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Bankruptcy Brief - January 28, 2010
Posted in General


Debtors in chapter 11 reorganizations frequently seek to sell some or all of their assets.  The sale process almost always includes an auction, often begun with a stalking horse, or initial, bid that is subject to higher and better offers.  Purchasers are reluctant to spend time and money for due diligence that would ultimately benefit another bidder at the auction.  The seller-debtor solves this problem by agreeing to pay a break-up fee if the stalking horse bidder is not the winning bidder at the auction.  The amount of the break-up fee is negotiable, usually structured as a percent of sale (e.g., 1-3%) or as a lump sum payment (e.g., equal to actual expenses incurred).

On January 15, 2010, the Third Circuit upheld a bankruptcy court’s ruling that a stalking horse bidder could not receive a break-up fee, even though the bankruptcy court had previously entered an auction procedures order that provided for the fee.  The Third Circuit reaffirmed its ruling in an earlier case that a stalking horse bidder must prove its bid benefitted the debtor’s estate to justify the break-up fee, regardless of the advance approval.  The Third Circuit held that, in evaluating the benefit, the bankruptcy court must consider:  (1) whether the break-up fee was needed to induce the first bid; and (2) whether the break-up fee was needed to induce the stalking horse to preserve its bid.

Treatment as a stalking horse bidder is usually more advantageous than simply bidding at a bankruptcy auction sale.  Careful attention to the facts and law of the circuit is necessary to protect that advantage, however.  A prospective bidder has interests different than not only the seller-debtor, but also all other parties.  Therefore, the bidder should have its own legal counsel as soon as possible in the process.

If you have questions regarding stalking horse bids, please contact any member of Greenebaum’s Bankruptcy and Workout Team

To learn more about John W. Ames and his practice, please visit his profile.

To learn more about Richard Boydston and his practice, please visit his profile.

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  • Senior Partner

    John is a member of the Tax and Finance Department. He works exclusively in the business reorganization process, both in Chapter 11's and state law workouts. He represents debtors, as well as creditors, both secured and unsecured. He ...

  • Senior Partner

    Mr. Boydston practices in the areas of bankruptcy (including representation of creditors, debtors and of committees and bankruptcy litigation), receiverships, debtor/creditor relations, and commercial transactions and ...



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