United States Bankruptcy Court, Central District of California
Judge Theodor Albert, Presiding
Tuesday, June 02, 2015 Hearing Room 5B
11:00 AM
8:14-12049 Ergocraft, Inc. Chapter 7
#16.00 Motion for Order: (1) Approving Asset Purchase Agreement and Authorizing the Sale of the Estate’s Interest in Avoidance Actions Pursuant to 11 U.S.C. Section 363(b); and (2) Approving Overbid Procedures
The Chapter 7 trustee moves for an order approving the asset purchase he has negotiated with Jiangsu World Plant Protecting Machinery Co., Ltd. (“Jiangsu”). Jiangsu previously obtained a judgment against the debtor in the amount of $1,821,983.28. This claim is designated Claim No. 1 on the claims register (“Jiangsu Claim”). Trustee has negotiated with Jiangsu for the purchase of estate’s interest in avoidance actions which are reportedly the only realizable assets of the estate. Jiangsu will pay $52,500, release the Trustee and the estate from all claims, and subordinate the Jiangsu Claim to the payment of all other allowed claims. In addition, the Trustee seeks approval of overbid procedures, whereby qualified bidders may bid on the same assets at an auction to be held during the hearing for the motion. Bidders must bid a minimum of $67,500 (an initial overbid of $15,000), and each subsequent increase must be by an increment of $1,000.
A court is to evaluate a proposed sale by considering the “business justification” for the proposed sale. In re 240 North Brand Partners, Ltd., 200 B.R. 653, 659 (B.A.P. 9th Cir. 1996). In approving any sale outside the ordinary course of business, the court must not only articulate a sufficient business reason for the sale, it must further find it is in the best interest of the estate, i.e., it is fair and reasonable, that it has been given adequate marketing, that it has been negotiated and proposed in good faith, that the purchaser is proceeding in good faith, and that it is an ‘armslength’ transaction. In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 841 (Bankr. C.D. Cal. 1991). Here, the proposed sale is justified because it is a reasoned business judgment to liquidate these assets to pay allowed claims. Furthermore, Trustee’s motion indicates that the agreement has been reached after “months of negotiations.”
There is no evidence that Jiangsu has acted in bad faith, nor is there any evidence that the proposed sale was the result of anything but “arms-length” negotiations. Moreover, no objections to the proposed sale or the overbid procedure have been
filed.
Minimum overbids are a common procedure to facilitate orderly and efficient sales in bankruptcy. Requesting that the court conduct a proposed auction is also “normally an appropriate procedure.” In re Mama’s Original Foods, Inc., 234 B.R. 500, 505 (Bankr. C.D. Cal. 1999). The bidding process should be fair, and “how much higher an overbid must be is a matter to be determined by the court.” Id. The ideal level for a minimum overbid is “the minimum level that is high enough to move the procedure along toward achieving the highest bid.” Id. Obviously, too steep a minimum overbid is counterproductive. Rather than facilitate a sale, it merely discourages an auction favoring the “stalking horse’s” opening bid.
In In re Mama’s, the court found that the minimum overbid suggested by the trustee was improper in two respects. First, the court found that by specifying a minimum overbid the trustee was making a decision that ought to have been made by the court. Second, the court found that the minimum overbid proposed by the trustee, which was 11.3% more than the initial offer, was excessive. The court found that this minimum had been chosen to “chill the bidding” rather than encourage it. Id. at 505 Here, the Trustee has proposed a minimum overbid of $15,000, which is approximately 28.6% higher than Jiangsu’s initial offer of $52,500. This is pretty hard to justify under any approach other than to chill bidding. A distinction in this case may arise because Jiangsu is apparently the only creditor (other than the Trustee’s administrative claims) in which case one supposes that the point is largely moot. The subordination provision provides some additional comfort if late-filed claims should arise. On balance this might convince the court to allow such terms in this unique circumstance. Still, the court is very troubled by such a sky-high minimum overbid and would like to hear whether some re-noticing of the sale with a more modest initial over bid of, say, $5000 might not be more prudent (and consistent with the salutary purposes of overbids). Further, the court needs the trustee and counsel to understand that such terms scrape against the ceiling of what could ever be justified.
There may be another issue. Bankruptcy courts are reluctant to entertain avoidance actions as mere items in commerce for the benefit of only one creditor. In re Greenberg, 266 B.R. 45, 51 (Bankr. E.D.N.Y. 2001). Avoidance powers are founded uniquely in equity, and exist at all largely so that there might be a pro rata recovery of creditors rather than one creditor who receives a disproportionate share. See e.g. In re Tleel, 876 F.2d 769, 771 (9th Cir. 1989). It may be antithetical to these precepts, therefore, for a creditor to pursue such an action solely for his own account. The point is subject to some question as courts have held that avoidance powers can be sold for a sum certain. See, Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C. Inc.), 177 F. 3d 774, 781-82 (9th Cir. 1999). But even those cases authorizing such transfers qualify that the transfers must arise either under a plan or “when a creditor is pursuing interests common to all creditors.” Id. at 781 citing Briggs v. Kent (In re Professional Investment Properties of America), 955 F. 2d 623, 625 (9th Cir. 1992) cert. denied sub nom. Miller v. Briggs, 113 S. Ct. 63. Normally, this problem is mitigated by sharing the proceeds on some percentage basis with the unsecured creditors, and usually the trustee remains as at least the nominal plaintiff. See e.g., In re Lahijani, 325 B.R. 282 (B.A.P. 9th Cir. 2005); Greenberg, 266 B.R. at 51; P.R.T.C. 177 F. 3d at 783. But whether the initial price alone as offered here can serve as the sole interest of the estate remains somewhat unclear. Lahijani at 288. But again, ours may be a unique case in that there might in the end be only one creditor. Still, the court wants to hear argument as to whether a future Rule 12 motion to dismiss any avoidance action filed by Jiangsu should be granted on the basis that a single creditor, even one having purchased the right but acting solely on its own account, lacks equitable standing. See, e.g., In re Conley, 159 B.R. 323, 324 n. 2 (Bankr. Idaho 1993), citing Briggs 955 F. 2d at 626.
No tentative