Opinion
Case No. 99-41958
August 26, 2002
The Motion of James Henderson as the Chapter 7 Trustee of the bankruptcy estate of Gulf States Steel, Inc. of Alabama (the "Trustee") For An Order Establishing Bidding And Other Procedures In Connection With Sale Of Property Of The Estate Free And Clear Of Liens And Other Interests came on regularly for hearing on August 21, 2002, before the Honorable James S. Sledge in the above-entitled court. The Trustee filed a Certificate of Service that the Motion and Notice of Hearing, with the deadline for objections, was served on all parties in interest, which established adequate notice. The motion included the specific bidding procedures proposed by the Trustee. Objections were filed and advocated at the hearing and the only remaining dispute was whether the bid contracts must be identical in terms or would slight variations be permitted. No other objections to the bidding procedures were argued.
Most of the objections were eliminated when the Trustee agreed to modify the proposed procedures to allow the successful bidder to elect to decline to accept title and possession of any property in the sale. The remaining objector, Gadsden Industrial Park, LLC, wanted the proposed bidding terms modified to allow more flexibility in submitting bids. Gadsden Industrial Park argued that allowing bidders to propose terms not identical to the terms proposed by the Gulf States Reorganization Group (hereinafter "GSRG") but substantially similar to these terms would result in a higher return for the estate.
The Court began the hearing with a review of the legal standards required to be met in order for the Court to approve the procedures urged by the Trustee. The Second Circuit established the leading authority for approving sales in Equity Sec. Holders v. Lionel Corp. (In re Lionel), 722 F.2d 1063 (2nd Cir. 1983). In Lionel, the Circuit held the proper standard to use when considering a proposed motion to sell is the business judgment test. It is this standard which has been adopted by the vast majority of courts. See also U.S. ex rel. Rahman v. Oncology Associates, P.C., 269 B.R. 139 (D.Md. 2001) (The standard to be applied by a court in determining whether or not to approve the disposition of property is whether the Trustee exercised sound business judgment.) Under this standard, the Trustee has the burden to establish sound business reasons for the terms of the proposed sale. Factors for the Court to consider in whether to approve the sale include: (1) any improper or bad faith motive, (2) price is fair and the negotiations or bidding occurred at arm's length, (3) adequate procedure, including proper exposure to the market and accurate and reasonable notice to all parties in interest. The Trustee is responsible to administer the estate and his or her judgment on the sale and the procedure for the sale is entitled to respect and deference from the Court, so long as the burden of giving sound business reasons is met. In re Bakalis, 220 B.R. 525, 531-32 (Bankr.E.D.N.Y. 1998) (noting discretion accorded to trustee with regard to sale of assets).
After review of the legal standards, the Court instructed the Trustee to proceed. Counsel for the Trustee did not call the Trustee to testify, but instead presented the testimony of John Duncan. Mr. Duncan is the last CEO of the debtor and is listed as the representative of the debtor. Mr. Duncan is an officer and expects to be offered ownership in the initial bidder, GSRG. He is also a consultant to Ableco Finance LLC (hereinafter "Ableco"), the DIP lender with a superpriority lien on all estate assets. He is on the payroll of Ableco to provide services in liquidating the remaining assets to satisfy its liens. The Trustee declined to testify after inquiry from the Court as to the appropriateness of testimony from Mr. Duncan.
Mr. Duncan established that the asset purchase agreement for the purchase of property between the Trustee and the GSRG was negotiated between Ableco and GSRG. This agreement established the bidding procedures proposed by the Trustee. He said no one has questioned his actions and role in representing both GSRG and Ableco. He said he has received inquiries from potential purchasers around the world. The $5 million purchase price was determined by the amount that the City and County will give to GSRG to fund the purchase and it is roughly close to the percentage of appraised value that prier sales had brought. He further testified that the value of this property is depressed by an oversupply of this property.
No other evidence on the sound business reasons was presented. Although the dispute remaining between parties present at the hearing was minimal, the Court concludes that the Trustee failed to present sound business reasons why the Court should not allow bids as proposed by Gadsden Industrial Park LLC. See In re Mama's Original Foods, Inc., 234 B.R. 500 (Bankr. C.D. Cal. 1999) (Trustee failed to present reasons supporting decision for amount of overbid and time to perform). Counsel for the Trustee argued for identical bids to be required in order to assist the Trustee in evaluating bids to determine which bid is the highest and best bid to recommend to the Court for approval. The Court finds that the Trustee may make these determinations with bids substantially similar to the one proposed by GSRG. Identical bids may discourage bidders and may reduce the value to be received by the estate. The Trustee may want the bids to be identical to easily determine which is the highest and best bid. However, the potential cost to the estate does not warrant such strict procedures. Allowing substantially similar bids will allow the Trustee to evaluate the bids fairly easily and affords more flexibility to encourage maximum interest in the sale and the maximum sale price.
Accordingly, after having considered the Sale Motion and the accompanying Memorandum of Points and Authorities, the various other pleadings filed in support of, and in opposition to, the Sale Motion, and reflected on the docket of this case, the testimony presented at such hearing, and the arguments of counsel appearing at such hearing, as reflected in the record of this matter:
IT IS HEREBY ORDERED that the Motion to Establish Bidding Procedures is GRANTED and it is FURTHER ORDERED that:
1. Notice of the Sale Motion was proper and timely and complies with and satisfies all noticing requirements set forth in Rules 2002, 6004, 6006 and 9007 of the Federal Rules of Bankruptcy Procedure.
2. After further briefing on the effect of the United States Supreme Court opinion of Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992) and any restriction by the Fifth Amendment upon the ability of the trustee to utilize 11 U.S.C. § 363(f)(5) to sell the real and personal property described in the Sale Motion (the "Steel Mill Assets") in this Chapter 7 case, and after the Trustee's report of the results of any auction conducted in connection with the sale of the real and personal property described in the Sale Motion (the "Steel Mill Assets"), the Court will determine at the final hearing on the Sale Motion whether and the extent to which the Trustee is authorized to sell the Steel Mill Assets free and clear of liens, claims and other interests in or against the Steel Mill Assets pursuant to 11 U.S.C. § 363 (f) to the bidder submitting the highest and best qualified bid.
3. The bidding procedures ("Bidding Procedures"), as amended by the Court, with respect to the Sale Motion attached hereto as Exhibit "A" are approved. As a clarification of such Bidding Procedures, the successful bidder may choose to take title to less than all of the Steel Mill Assets, without any deduction from the price.
4. Subject to the immediately following paragraph, all proceeds of the sale of the Steel Mill. Assets are to be paid to Ableco Finance LLC, as agent for certain term lenders, except to the extent ordered otherwise by this Court in connection with the Motion to Amend Compensation Agreement Between the Trustee and Ableco.
5. To the extent that the proceeds of the sale of the Steel Mill Assets exceed the amounts required by Ableco in order to pay Ableco in full and to comply with the terms of this Court's order on the Motion to Amend Compensation Agreement between the Trustee and Ableco, such excess proceeds will be held by the Trustee in a segregated account and such proceeds shall be subject to the liens, claims and other interests of all other parties asserting a claim against the Steel Mill Assets to the same extent and in the same priority that such liens and interests attached to the Steel Mill Assets, and will be disbursed by the Trustee as required by law.
6. The provisions of the immediately preceding paragraph constitute adequate protection of the interests of other parties asserting a claim against the Steel Mill Assets.
7. To the extent allowed by law, the Trustee shall not be deemed to have taken on any responsibility or liability with respect to the environmental, tax or other issues associated with the Steel Mill Assets as a result of the filing of this Motion or the participation in the transfer of the Steel Mill Assets to the successful bidder for the Steel Mill Assets.
8. In the event that the Trustee receives, prior to the close of business on Thursday, September 12, 2002, one or more higher and better offers that are qualified bids under the Bidding Procedures, the Trustee will conduct an auction at the Human Resources Building at the Gulf States Steel location at 174 So. 26th Street, Gadsden Alabama, commencing at 10:00 a.m. on Monday, September 16, 2002.
9. A FINAL HEARING on the Sale Motion will be held at 2:00 p.m. on Monday, September 16, 2002, in the Bankruptcy Courtroom, 600 Broad Street, Gadsden, Alabama.
10. The Trustee shall serve a copy of this Order and the Notice of Sale attached hereto as Exhibit "B" upon the Bankruptcy Administrator for this district, all entities that have expressed an interest in purchasing the Steel Mill Assets, all parties known to claim liens on, or to have other claims against or interests in, the Steel Mill Assets, all entities that have filed a request for service of papers in this case and all creditors of the estate, at least fifteen days prior to the date of the final hearing on the Sale Motion. In addition, the Trustee shall advertise the sale of the Steel Mill Assets in the Wall Street Journal at least once a week for at least two weeks prior to September 12, 2002. Interested parties may obtain a further description of the Steel Mill Assets and a copy of the Sale Motion by contacting the Trustee. The Court notes the sale on September 16, 2002, has already been advertised by news articles on the wire services and the August 22nd edition of Daily Bankruptcy News distributed by BKINFORMATION.com.
11. The Clerk is hereby directed to post a copy of this Order, the Sale Motion, and the contract between the Trustee and GSRG, and all attachments thereto, on the Clerk's website at www.alnb.uscourts.gov (click on National Interest Cases) pursuant to the General Order previously entered in this case. Interested parties may obtain a further description of the Steel Mill Assets and a copy of the Sale Motion by contacting the attorney for the Trustee.
EXHIBIT A TO ORDER GRANTING TRUSTEE'S MOTION FOR AN ORDER ESTABLISHING BIDDING AND OTHER PROCEDURES IN CONNECTION WITH SALE OF PROPERTY OF THE ESTATE FREE AND CLEAR OF LIENS AND OTHER INTERESTS GULF STATES STEEL — SALE OF CERTAIN REAL AND PERSONAL PROPERTY — BIDDING PROCEDURES(a) A competing Bid for the Property (a "Bid") must be made in writing and delivered to:
(i) James G. Henderson, 800 Financial Center, 505 North 20th Street, Birmingham, Alabama 35203;
(ii) Harry P. Long, Esq., Security Bank Building, 10 West 11th Street, Suite 2-A, P.O. Box 1468, Anniston, Alabama 36202;
(iii) Jeffery D. Hermann, Esq., Brobeck, Phleger Harrison LLP, 550 South Hope Street, Suite 2300, Los Angeles, California, 90071;
(iv) Eric Miller, 450 Park Avenue, 12th Floor, New York, New York 10022-2605; and
(v) Richard H. Cater, Esq., South Trust Bank Building, 1000 Quintard Avenue, Suite 407, P.O. Box 2307, Anniston, Alabama, 36202.
(b) All Bids must be received no later than September 12, 2002, and must include a copy of the Contract (attached to the Motion and being the contract between the Trustee and GSRG setting forth the terms of the sale) modified to include the Bidder's name and Bid, and must otherwise be substantially similar in form and content to the Contract (a "Modified Contract"). Each Bidder must include in its Bid an executed Modified Contract. A Modified Contract must clearly identify all changes to the contract and explain the benefits to the estate of such changes.
(c) All Bids must be accompanied by $1,000,000 in cash (in the form of a certified check made payable to the Trustee or a wire transfer to the Trustee of immediately available funds) (the "Deposit"). Bids submitted on or prior September 12, 2002, (the "Bid Deadline") shall remain open and irrevocable through the conclusion of the Sale Hearing unless further extended by agreement of the parties or as set forth herein. The Deposit shall be returned to any bidder whose Bid is not accepted.
(d) Bids shall not be subject to or contingent upon the obtaining of financing or any due diligence contingency. Each Bidder shall submit to the Trustee evidence of the Bidder's financial wherewithal to consummate the transaction, perform under the Modified Contract and otherwise meet the requirements set forth in sections 363(m) of the Bankruptcy Code or elsewhere herein. Prior to the Bid Deadline, each Bidder shall have obtained authorization and approval from its Board of Directors (or comparable governing body) with respect to the submission of its Bid and execution and delivery of its Modified Contract, and shall have provided evidence of such authorization to the Trustee. All Bids must provide that the purchase price must be paid and the sale closed within sixty (60) calendar days after the sale has been approved by the Bankruptcy Court or such additional time as is approved in advance by the Trustee in his discretion (which approval may be conditioned upon the payment of additional monies).
(e) A Bid will not be considered as a higher and/or better bid and will not be considered by the Trustee as qualified unless such Bid (i) has an aggregate purchase price of at least $5,250,000 in cash, (ii) does not contain financing or due diligence contingencies of any kind and (iii) does not contain any breakup or similar fee or expense reimbursement (an "Overbid").
(f) At the Auction, the Trustee will have the right to select, and thereafter seek final approval of the Bankruptcy Court for, the highest or otherwise better qualifying Bid in accordance herewith.
(g) If there is at least one qualified Overbid for the Property, the Trustee will conduct an auction (the "Auction") commencing at 10:00 a.m. on Monday, September 16, 2002, at the Human Resources Building at the Gulf States Steel location at 174 So. 26th Street, Gadsden Alabama.
(h) At the Auction, all qualified bidders shall be given the opportunity to revise and submit increased Bids so long as the increased Bid or Bids is at least $50,000 higher than the then existing highest or better Bid. Such bidding shall continue until the Trustee concludes the Auction, which the Trustee may elect to do at anytime if no increased Bid has been submitted to the Trustee or his designee within thirty (30) minutes from the submission of the last increased Bid.
(i) By submitting a Bid, each Bidder shall be deemed to have acknowledged and agreed that, if the Bidder approved by the Court as the successful Bidder fails to consummate the sale due to breach of the Modified Contract by such Bidder, the Trustee shall have the right to retain the Deposit together with any interest accrued thereon.
(j) By submitting a Bid, each Bidder shall be deemed to have acknowledged and agreed that the Property is sold AS IS WHERE IS AND WITH ALL FAULTS.