Bankruptcy, 363, Stalking Horse Bidders, Break-up Fees


Following the surge of bankruptcies in the wake of the Great Recession, a growing and somewhat controversial trend has emerged whereby companies seeking to purchase a debtor’s assets in bankruptcy frequently make use of Section 363 of the United States Bankruptcy Code (“§ 363”). In general, § 363 sales are accomplished via public auction. This aspect of § 363 exposes initial bidders, known in bankruptcy as “stalking horse bidders,” to the risk that they will commit time and resources in pursuit of the acquisition and yet fail to succeed as the prevailing bidder. To hedge against this risk, stalking horse bidders frequently request “break-up fees” when negotiating a purchase agreement for a § 363 sale. There is no consensus among the Bankruptcy Courts as to how to treat break-up fee provisions. Thus, the foundation of this Note is that the lack of a uniform break-up fee standard is detrimental to the consistency of bankruptcy law and leaves debtors and stalking horse bidders on unstable ground when utilizing § 363. Courts predominantly use three standards when reviewing a break-up fee provision in a § 363 asset sale: the business judgment standard, the best interests of the estate test, and the administrative expense test. Because all bankruptcy law is, at its core, based in principles of equity, it only makes sense to develop a theory of break-up fees based upon the philosophies underlying the law’s procedures. As such, this Note analyzes break-up fees with a view toward the purpose of § 363 and Chapter 11 bankruptcy. Using that perspective, this Note argues in favor of using the best interests of the estate test when determining whether to award break-up fees to stalking horse bidders in § 363 sales.



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