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The Bankruptcy StrategistLJN NewslettersNewsSections

Bankruptcy Courts Allowed to Reopen Section 363 Auctions

By Tanvir Alam and Scott J. Friedman

A bankruptcy judge's mandate, and the purpose of a section 363 sale process, is to obtain the “highest and best” offer for the assets. Finality and integrity of the process are also important policy considerations. Bankruptcy sales are designed to facilitate the estate's ready realization of value from its assets, while at the same time giving purchasers some degree of certainty that they will obtain clear title to an asset, without the fear of having the transaction later reversed. At times, however, these principles may be in conflict, as outlined by the Seventh Circuit.

For potential acquirers of a bankrupt's assets, the Seventh Circuit's recent holding in Corporate Assets, Inc. v. Paloian 386 F.3d 761 (7th Cir. 2004) is cause for concern. In that case, the court upheld the decision of the bankruptcy court to reopen an auction conducted pursuant to section 363 of the Bankruptcy Code when a losing bidder increased its offer by 9% to top the highest bid after the conclusion of the auction. The decision demonstrates that an auction may not be the last time to bid.

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