533 B.R. 600
Bankr. W.D. Mich.2015Background
- Debtors (Family Christian entities) filed Chapter 11 and sought authority to sell substantially all assets via auction; assets included inventory some vendors claim was consigned.
- Multiple lenders and stakeholders were involved: FC Special Funding (insider-controlled), Credit Suisse (term lender), committee of unsecured creditors, and an ad hoc consignment vendor group.
- Debtors ran an auction with several qualified bidders: Acquisition (insider/going-concern), GBH (Gordon/Hilco joint venture; liquidation agent), Great American (liquidator), Yellen, and FC Special Funding. Auction was contested and suspended mid-process.
- GBH (second-highest bidder) alleged the auction was rigged and sought discovery; GBH purchased an unpaid administrative claim and the court found it had standing to object.
- The Acquisition bid included minimum cash floor, broad releases (including insider releases) and settlements affecting priority/distributions; the court required heightened scrutiny because the purchaser was an insider.
- The court denied the Sale Motion, finding auction mistakes, inadequate valuation/notice of releases and avoidance actions, questionable insider communications during the auction, and insufficient evidence of good faith and full disclosure to justify approving the insider sale under §363.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to object to sale (GBH) | GBH: as an aggrieved/frustrated bidder and holder of an unpaid administrative claim, it has pecuniary interest and standing. | Debtors/Acquisition: GBH is merely a frustrated bidder lacking standing. | Held: GBH has standing (pecuniary interest + allegation of flawed auction). |
| Fairness/integrity of auction process | GBH: auction was flawed/rigged, Debtors withheld valuation info, and insider conduct tainted process. | Debtors: auction was adequately run, bidders were sophisticated, risks disclosed; choosing lower-but-certain bid was proper business judgment. | Held: Auction flawed (mistakes and improper ex parte contact) but not proven fraudulent; however flaws weigh against approving sale as presented. |
| Sale to insider, releases, avoidance actions, and sub rosa plan concerns | Objectors: Acquisition is insider; releases are broad and affect avoidance causes of action and creditor priorities — should be approved only with full disclosure and plan protections. | Debtors/Supporters: sale maximizes value, settlements with key creditors resolve concerns; time-sensitive liquidation requires §363 sale. | Held: Heightened scrutiny required; Debtors failed to value or justify releases/avoidance action treatment or provide adequate notice — cannot approve sale to insider on current record. |
| Business justification / good faith purchaser | Debtors: need to sell now (assets declining in value), marketing was extensive, Acquisition offered certainty and will pay administrative claims. | Opponents: insufficient evidence of value of assets being sold (releases/avoidance actions), Acquisition’s good faith not proven, insider ties problematic. | Held: Debtors did not meet burden under Lionel/Stephens — lacked sufficient evidence on value of releases/avoidance actions and good-faith; sale denied. |
Key Cases Cited
- Stephens Indus., Inc. v. McClung, 789 F.2d 386 (6th Cir. 1986) (adopted Lionel factors for approving §363 sales)
- Matter of Lionel Corp., 722 F.2d 1063 (2d Cir. 1983) (factors for evaluating business justification for out‑of‑court asset sales)
- Stark v. Moran (In re Moran), 566 F.3d 676 (6th Cir. 2009) (aggrieved bidder may have standing to challenge sale)
- Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors (In re Made in Detroit, Inc.), 414 F.3d 576 (6th Cir. 2005) (good-faith purchaser analysis under §363)
- In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (involuntary releases of third‑party claims are extraordinary; require careful scrutiny)
- In re Bakalis, 220 B.R. 525 (Bankr. E.D.N.Y. 1998) (approving lower, less risky bid over higher contingent bid)