Section 363 of the Bankruptcy Code allows a debtor to sell its assets outside the ordinary course of business, free and clear of liens and encumbrances. Section 363 sales generally seek to generate substantial interest in bidding in order to maximize the value from the sale for a debtor’s estate and creditors. Debtors typically are given wide latitude to design a sale processes (e.g., establishing bidding rules) to achieve that goal. While there are unsuccessful bidders in any competitive sale process, it is rare that a sale is unwound and a different bidder than the winning bidder chosen. The Limetree Bay Services bankruptcy case, however, is a recent, and interesting, example of this. There, the Southern District of Texas Bankruptcy Court reopened an auction that was closed by its own terms1 —resulting in a new winning bidder—in a decision that is now being appealed by the original “winner.”
On July 12, 2021, Limetree Bay Services, LLC and its affiliates (the "Debtors" ) filed for chapter 11 relief in the Bankruptcy Court for the Southern District of Texas. The Debtors were facing severe liquidity issues and promptly sought to implement an expedited sale process. Pursuant to the bidding procedures proposed by the Debtors and eventually approved by the court (the "Bidding Procedures"), an auction of substantially all the Debtors’ assets (the "Auction") was scheduled. To participate at the Auction, a bidder had to submit a qualified bid by November 16, 2021 (the "Bid Deadline").
West Indies Petroleum Limited ("WIPL") initially submitted a going-concern bid, but it was not considered a “qualified bid” because it was not accompanied by an executed version of an asset purchase agreement or the requisite $3,000,000 deposit. This prohibited WIPL from participating in the Auction. The only party to submit a qualified bid to purchase the Debtors’ business as a going-concern was St. Croix Energy, LLP ("SCE"), whose bid consisted of $20 million in cash and $13 million in other consideration. SCE was designated as the stalking horse bidder and subsequently selected as the winning bid at the conclusion of the Auction, which was held four days later.
Then things got interesting. After the Auction, WIPL informed the Debtors that WIPL’s failure to submit a qualified bid by the Bid Deadline was due to an unforeseen medical emergency suffered by its CEO on the eve of the Bid Deadline.2 On December 6, 2021, the Debtors filed an emergency motion to reopen the Auction, arguing that WIPL’s failure to submit a qualified bid, and thus its inability to participate in the Auction, was “the result of extraordinary circumstances beyond the control of WIPL or the Debtors and, at worst, excusable neglect.”3 The Debtors insisted that they had a fiduciary duty to accept WIPL’s bid, which they deemed “preferrable to the SCE bid in several respects, including, without limitation, an increase in the purchase price by $10 million to $30 million and the ability to acquire all assets at closing.”4
A Second Bite at the Apple Lime
After an evidentiary hearing, and over the objection of SCE, Judge David R. Jones granted the Debtors’ motion to reopen the Auction. In his decision, delivered orally from the bench, Judge Jones suggested that the sanctity of the Auction process meant that it be fair and open, and that everyone be given an opportunity to participate. Judge Jones accepted that WIPL was acting in good faith and that its failure to submit a qualified bid by the Bid Deadline was not a strategic maneuver. He found that his order approving the Bidding Procedures expressly authorized him to reopen the Auction prior to the sale hearing,5 and that there was little harm in doing so.
A reopened Auction was held on December 17 and 18, 2021. This time, the winning bid selected by the Debtors was a $62 million joint bid submitted by WIPL and Port Hamilton Refining and Transportation ("Port Hamilton"). SCE, with a bid of $57 million, was designated as the backup bidder. At the December 21, 2021 sale hearing, Judge Jones approved the results of the reopened Auction over the objection of SCE, which he determined was merely a restatement of its objection to the Auction’s reopening. Judge Jones found that WIPL’s joint bid was the highest and best offer and that the Debtors properly exercised their business judgment in selecting it as the winning bid.
SCE then filed a notice of appeal with respect to the orders reopening the Auction and approving the sale and an emergency motion for a stay pending its appeal of those orders. In that motion, SCE argued that “the Court reopened the auction based on a misunderstanding, if not misrepresentations, of the critical facts as to . . . the late bid.”6 Specifically, SCE asserts that WIPL’s failure to submit a bid by the Bid Deadline actually resulted from its CEO’s pre-planned surgery occurring after the Bid Deadline.7 SCE argued its appeal is likely to succeed on the merits because the court erred by reopening the Auction without record evidence of “excusable neglect” for WIPL’s failure to submit a timely Qualified Bid and determining that WIPL’s bid was more than a “slightly higher bid” than SCE’s initial winning bid.8 SCE also takes issue with the fact that the winning bidders—namely, Port Hamilton—consisted of different bidders than those specifically approved by Judge Jones in his order reopening the Auction.9 Absent the stay, SCE asserted that it would suffer irreparable harm, in part, because its appeal would be mooted by the closing of the sale to WIPL.10
On January 11, 2022, Judge Jones denied SCE’s motion for a stay pending appeal. He concluded that SCE failed to show a likelihood of success on the merits given that the record evidence—particularly the substantial increase in the purchase price after the Auction was reopened—demonstrated that his prior orders were “entirely appropriate” and “added transparency to the process with no loss in terms of finality.” He questioned whether SCE would actually suffer irreparable harm and whether its appeal would be mooted by denial of the stay. Nonetheless, assuming for argument’s sake that SCE would suffer irreparable harm, Judge Jones found any harm was significantly outweighed by the injury that would occur by granting the stay and risking the timely closing of the sale to WIPL. He reasoned that such an outcome would not only severely harm the Debtors and other case constituents, but would also threaten the health, safety, and welfare of the residents of St. Croix and surrounding communities.
This case highlights the tension between running a sale process in accordance with its court-approved terms and obtaining the most dollars for a debtor’s estate and creditors. It is not unusual for a debtor to adopt a liberal interpretation of the framework set out in bidding procedures (bidding procedures often contemplate that the debtors can amend them on the fly with the agreement of other significant case constituents, usually lenders and creditors’ committees) to obtain more or higher bids. The only parties potentially prejudiced in those circumstances are the bidders. This case, however, brings this practice into stark relief given the facts, which include a auction that was nominally closed, with notice of a winning bidder filed on the case docket, and motivated unsuccessful bidder. The appeal, which Judge Jones noted for the record should be expedited given its heightened ramifications, will be telling—if the court’s decision to reopen the Auction is affirmed, it could embolden debtors to play fast and loose with section 363 sale processes in search of better bids, or bidders to up the ante when it comes to gamesmanship by submitting bids at or after a bid deadline. If the decision is reversed, debtors will be more careful in crafting their bidding procedures so that they afford themselves discretion to reopen as necessary.
1 In re Limetree Bay Services LLC, Case No. 21-32351, Dkt. No. 882 (Bankr. S.D. Tex. Dec. 7, 2021).
2 According to the Debtors, the CEO was “the only person at WIPL who had sufficient knowledge of the proposed refinery transaction and sale process and was the only person at WIPL who could authorize a deposit or execute an asset purchase agreement.” Dkt. No. 862 at 3.
5 The Bidding Procedures expressly permitted the Debtors to re-open the Auction at any time prior to the commencement of the sale hearing to approve the Auction’s winning bid and provided that winning bid at Auction would only be accepted by the Debtors upon approval by the bankruptcy court. Moreover, as is standard, pursuant to the Bidding Procedures, the bankruptcy court retained exclusive jurisdiction to interpret and enforce its terms.
6 Id. Dkt. No. 1018 at 9.
7 Id. at 11-12.
8 Id. at 9-10.
9 Id. at 10-11.
10 Id. at 13-14.