Recent bankruptcy sales in Rite Aid’s and 23andMe’s Chapter 11 cases have exposed the tension in bankruptcy auctions generated by the sometimes competing goals of maximizing the assets of the bankruptcy estate and satisfying auction participants’ expectations of predictability and finality.

In Rite Aid, the Bankruptcy Court declined to approve the sale of the company’s Thrifty Ice Cream assets to a bidder that offered, after the auction had ended, more money than the winning bidder. By contrast, in 23andMe, the Bankruptcy Court approved a sale of the company’s assets to a vehicle of the debtors’ ex-CEO notwithstanding that its higher bid was submitted after the auction ended.

In this article, the Debtwire legal analyst team provides an overview of the case law concerning bankruptcy bids submitted after auctions have closed and the controversial Rite Aid and 23andMe sales. We also discuss, based on a survey of relevant case law, whether late submitted bids can be considered based on a fact-specific analysis, subject to a host of guiding factors.

Case law – the need for finality versus the duty to maximize estate assets

Bankruptcy auctions generate conflicting obligations. “[I]t is ‘Bankruptcy 101’ that a debtor and its board of directors owe fiduciary duties to the debtor’s creditors to maximize the value of the estate, and each of the estates in a multi-debtor case.”[1] Debtors must ensure that they engage in an auction process that will generate the highest bids and greatest value for stakeholders including creditors and, on occasion, equity holders.

At the same time, bidders’ faith in auctions depends on the extent to which bidding procedures conform to their expectations. This includes honoring the finality of properly conducted auctions, which one Texas bankruptcy court judge has said reflects upon the “integrity of the judicial system [and] should take precedence over ensuring more dollars to the estate by allowing a late bid that is a higher offer”[2] Respecting finality ensures that auction participants are treated in an “anticipated manner” and bolsters confidence in the judicial sales process.[3] To do otherwise would “undercut such confidence and faith in the system.”[4]

The conflict between finality and optimizing estate proceeds surfaces when a debtor receives a higher bid from a prospective purchaser after an auction has closed. In such cases, the bankruptcy court, which approves bidding procedures and sanctions bankruptcy sales, becomes the ultimate arbiter tasked with reconciling this conflict. One federal circuit court of appeals has described the court’s role in such cases as a “balancing act” and “walk[ing] a tightrope.”[5]

Courts have offered differing opinions about the extent to which the finality of bankruptcy auctions should be respected. Some courts emphasize the importance of finality. In one case decided under the old Bankruptcy Act, the US Court of Appeals for the First Circuit held that absent any contrary local customs, it is an “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.”[6] This serves the goal of “promoting and preserving the integrity of the judicial process” so that the auction procedures don’t “undercut . . . confidence and faith in the system.”[7]

Other courts have warned against a blind application of finality that would “reduce the broad discretion and flexibility a bankruptcy court must necessarily have to enhance the value of the estates before it.”[8] These cases endorse a sliding scale approach, under which “the importance of estate enhancement diminishes as an auction participant’s reasonable expectations, and the gravity of finality, increase.”[9] Thus, the more complex the auction, and the more flexible and informal the bidding procedures, the greater the debtor’s latitude to accept a bid after the auction is over.[10] Another factor is the time at which the bid is made. Some courts have pointed to the entry of the sale order as an absolute point after which new bids cannot be entertained in the absence of a “grossly inadequate price” that would “shock the conscience” or fraud.[11] In addition, in one recent decision, an Ohio bankruptcy court concluded that the restrictions on bidding are lessened in a stalking horse situation prior to an auction.[12]

Another part of a bankruptcy court’s analysis is the application of the business judgment rule.[13] In Delaware, where lead debtor New Rite Aid, LLC is incorporated, the business judgment rule is a highly deferential “presumption that directors making a business decision, not involving self-interest, act on an informed basis, in good faith and in the honest belief that their actions are in the corporation’s best interest.”[14] The US Court of Appeals for the Third Circuit has said that “[o]vercoming the presumptions of the business judgment rule on the merits is a near-Herculean task” that is met by a showing of “irrationality or inattention.”[15] Irrationality is demonstrated if “no reasonable business person could possibly authorize the action in good faith.”[16] In California, where seller Thrifty PayLess is incorporated, the business judgment rule is codified and protects a director from liability when they act “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”[17]

Rite Aid and the importance of finality

Rite Aid’s strategy in its second Chapter 11 filing has been to sell off its assets. As part of this process, Rite Aid put its Thrifty Ice Cream business up for auction. The debtors selected Hilrod Holdings as the winning bidder with a USD 19.2m bid and Optimal Investment Group (OIG) as the back-up bidder with a USD 19.126m bid. In addition to the purchase price, other factors on which the debtors relied in selecting Hilrod were the facts that Hilrod had made a non-refundable deposit of USD 4m and that the debtors had less confidence in OIG’s ability to consummate the transaction.

According to a reply submitted by the debtors, after the selection of Hilrod and the execution of an asset purchase agreement (APA), another losing bidder, Skyline Rocky Road Acquisitions (Skyline), informed the debtors’ advisors that it would sign an APA for USD 20m. In violation of the bidding procedures and the debtors’ directions, Skyline and OIG communicated with one another about submitting a joint bid. Skyline then executed and submitted an APA for a purchase price of USD 20.05m, or USD 850,000 higher than the Hilrod bid. However, the bid did not demonstrate that Skyline had any assets or that the two entities guaranteeing Skyline’s obligations had the financial ability to close the deal.[18]

The Hilrod APA contained a “fiduciary out” that allowed the debtors to terminate the agreement and pursue another transaction if consummating the transaction would be inconsistent with their fiduciary duties. Specifically, section 9.7 of the APA provided that nothing in the agreement would require Rite Aid to act inconsistently with their fiduciary obligations, and that “[f]or the avoidance of doubt, the Seller retains the right to pursue any transaction or restructuring strategy that, in the Seller’s business judgment, will maximize the value of their estates.”

The court-approved bidding procedures also recognized the debtors’ fiduciary obligations. A fiduciary out provision stated that nothing in the bidding procedures or bidding procedures order required a debtor to act or refrain from acting in any way “inconsistent with . . . its fiduciary obligations under applicable law.” Elsewhere, the procedures provided that the prohibition on the consideration of bids after the closing of the auction and the selection of a final bid was subject to the debtors’ fiduciary obligations. Furthermore, the debtors could, “in their reasonable business judgment and consistent with the Debtors’ fiduciary obligations to maximize the value of their estates and to consider the interests of their stakeholders” reject any bid before the court enters an order approving the successful bid. The bidding procedures also provided that the debtors were to select the “highest or otherwise best Bid” in the exercise of their reasonable business judgment.

Taken together, the APA and bidding procedures provisions arguably gave the debtors the ability to select the “highest or otherwise best Bid” at least until the Bankruptcy Court approved the final bid. Rite Aid could have accepted the Skyline bid even after the debtors signed the Hilrod APA and obtained more than USD 850,000 for the bankruptcy estates. However, as the “highest or otherwise best bid” language implies, price was not the only factor weighing on the debtors’ decision. As noted, the demonstrated ability of each bidder to consummate the transaction also played a role.

At the sale hearing, Skyline objected that it had made the highest and best bid, thereby triggering the fiduciary out clause in the Hilrod APA. It also said that after the auction went off-record it became disorganized, unfair, and lacked transparency. The debtors countered that Hilrod’s offer was stronger, that Skyline’s financing was more doubtful and that Skyline had appeared to violate the bidding procedures by coordinating a joint bid with OIG.

As a threshold matter, bankruptcy judge Michael Kaplan of the US Bankruptcy Court for the District of New Jersey accepted the debtors’ argument that Skyline was a disgruntled losing bidder that lacked standing to object to the sale. However, he also addressed the objection on the merits. He concluded that he would defer to the debtors’ business judgment as to what constituted the highest and best bid. He found that the bidding procedures had been fair and gave all parties the opportunity to submit their best and final bids. He also declined to reject the Hilrod deal on fiduciary out grounds, stating that such provisions should only be used in limited circumstances.

Judge Kaplan’s decision represents a typical example of judicial deferral to a debtor’s business judgment. Here, the fact that Skyline’s post-closing bid was higher than Hilrod’s winning bid did not cause the Court to question the debtors’ conclusion that Hilrod had the superior offer. Foregoing an extra 4.4% in proceeds for the estate was insufficient for the Court to question the rationality of the debtors’ decision or their good faith, especially where the debtors’ selection was not informed solely by price, but took into account other factors such as which party was most likely to be able to consummate the deal.

The Bankruptcy Court’s decision joins those that place greater importance on respecting the finality of auctions and the expectations of bidding parties such as Gil-Bern and Bigler. To the extent that Judge Kaplan may have applied the sliding scale analysis used by many courts, his conclusion that all bidders had a fair opportunity to submit their best bids removed the auction from the realm of auctions with fluid or informal bidding procedures where less weight is placed on finality and more on estate maximization. Given this, the Court may have felt more compelled to place greater importance on finality, especially because Skyline’s final bid was not received until after the auction closed and the APA was executed.

23andMe – the tension between finality and estate maximization creates fertile ground for settlement

The recent auction in the 23andMe Chapter 11 cases provides an interesting counterpoint to the Rite Aid auction and even more vividly demonstrates the tension between the competing goals of finality and estate maximization.

Regeneron initially won the auction for substantially all of 23andMe’s assets with a USD 256m bid. TTAM Research Institute, a vehicle of former CEO Ann Wojcicki, was named back-up bidder with a USD 146m bid. After the auction closed and Regeneron executed an APA, TTAM sent a revised proposal to the debtors, the key term being a higher purchase offer than Regeneron’s. After the debtors’ filed a notice of successful bidder naming Regeneron as the auction winner with the Bankruptcy Court, TTAM filed an objection to the sale motion, arguing extensively that the debtors’ principal duty with respect to the asset sale was to maximize the value of the bankruptcy estates and that, given TTAM’s higher offer, they would fail in that duty if they proceeded with the Regeneron deal. Pointing to the need to balance finality and bidders’ reasonable expectations with the goal of estate maximization, TTAM argued that “[h]ere, these considerations weigh decisively in [its] favor.”

In view of the new proposals, the debtors filed a motion to establish procedures for the submission of final proposals from Regeneron and TTAM. The debtors said that given the fiduciary out in the APA and in accordance with their fiduciary duties, a special committee of independent directors had evaluated TTAM’s proposals. The debtors argued that in the absence of a court-approved framework for submitting final proposals there would be a “significant risk” of value-destructive litigation. They noted that Regeneron had asserted that TTAM’s post-auction proposals were prohibited by the existing bidding procedures and that filing a new bidding procedures motion without Regeneron’s approval would trigger the latter’s termination rights under the APA. The debtors also argued that these disputes with Regeneron could jeopardize the Regeneron transaction, “impact the Debtors’ ability to conduct a value-maximizing sale process,” and risk losing USD 256m in value for stakeholders.

In a statement filed in response to the final proposals motion, Regeneron contended that although it had “won the auction fair and square” it had been “subject[ed] to remarkably unfair treatment” post-auction. As evidence, the company pointed to TTAM’s attempts to reopen the auction and its “flurry of new bids,” notwithstanding court-approved auction rules that it said “unambiguously” prohibited such behavior. Regeneron also accused the debtors of violating their own bidding procedures by considering TTAM’s bids without exercising their fiduciary out, which left Regeneron bound to the APA. Relying on case law emphasizing the importance of adhering to bidders’ expectations in bankruptcy auctions, Regeneron protested that the debtors “offered finality to induce Regeneron to bid” but later failed to respect the process “that all bidders agreed to respect.” Regeneron said that it had been turned into an “effective stalking horse.”

Remarkably, notwithstanding its beliefs that it was entitled to terminate the APA and that there were “clear grounds” for disregarding TTAM’s post-auction bids, Regeneron agreed to the new bidding procedures. The stated reason was Regeneron’s desire to purchase the debtors’ assets “without further acrimony or litigation” and to realize its goal of a “near-term closing,” even if it meant that TTAM would be allowed an additional bid. Regeneron was likely further incentivized by the debtors’ agreement to give it a “last look” at TTAM’s final bid, as well as a USD 10m break-up fee.

In choosing to compromise, Regeneron made allowance for the “difficult position” in which TTAM’s sponsors had placed the debtors’ special committee. Notwithstanding, it admonished the debtors and TTAM, asking – “Why participate in an auction at all when the Debtors’ insiders can ignore the rules and bid whenever they please?” It added that it would “never have participated in this Auction” had it known that winning would “result in a further takeover attempt from the Wojcicki parties” and another bidding process.

TTAM, for its part, filed an objection to the final proposals motion, agreeing with a final bidding round, but objecting to the last look and break-up fee.

At the hearing on the final proposals motion, the proceedings took a dramatic turn when the debtors’ counsel accidentally revealed that TTAM’s new bid was USD 305m. That disclosure led the parties to strike a new deal, with bidding starting at USD 305, Regeneron needing to bid at least USD 315m to participate, and either party potentially entitled to the break-up fee. With those procedures in place, TTAM won the final bidding round with its USD 305m bid, which exceeded Regeneron’s “winning” bid by USD 49m, or approximately 19%..

The final compromise in 23andMe deprived the Bankruptcy Court of an opportunity to add to body of case law concerning disputes generated by the sometimes opposing priorities of finality and the maximization of estate assets. Nonetheless, the dispute remains notable because the tension between these goals, as reflected in the sometimes conflicting case law, created uncertainty about litigation risk and outcomes. It certainly appears that the debtors thought it more prudent, and consistent with their fiduciary duties, to reach some kind of compromise rather than risk losing Regeneron’s USD 256m bid. With respect to Regeneron, the lack of certainty as to whether it could have successfully challenged TTAM’s post-auction bid may have contributed to its decision to agree to the new bidding procedures for the final proposals. Ultimately, the parties decided that it was better to reach a settlement on procedures rather than roll the dice on litigation.

Putting it all together – late bids may be allowed if the price is right

There are several key takeaways from the case law on post-auction bids is, as demonstrated by the Rite Aid and 23andMe cases. For one, a bankruptcy court (which is a court of equity) has significant discretion to determine whether to approve a late bid. In making this determination, courts will generally apply a sliding scale, and the decision likely will be fact specific. Even courts that have placed a greater emphasis on finality, including within the First Circuit,[19] acknowledge that greater flexibility may be warranted where departures from the rigid enforcement of finality rules are demonstrated to be a local custom or practice.

Along the sliding scale, the rule generally appears to be that the simpler the bidding procedures, the less complex the transaction, and the more transparent the process, the greater the likelihood that the court will insist on finality and fidelity to the original winning bid. On the other hand, auctions with complex or fluid bidding procedures and those that have less transparency are more likely to produce a situation where a late bid will be allowed. Arguably, the most important factor, as demonstrated by Rite Aid and 23andMe, appears to be the size of the late bid, both in absolute and relative terms. A debtor with fiduciary obligations to maximize estate assets may find it hard-pressed to resist a supersized late bid that promises significantly improved stakeholder recoveries. A bankruptcy court is also likely to consider the benefits that an untimely bid can bring. In sum, while there is no brightline test for deciding whether to allow a late-submitted bid, the above factors are likely to govern a court’s decision on the issue.

Paul Gunther is a former practicing restructuring and litigation attorney. Prior to joining Debtwire as a Legal Analyst, Paul practiced in the New York offices of Dentons US LLP, Salans LLP and Mayer Brown LLP. He has represented various constituencies in high-profile restructurings.

This report should not be relied upon to make investment decisions. Furthermore, this report is not intended and should not be construed as legal advice. ION Analytics does not provide any legal advice, and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain, ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

——————

Endnotes

[1] In re Innkeepers USA Trust, 442 B.R. 227, 235 (Bankr. S.D. N.Y. 2010).

[2] In re Bigler, LP, 443 B.R. 101, 110 (Bankr. S.D. Tex. 2010).

[3] In re Food Barn Stores, Inc., 107 F.3d 558, 565 (8th Cir. 1997).

[4] In re Bigler, LP, 443 B.R. at 115.

[5] In re Financial News Network, Inc., 980 F.2d 165, 166 (2d Cir.1992) (noting that the court should institute an “orderly bidding process” and that “absent such a fixed and fair process bidders may decline to participate in the auction,” yet at the same time “retain[] the liberty to respond to differing circumstances so as to obtain the greatest return for the bankrupt estate”).

[6] In re Gil-Bern Indus., Inc., 526 F.2d 627, 629 (1st Cir. 1975).

[7] In re Bigler, 443 B.R. at 115.

[8] In re Financial News Network, Inc., 980 F.2d at 166.

[9] In re Food Barn Stores, Inc., 107 F.3d at 565; see also Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 768 (2004) (stating that where bidding is “complex and fluid” or “informal and flexible” and the court has not yet approved the sale, “the court might appropriately conclude that consideration of a late bid would not unduly frustrate the reasonable expectations of the participants or compromise the integrity of the process”).

[10] See, e.g., Food Barn, 107 F.3d at 566 (debtor could accept a bid made at sale hearing that was 40% higher than winning bid).

[11] Food Barn at 564-65 (upon entry of a sale order “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”); see also Paloian, 368 F.3d at 769 (the bankruptcy court “loses much of the discretion it otherwise enjoys” to confirm auction results after the entry of the sale order).

[12] In re Parkcliffe Development, LLC, Case No. 24-30814 (Bankr. N.D. Ohio Jan. 28, 2025).

[13] See, e.g., In re Dura Automotive Systems, Inc., No. 06-11202, D.I. 1386 (Bankr. D. Del. Aug. 15, 2007) (noting that while the Bankruptcy Code does not specify a standard for a court to authorize an asset sale but that courts “routinely” approve such sales based on the debtor’s business judgment and citing cases).

[14] In re Tower Air, Inc., 416 F.3d 229, 234 (3rd Cir. 2005).

[15] Id. at 238.

[16] Id.

[17] Kanter v. Reed, 92 Cal.App.5th 191, 204 (June 2, 2023) (citing Cal. Corp. Code § 309).

[18] Subsequently, in an objection to the proposed sale, Skyline submitted a bank account statement from one of the guarantors showing a balance of USD 3.4m, availability of the same guarantor under a line of credit of USD 17.8m, and a bank statement for the other guarantor showing a pending USD 24m deposit.

[19] The First Circuit comprises the district of Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island.