Four B. Corp v. Food Barn Stores ( 1997 )

No. 95-4211
In re: Food Barn Stores, Inc. *
*
Debtor. *
*
*
------------------------- *
*
* Appeal from the United States
Four B. Corporation, * District Court for the Western
* District of Missouri.
Creditor - Appellant, *
*
v. *
*
Food Barn Stores, Inc., *
*
Debtor - Appellee. *
Submitted: September 12, 1996
Filed: February 20, 1997
Before RICHARD S. ARNOLD, Chief Judge, FLOYD R. GIBSON, and ROSS,
Circuit Judges.
FLOYD R. GIBSON, Circuit Judge.
In this appeal, Four B. Corporation ("Four B") challenges the
district court's1 affirmance of a bankruptcy court2 order requiring Four B
to pay $2.1 million to secure assignment of a debtor's real property lease.
Utilizing a number of legal theories, Four B submits that the bankruptcy
court should have permitted it to
The HONORABLE D. BROOK BARTLETT, Chief United States
District Judge for the Western District of Missouri.
The HONORABLE FRANK W. KOGER, Chief United States Bankruptcy
Judge for the Western District of Missouri.
tender only $1.5 million for the contract. After careful contemplation of
Four B's contentions, we affirm.
I. BACKGROUND
Food Barn Stores, Inc. ("Food Barn"), the debtor, owned and managed
supermarkets in Missouri and Kansas. On January 5, 1993, Food Barn filed
a voluntary petition for bankruptcy reorganization under Title Eleven of
the United States Bankruptcy Code. For several months thereafter, the
company continued to operate its business as a debtor-in-possession
pursuant to 11 U.S.C. §§ 1107-1108 (1994).3 On April 8, 1993, Food Barn
entered into a Purchase Agreement with Four B; the agreement, which by its
terms was subject to bankruptcy court approval, provided that Four B would
tender $1.5 million to purchase the lease and certain equipment, fixtures,
and inventory for the Food Barn store at a shopping center in Olathe,
Kansas.4 The Purchase Agreement also contained two "bid protection"
features. Specifically, the contract granted Four B the right to match any
rival offers for the property, and it precluded Food Barn from recommending
an alternate party's proposal unless the competing bidder agreed to
reimburse Four B no less than $10,000 for its "actual" legal and accounting
expenses.
In order to effectuate the contract, Food Barn filed with the
bankruptcy court a motion seeking authorization for the transaction. At
a subsequent hearing on that request, Food Barn informed the judge that
Schnuck Markets, Inc. ("Schnuck"), the proprietor of yet another chain of
grocery stores, had offered $1.6 million for the lease. Nonetheless,
because Food Barn desired
Four B's attempt to restructure its finances was, in the
end, unsuccessful, and the company thus found it necessary to
liquidate its assets.
The lessor for this property was the Equitable Life
Assurance Society of the United States ("Equitable").
2
immediate consummation of the deal, it expressed a willingness to honor the
original Purchase Agreement with Four B. Various interested parties then
made arguments for or against assignment of the lease to Schnuck rather
than Four B.5 For instance, citing 11 U.S.C. § 365(b)(3)(D) (1994), which
essentially prohibits a bankruptcy court from approving a lease assignment
that will "disrupt any tenant mix or balance in [a] shopping center," and
professing its understanding that Schnuck did not intend to operate a
supermarket on the property, Equitable exhorted the court to deny Schnuck's
attempt to obtain the lease. The representative of the Unsecured Creditors
Committee, on the other hand, emphasized the importance of maximizing the
estate's assets and implored the court to approve Schnuck's more lucrative
bid. After some deliberation, the court orally declared its preliminary
inclination to authorize the original deal between Food Barn and Four B.
Within seconds, though, Schnuck announced that it was raising its offer to
$2.1 million. The bankruptcy judge at that time granted Food Barn's
request for a recess, stating, "Yeah, I think we all better have a recess
for a half a million dollars."
When the hearing reconvened, Food Barn proposed that the court compel
Schnuck to extend its best and final offer, which Four B would then be
allowed to equal. Four B, relying in part upon the tenant mix protections
in § 365(b)(3)(D), remonstrated that it was inappropriate for the court to
consider any of Schnuck's submissions, but the bankruptcy judge accepted
Food Barn's first suggestion to oblige Schnuck to submit its best and final
bid. Schnuck verified that $2.1 million was its final offer, and Four B
then volunteered to proceed under one of the two following courses
We are aware of the legal distinction between assignment of
rights and delegation of duties. When both rights and duties are
transferred, it is permissible to characterize the transaction as
an "assignment" of the lease or contract. See Metropolitan
Airports Comm'n v. Northwest Airlines, Inc. (In re Midway
Airlines, Inc.), 6 F.3d 492, 495 n.4 (7th Cir. 1993).
3
of action: (1) it would match the offer with a right to appeal the
bankruptcy court's insistence that Four B pay any amount in excess of the
original $1.5 million purchase price; or (2) it would match without
reservation Schnuck's initial bid of $1.6 million. The judge selected the
first option, and he subsequently approved the sale to Four B for $2.1
million. In accord with the court's order, Four B placed $600,000 of the
purchase price into an escrow account pending resolution of this appeal.
The district court affirmed the bankruptcy court's ratification of
the sale for $2.1 million, and the matter is now before us for disposition.
For reversal, Four B contends the bankruptcy judge committed error by (1)
considering Schnuck's proposals despite the fact that the tenant mix
provisions of § 365(b)(3)(D) would have prevented assignment of the lease
to that company, (2) allowing additional bids after the court had orally
accepted Four B's original $1.5 million offer, and (3) refusing to honor
Four B's right to match Schnuck's initial $1.6 million submission. We
consider each of these arguments seriatim.
II. DISCUSSION
A. Standard of Review
As a second court of review in bankruptcy proceedings, we apply the
same standards used by the district court. See Jones Truck Lines, Inc. v.
Foster's Truck & Equip. Sales, Inc. (In re Jones Truck Lines, Inc.), 63
F.3d 685, 686 (8th Cir. 1995). We examine the bankruptcy court's findings
of fact for clear error and its conclusions of law de novo. Id.
Furthermore, we will reverse on matters committed to the bankruptcy court's
discretion only if the court abused its discretion. See id.
4
B. Schnuck's Ineligibility under § 365(b)(3)(D)
Section 365 of the Code allows the trustee,6 within a prescribed time
period and subject to statutory limitations as well as bankruptcy court
approval, to assume "any executory contract or unexpired lease of the
debtor." 11 U.S.C. § 365(a); see also Cameron v. Pfaff Plumbing & Heating,
Inc., 966 F.2d 414, 415 (8th Cir. 1992). In addition, the statute
authorizes the trustee to assign most types of contracts the trustee has
elected to assume. See 11 U.S.C. § 365(f). Before the court will sanction
an assignment, however, the trustee must provide "adequate assurance" that
the assignee will satisfactorily perform under the contract. See id. §
365(f)(2)(B).
In general, the Code is conspicuously silent on what suffices as
"adequate assurance of future performance." Nonetheless, as applied to one
discrete class of unexpired leases, Congress has supplied quite explicit
guidelines for determining when the trustee has met this standard. See id.
§ 365(b)(3). Namely, when the trustee seeks to assume or assign a lease
of real property in a shopping center, the trustee must furnish, inter
alia, adequate assurance "that assumption or assignment of such lease will
not disrupt any tenant mix or balance in such shopping center." Id. §
365(b)(3)(D). This legislative directive to protect the tenant mix in
shopping centers forms the basis for one of Four B's grounds for reversal.
Four B emphasizes there is a strong inference that Schnuck, which
owns a grocery store across the street from the site at issue, did not
intend to open another supermarket in the location vacated by Food Barn.
At the hearing in bankruptcy court, Schnuck
Food Barn, as debtor-in-possession, enjoyed all the powers
under § 365 as a duly appointed trustee. See 11 U.S.C. § 1107(a)
(1994). For ease of discussion, this opinion refers to Food Barn
as a trustee.
5
was evasive about its designs with regard to the property, but it conceded
that it would be disinclined to operate the premises as a grocery store.
See Transcript of Hr'g at 142 ("Our interest in consolidating volume would
be to acquire the property and sublease or lease the space to another
retail use, a non-food retail use."). Echoing the protestations originally
advanced by Equitable, Four B contends that Schnuck was not qualified to
bid on the lease because its acquisition of the property would have
necessarily disrupted the tenant mix in the Olathe shopping center.
According to Four B, it naturally follows that the bankruptcy court
committed error when it considered any of Schnuck's offers.7
We disagree. To begin with, we reject any intimation that a
bankruptcy court should prequalify bidders before conducting a sale of the
estate's property. Adoption of this custom would, in our view, needlessly
divert the court's time and resources to matters that are true issues only
in the most speculative sense. See In re Joshua Slocum, Ltd., 99 B.R. 261,
8
264 (Bankr. E.D. Pa. 1989).
In light of the fashion in which we analyze this issue, we
need not decide whether § 365(b)(3)(D) is germane to leases, such
as the one before us, that do not include language restricting
use or purporting to preserve tenant mix. See generally In re
Ames Dep't Stores, Inc., 127 B.R. 744, 753 (Bankr. S.D.N.Y.
1991)("Where there is no indication of any intention by Congress
to do anything other than hold a shopping center debtor tenant to
its bargain with a landlord and to leave intact the property
interests of debtor and landlord as set forth in that bargain,
the courts should not imply an additional non-bargained-for
term."); In re Ames Dep't Stores, Inc., 121 B.R. 160, 165
(Bankr. S.D.N.Y. 1990)("[S]ection 365 (b)(3)(D) must be
interpreted to refer to contractual protections and not undefined
notions of tenant mix.").
In In re Joshua Slocum, Ltd., 922 F.2d 1081 (3d Cir. 1990),
the Court of Appeals for the Third Circuit vacated the bankruptcy
court's opinion in In re Joshua Slocum, Ltd., 99 B.R. 250 (Bankr.
E.D. Pa. 1989). The circuit court's opinion, however, has
absolutely no impact upon In re Joshua Slocum, Ltd., 99 B.R. 261
(Bankr. E.D. Pa. 1989), which is the case we cite as authority.
See In re Carlton Restaurant, Inc., 151 B.R. 353, 357 (Bankr.
E.D. Pa. 1993)(noting the subsequent history of the decision we
find relevant).
6
Moreover, we are persuaded that a prequalification requirement would have
an adverse effect on the bidding process. Because a premature adjudicative
evaluation of an individual bidder's eligibility would almost certainly
require that person to hire an attorney and prepare for a hearing without
any assurance that his will be the triumphant offer, it seems obvious that
prequalification would deter some individuals who might otherwise be likely
to participate in the bidding.9 See id. ("[R]equiring . . . a pre-
bidding qualification hearing would put a damper upon free and open
participation by all retailers ready and willing to engage in the bidding-
process."). Indeed, even in the relatively distinct context of § 365, we
have located numerous cases in which courts solicited competing offers
before assessing the eventual assignee's ability to satisfactorily perform
under the relevant lease. See In re Casual Male Corp., 120 B.R. 256, 259
(Bankr. D. Mass. 1990)(describing practice through which the court accepted
offers before determining the prevailing party's qualifications); In re
Windmill Farms Management Co., 116 B.R. 755, 757 (Bankr. S.D. Cal.
1990)(same); Joshua Slocum, 99 B.R. at 264-66. As such, it cannot be
gainfully argued that the bankruptcy court abused its discretion when it
failed to precertify Schnuck as an acceptable assignee.
In apparent recognition of the weight of authority against this
position, Four B explains that it did not expect the bankruptcy court to
precertify Schnuck. Instead, seizing upon the Joshua Slocum court's
observation that none of the bidders in that case was "patently
unqualified" or "insincere," Joshua Slocum, 99 B.R. at 263, 265, Four B
maintains that Schnuck, which it describes as manifestly unacceptable under
§ 365(b)(3)(D), was clearly
It is notable that Four B, like the party favoring
prequalification in Joshua Slocum, had an identifiable interest
in keeping the sale price as low as possible.
7
ineligible to bid even in the absence of a prequalification process. To
buttress this point, Four B adverts that, at the time the judge initially
issued an oral "ruling" in its favor, its bid was $100,000 lower than
Schnuck's proposal. Four B continues that the only rationale supporting
acceptance of the lower offer was Schnuck's inability to satisfy the
command of § 365. Consequently, because Schnuck was patently unqualified
when it extended the first offer, the company must also have been patently
unqualified when it raised the bid to $2.1 million.
Unlike Four B, we do not think that Schnuck was patently unqualified
when it engaged in the bidding. Though it is true that the court at first
expressed a predilection toward Four B's $1.5 million offer, we can by no
means agree that the court made this decision based on § 365(b)(3)(D). In
fact, when the court stated its preliminary intentions, it had not yet
received any evidence pertinent to the tenant mix issue. We simply cannot
accept that the experienced bankruptcy judge made a definitive
determination on a hotly disputed factual question solely in reliance on
the somewhat vague representations of counsel.10 The judge's comments do
reveal that he was pondering the application of § 365 to the facts before
him, but our review of the record discloses that his preference for Four
B's bid was counseled more by perceived time constraints than by any final
resolution of the tenant mix arguments.11 The court never ruled, or even
hinted, that it
We do not mean to imply that the court must receive evidence
any time a conflict about tenant mix arises. We merely observe
that where, as here, the parties' attorneys are unable to agree
on a possible assignee's intentions and the effect upon tenant
mix caused by an alleged change in use, it would be highly
irregular to render a dispositive decision before, at minimum,
hearing some testimony on the issue.
After the court announced its partiality toward the Four B
proposal, Schnuck advised the court that it was prepared to raise
its offer. The court replied, "Well, you know, it -- that's
probably a possibility, but I think, in this instance, if I had
time and the debtor had time, but the debtor has told me they
haven't got time." Transcript of Hr'g at 64-65 (emphasis added).
This immediate response bolsters our understanding that the need
for an instantaneous deal, and not a belief that Schnuck was an
absolutely ineligible assignee, caused the court to view Four B's
bid more favorably. To be sure, had the court deemed Schnuck to
be patently unqualified, it would not have acknowledged the
"possibility" that the company might increase its offer.
8
considered Schnuck to be patently unqualified,12 and we decline to
retroactively hold that the company occupied that status.
Likewise, we could not rightfully characterize Schnuck as an
insincere bidder. Schnuck may have possessed suspect motivations for
participating in the auction and seeking to procure the lease, but it
appears undisputed that the company is a financially sound party which
truly desired the assignment and would have been ready, willing, and able
to remit the purchase price should it have won the coveted prize. Thus,
despite our admitted misgivings about Schnuck's conduct, we cannot hold
that it acted insincerely.
There was no need for the bankruptcy court to precertify Schnuck, and
the company was not a patently unqualified or insincere bidder. Under
these circumstances, the district court did not abuse its discretion by
entertaining Schnuck's overtures.
C. The Propriety of Receiving Schnuck's $2.1 Million Offer
Proclaiming the undoubted importance of finality and integrity in
judicial sales, Four B complains that it was improper for the bankruptcy
court to accept additional offers after it had verbally approved the
Purchase Agreement negotiated by Four B and Food Barn. Four B attaches
much significance to In re Gil-Bern Indus., 526
After approving the $2.1 million sale to Four B, the court,
in an attempt to "protect th[e] record," allowed the parties to
introduce evidence on the tenant mix question. The results of
this post-hoc procedure have no bearing on the question of
whether Schnuck was patently unqualified at the time it submitted
bids.
9
F.2d 627 (1st Cir. 1975), in which the Court of Appeals for the First
Circuit declared that "[i]f there is no local custom to the contrary, . .
. it is an abuse of discretion for a bankruptcy court to refuse to confirm
an adequate bid received in a properly and fairly conducted sale merely
because a slightly higher offer has been received after the bidding is
closed." Id. at 629.
By way of this relatively benign statement, the First Circuit aligned
itself with the scores of courts which have adopted the modern rule
outlining the limited circumstances under which an approved judicial sale
may be undone. Typically, a court will reopen bidding, and thereby upset
the results of a properly conducted judicial auction, only if "there was
fraud, unfairness or mistake in the conduct of the sale . . . or . . . the
price brought at the sale was so grossly inadequate as to shock the
conscience of the court." In re Stanley Eng'g Corp., 164 F.2d 316, 318 (3d
Cir. 1947), cert. denied, 332 U.S. 847 (1948); accord In re WPRV-TV, Inc.,
983 F.2d 336, 340-41 & n.12 (1st Cir. 1993); In re Chung King, Inc., 753
F.2d 547, 549-50 (7th Cir. 1985).
We are in complete agreement with these general conventions, but we
are also cognizant that an unwavering adherence to formality is not
normally advisable in bankruptcy cases. See Committee of Equity Sec.
Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1069 (2d Cir.
1983)("[A] bankruptcy judge must not be shackled with unnecessarily rigid
rules when exercising the undoubtedly broad administrative power granted
him under the Code."). Finality and regularity of proceedings are
significant factors whenever the courts are involved in a sale of property,
for devotion to those principles encourages fervent bidding and ensures
that interested parties will sincerely extend their best and highest offers
at the auction itself. See In re Webcor, Inc., 392 F.2d 893, 899 (7th Cir.
1968)("If parties are to be encouraged to bid at judicial sales, there must
be stability in such sales and a time must come when a fair bid is accepted
and the proceedings are
10
ended."), cert. denied, 393 U.S. 837 (1968). This, in turn, redounds to
the benefit of bankruptcy estates in general by increasing a trustee's
ability to command top dollar for items sold.
But these are not the only elements at play during bankruptcy sales.
As a counterweight, the court must also remain mindful of the ubiquitous
desire of the unsecured creditors, and a primary objective of the Code, to
enhance the value of the estate at hand. See, e.g., Metropolitan Airports
Comm'n v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.), 6 F.3d
492, 494 (7th Cir. 1993)("Section 365 . . . advances one of the Code's
central purposes, the maximization of the value of the bankruptcy estate
for the benefit of creditors."). The existence of these competing
considerations in judicial sales has not gone unheeded in the First
Circuit, as that court has explained, in cases subsequent to Gil-Bern, that
"th[e] policy [of inspiring confidence in sales under the supervision of
the court] must be weighed against the purpose to be achieved by these
judicial sales, which is to benefit the creditors and debtor." Munro
Drydock, Inc. v. M/V Heron, 585 F.2d 13, 14 (1st Cir. 1978).
In fact, Gil-Bern itself did not completely disregard the tightrope
a bankruptcy judge must navigate when presiding over judicial sales. The
court there held that, absent any local rule to the contrary, the judge was
constrained to confirm the highest bid submitted pursuant to the procedure
described in the notice of sale. Gil-Bern, 526 F.2d at 628-29. Despite
what the court viewed as the "prima facie meaning" of that notice, however,
it determined that the judge's approval of a later bid would be affirmed
if the bankruptcy court followed a known custom of allowing additional
offers at confirmation hearings. Id. Underpinning this reasoning was the
First Circuit's recognition that the participants in a judicial sale should
receive what they have "reason to expect." Id. at 628; see also Munro
Drydock, 585 F.2d at 16 ("It is
11
important, in the ordinary case, to honor the expectations of those bidding
at the sale."); In re Wintex, Inc., 158 B.R. 540, 545 (D. Mass.
1992)("[T]he hallmark of Gil-Bern is . . . fealty to bidders'
expectations.").
By implicitly utilizing bidders' reasonable expectations as a
guidepost in reviewing the propriety of a bankruptcy court's actions, the
First Circuit charted what we feel is a logical path in balancing the need
for finality against the interest in maximizing the estate's worth. The
concern the emphasis on finality is intended to serve, encouraging
confidence in judicial sales, is satisfied so long as members of the public
are treated in an anticipated manner. Thus, employing a sliding scale
approach, the importance of estate enhancement diminishes as an auction
participant's reasonable expectations, and the gravity of finality,
increase. At some point, such as when the court actually enters an order
approving the sale, expectations become sufficiently crystallized so as to
render it improper to frustrate anticipated results except in the limited
circumstances where there is a grossly inadequate price or fraud in the
conduct of the proceedings.13 Cf. In re Muscongus Bay Co., 597 F.2d 11, 12
(1st Cir. 1979)("The policy favoring confirmation of a bankruptcy sale to
the highest bidder at a fairly conducted public auction gives way to the
goal of benefitting the bankrupt estate and its creditors when the sale
price would be 'grossly inadequate.'"); Stanley, 164 F.2d at 318
(articulating modern rule). In other
This is not to say that the standard from Stanley is
pertinent only when the court has actually entered a confirmation
order. Numerous other scenarios can be envisioned in which the
parties' expectations will be adequately solidified to justify
additional bidding only upon proof of exceptional circumstances,
but we need not attempt to enumerate each such set of events.
Cf. In re Northern Star Indus., 38 B.R. 1019, 1022 (E.D.N.Y.
1984)(describing situation where no objections were received in
response to notice of sale, and where, after learning that no
party had objected, expectant buyer expended significant sums to
improve subject property).
12
situations, where the sale had not progressed to a comparable plateau, a
reviewing court should evaluate the bankruptcy judge's decisions on a case
by case basis, with due regard both for the parties' expectations and the
judge's broad discretion to weigh the multifarious interests involved.
To summarize, we think that the important notions of finality and
regularity in judicial auctions are appeased if the court acts consistently
with the rules by which the particular sale is conducted and in compliance
with the bidders' reasonable expectations. See Consumer News & Bus.
Channel Partnership v. Financial News Network, Inc. (In re Financial News
Network, Inc.), 980 F.2d 165, 170 (2d Cir. 1992)(commenting that submission
of post-auction proposal was consistent with both the rules of the auction
and the participants' expectations). We realize that this is a deferential
standard, but we feel it provides the bankruptcy court, in the first
instance, with ample latitude to strike a satisfactory balance between the
relevant factors of fairness, finality, integrity, and maximization of
assets. "The bankruptcy court must be accorded sufficient discretion to
decide the truly close cases as best it can in view of these competing
considerations." Muscongus, 597 F.2d at 13; see also Financial News, 980
F.2d at 170 ("There are cases where the bankruptcy court's discretion must
be sufficiently broad so that in making its decision it can compass these
competing considerations as best it can.").
Turning, then, to the facts before us, we conclude that the
bankruptcy court acted within its wide discretion when it accepted bids
after announcing its intention to approve the proffered Purchase Agreement.
As a preliminary matter, it is significant that the judge chose to adopt
a very informal and flexible bidding process, and to the extent the method
used can even be called an auction, it was an auction marked by a lack of
applicable rules and
13
guidelines.14 Unlike Gil-Bern and other similar cases, there was no
definite time by which the court required parties to submit offers, and,
prior to the judge's announcement, Schnuck had no notice that cessation of
bidding was imminent. Literally seconds following the court's "surprise"
statement, Schnuck tendered what was ultimately its best and final
proposal. Given these events, we are comfortable that this is not a
situation in which a potential buyer purposely bided its time during the
auction, taking an opportunity to survey the landscape of the sale, only
later to submit an upset bid at the lowest possible price. Cf. Stanley,
164 F.2d at 319 ("This unwillingness [to upset a judicial sale at auction]
results from the effect upon such sales of knowing that a prospective
bidder may abstain from bidding at the auction . . . and may then outbid
the price at which the property has been struck down.")(quotation omitted).
Instead, Schnuck obeyed what it perceived to be the rules of the sale, and
its $2.1 million submission was untimely only in light of the court's
unforeseeable declaration.
Also, we cannot say that the court's decision to entertain additional
offers was inconsistent with Four B's justifiable expectations. Four B
knew, and contractually acknowledged, that assignment of the lease was
subject to bankruptcy court approval, and it protected itself against
unfavorable consequences by bargaining for bid protection features in the
Purchase Agreement. These facts, especially when viewed in tandem with the
bankruptcy
The attorneys present at the hearing noted and even lamented
this dearth of governing rules. See, e.g., Transcript of Hr'g at
79-80 ("And, in fact, we would love to see the Court establish
what procedures we follow in the future so that we don't get into
this mess again."). Under appropriate circumstances, a complete
lack of standards, resulting in chaos, could conceivably give
rise to an independent claim that the court abused its
discretion, but this is not such a case.
14
judge's known propensity to auction estate property in open court,15 make
it highly likely that Four B had an acute awareness of the possibility that
the court might, on the day of the hearing, consider additional proposals
for this apparently valuable commodity. We are therefore convinced that,
though Four B may have had some fledgling expectation to procure the
assignment if all went well at the hearing, it was not nearly mature enough
to render the bankruptcy judge's decision an abuse of discretion.
We also reject the notion that acceptance of further bids was
reversible error due to any expectation that may have developed during the
hearing itself. Notably, Four B learned when the proceedings began that
it had been outbid, and it would assuredly be counterintuitive to suggest
as a general proposition that a low bidder has a supportable expectation
to receive property on the auction block. See Wintex, 158 B.R. at 545 ("A
high bidder expects to win the bid under ordinary circumstances . . . .").
While the court's declaration of an intention to approve the Purchase
Agreement, if left unchallenged, would almost certainly have led to
crystallization of Four B's expectations, the announcement was met
forthwith by Schnuck's offer to increase its bid by $500,000. A recess
ensued, and we would be hard pressed to hold that the few seconds during
which Four B considered itself the victor were of such significance to
preclude the bankruptcy court from entertaining an alternative that would
substantially benefit the estate.
The bankruptcy judge himself remarked that "out-of-town
counsel are probably not aware of my proclivities. I love to
sell in the courtroom. . . . Had several auctions in my tenure."
Transcript of Hr'g at 64. It seems, though, that the judge
underestimated his reputation, as Schnuck's attorney, who
practices in St. Louis, divulged that even he was aware of the
judge's penchant for holding auctions in court. See Transcript
of Hr'g at 82 ("[Y]ou've got a reputation for holding auctions.
[I c]ertainly expected to have an auction here.").
15
We have no doubt that Four B possessed some inchoate expectation to
obtain the assignment for $1.5 million. The company knew that procurement
of the lease was not a foregone conclusion, however, and it protected
itself against harm should its attempts have gone awry. Accordingly, for
the reasons already discussed, we are of the opinion that the company's
expectations had not progressed to a level which should have prohibited the
solicitation of additional bids except under the standard explicated in
Stanley. This case is a classic example of the challenges confronted by
the bankruptcy court in making decisions that incorporate, and attempt to
mollify, each of the antagonistic considerations relevant to a sale of
estate property. It is in the best interest of our bankruptcy system to
allow learned bankruptcy judges to make these value determinations
unrestrained by an unwarranted fear of reversal should another court
appraise the balance slightly differently. With this precept in mind, we
do not think that the bankruptcy judge's actions constituted an abuse of
his broad discretion.16
Another body of law lends support to the bankruptcy court's
decision to consider Schnuck's $2.1 million offer. Although the
court uses a business judgment test in deciding whether to
approve a trustee's motion to assume, reject, or assign an
unexpired lease or executory contract, this entails a
determination that the transaction is in the best interest of the
estate. See Nostas Assocs. v. Costich (In re Klein Sleep Prods.,
Inc.), 78 F.3d 18, 25 (2d Cir. 1996)("Th[e] decision [to allow a
debtor to assume an unexpired lease] required a judicial finding
-- up-front -- that it was in the best interests of the estate
(and the unsecured creditors) for the debtor to assume the lease
. . . ."). Where the trustee's request is not manifestly
unreasonable or made in bad faith, the court should normally
grant approval "[a]s long as [the proposed action] appears to
enhance [the] debtor's estate." Richmond Leasing Co. v. Capital
Bank, N.A., 762 F.2d 1303, 1309 (5th Cir. 1985) (quotation
omitted). Had the court blindly proceeded to enter an order
confirming the original Purchase Agreement without giving the
slightest thought to Schnuck's substantially higher bid, it might
have been accused of dereliction in its duty to guarantee that
the particular assignment was in the best interest of the estate
and the unsecured creditors.
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D. Four B's Contractual Right to Match Competing Offers
Finally, Four B alleges that the bankruptcy court committed
reversible error by refusing to respect its contractual right to match
Schnuck's $1.6 million offer. As we understand this argument, Four B
claims that the right of first refusal granted by the Purchase Agreement
afforded it the option to complete the sale by matching a competing
suitor's first offer. Under this theory, Schnuck's $2.1 million proposal
was, for practical purposes, void, and the bankruptcy court was wrong to
"ignore" Four B's prerogative to close the deal by matching Schnuck's
initial $1.6 million submission.
We do not read the contract's match provision as broadly as Four B.
The operative paragraph indicates that the company enjoyed the "opportunity
to match all competing bids," but it says absolutely nothing about limiting
Food Barn's ability to entertain multiple offers from the same party. The
express terms of the Purchase Agreement gave Four B the privilege to secure
assignment of the lease by equalling another bidder's offer, and the
bankruptcy court scrupulously honored this aspect of the bargain. Four B
obtained the lease by matching Schnuck's $2.1 million submission, and it
has no foundation from which to argue that the court "ignored" the bid
protection feature.
In any event, we would be extremely reluctant to hold a bankruptcy
court to the particulars of the right of first refusal envisioned by Four
B. Some amount of bid protection is, of course, permissible under the
Code, and the trustee is not normally required to seek court approval
before in good faith entering into an agreement which includes a right of
first refusal. See In re Table Talk, Inc., 53 B.R. 937, 942 (Bankr. D.
Mass. 1985). "A contrary position might discourage potential buyers from
negot[i]ating with trustees, thereby forcing down the market value of the
bankruptcy estate['s] property in general." Id. Still, it
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would be unwise to allow the parties to hamstring the court's discretion
to implement bidding procedures it deems to be fit under the circumstances.
The bankruptcy judge must retain the capability to conduct sales in a
manner that most benefits the bankruptcy estate, and we would be loath to
accept any contractual provisions that purport to limit this authority.
III. CONCLUSION
Because the bankruptcy court did not commit reversible error when it
required Four B to remit $2.1 million for the lease assignment, we affirm.
AFFIRMED.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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