unless the attorney’s failings are justifiable.

Key Takeaways

Courts must avoid setting precedents that encourage disregard for procedural rules. Allowing violations to maximize value undermines the predictability and reliability of bankruptcy proceedings.

While increasing the value of the estate is a primary goal in bankruptcy, it must occur within the confines of the law and court-approved procedures. Enforcement of sale procedures orders absent extraordinary circumstances should take precedence over achieving the highest price when the procedures are fair and transparent.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kenneth Rosen practices debtor and creditors’ rights law and advises companies on practical strategies for resolution of financial distress.

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