363 Sales: Watch It – A Good Faith Deposit May Not Be As Reliable For Protection As You Thought

The Brown Publ'g Co. Liquidating Trust v. Brown Media Corp. (In re Brown Publ'g Co.), 486 B.R. 46 (Bankr. E.D.N.Y. 2013) -

A stalking horse (BMC) was the winning bidder in a section 363 bankruptcy sale. After the sale to BMC failed to close and the debtors' assets were instead sold to a back-up bidder, BMC claimed that it was entitled to a refund of its 5% good faith deposit, while the debtors' successor (a liquidating trust) claimed BMC defaulted and sought to retain the good faith deposit.

The debtors filed for bankruptcy on April 30, 2010 and May 1, 2010. Four days after the bankruptcy petitions were filed, the debtors filed a motion to sell substantially all of their assets to BMC as a stalking horse for $15.3 million in cash plus certain additional consideration, subject to competing bids at an auction. Under the asset purchase agreement (APA), only competing bidders were required to submit a cash good faith deposit equal to 5% of their bids. However, in reviewing the proposed sale, the court required that BMC also submit a deposit.

BMC was formed by three insiders (CEO, general counsel and CFO of the debtors), who had begun working on financing as early as February 2010 so that they could purchase the debtors' assets for themselves, and had obtained a financing commitment for $18 million prior to the bankruptcy filings. Although BMC was relying on this commitment to fund the purchase price, the APA included a representation that it had sufficient funds available to close the sale, and there was no financing contingency.

The auction was held on July 19. BMC was the successful bidder for substantially all of the debtors' assets with a bid of $22.4 million in cash and other consideration. The next highest bidder was a secured creditor (PNC).

At the hearing to approve the sale, it became clear that the debtors had included assets that were not identified in the APA nor disclosed to the courts (and in fact, may not even have been owned by the debtors). Among other things, the assets included three pieces of property that were listed on the debtors' schedules as having a value of ~$550,000. In particular, one of the properties had been acquired by the debtors pursuant to an option within days before the bankruptcy petitions were filed for $375,000. BMC's separate bid of $10,000 was the only bid for this real estate (since PNC was not interested). There were no appraisals and the properties had not been marketed or listed with a real estate...

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