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In Federal Bankruptcy auctions — such as in Chapter 11 cases — assets are sometimes sold at public auction in a reorganization effort and/or to satisfy creditors.

Generally, when Bankruptcy courts oversee auctions, and for that matter, when state and county courts oversee auctions, there is often a “confirmation” which follows receipt of the highest and best bid at the auction.

This confirmation takes place after the auction, allowing for some time to pass between the end of the auction and confirmation. As such, this allows other interested parties to approach the court to submit higher bids than were received at the auction.

It’s interesting that two such cases, with two different judges, looked at this issue in opposite ways:

  • In 2009 Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware agreed to recommence bidding following an auction’s conclusion based on his determination that it would result in increased value to the estate.

    In other words, money trumps principle.

  • In 2010 James M. Peck of the United States Bankruptcy Court for the Southern District of New York refused to allow bidding after the conclusion of an auction, citing that finality is of central importance to bankruptcy estate auctions.

    In other words, principle trumps money.

While these cases are not identical in nature, they exhibit our topic today, which is — “Does money trump principle?”

In other words, should courts be open to further, higher offers following the finality of an open, competitive auction? If the final bid is $150,000 and the auctioneer says, “Sold!” should the court exhibit any power beyond accepting or rejecting the $150,000? We think not.

By courts reopening bidding following an auction, confidence is lost in the auction process. As Judge Peck noted in response (in two different cases) to a losing bidder asking the court to reopen the bidding as they would bid more:

    “The only way that auctions of assets can be conducted fairly, not only in this case, but in every other case, is if the parties who participate in the auction recognize that it really matters whether they choose to bid or not to bid … you were not limited in any way, you participated voluntarily in an auction and now you’re complaining about it…you accepted the rules, you participated pursuant to the rules. And with all the creativity available to you[,] you could have come up with a bid that was the highest and best bid.”

While procedural issues can result in a court feeling the auction results require invalidation, the better solution is to have another open, competitive auction, and notify all interested parties, rather than continuing the bidding in the judge’s chambers or in the courtroom.

Actually, when an auctioneer says, “Sold!” it means “Sold!” and is not dependent upon a follow-up approval or confirmation; there’s an abundance of case law which supports the binding nature of the word, “Sold!”

We applaud Judge Peck’s 2010 rulings, and believe more courts across the United States (and more sellers, regardless of circumstance) should take his opinion under advisement.

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Greater Columbus Auctions and Goodwill Columbus Car Auction and. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.