Bankruptcy Auction

October 22, 2013 - As a buyer, have you ever experienced the letdown of an auction you were interested in being cancelled? Chances are, when you are in the business of buying at auction you are likely to come across an auction that you are excited about to find out later that it has been cancelled. As a buyer sometimes you have incurred expense to inspect equipment, examine title or do environmental reports only to learn that the item(s) you were after are no longer available.

What gives with that? There are many things that can cause the cancellation of an auction, but for this discussion we will focus on three of the most common causes: refinancing, bankruptcy, and bulk sale.

When an auction has been scheduled for a secured creditor, it is not uncommon for the borrower to refinance and restructure, and thus force a cancellation of an auction. Takeout financing is often structured in a way that allows business to continue and pay the original creditor. When this happens, the need for an auction no longer exists.

Bankruptcy affects auction sales in different ways depending on the situation. In a secured creditor auction, a borrower filing chapter 11 is afforded protection by the automatic stay under II U.S.C. §362. The automatic stay prevents any action to collect a debt, thus cancelling a secured creditor auction that was initiated pre-petition. Sometimes a borrower will file the morning of an auction, simply to buy more time. Oddly, the very next section of the bankruptcy code is II U.S.C §363. This section is the section that provides for the sale of assets outside the ordinary course of business and is the section that authorizes most bankruptcy auctions.

Lastly, an auction may be cancelled due to a bulk sale. It is possible that a creditor, a competitor, or third party may offer to purchase all assets for one lump sum. In this case, the borrower, bank, trustee… along with the auctioneer makes the decision whether it is a fair offer. A bulk sale is often beneficial to the client and the auctioneer because it is a guarantee that all assets will be sold. There is no way of guaranteeing the outcome of an auction, so if the offer is fair then the assets will be sold in bulk and the auction will be cancelled.

As the auctioneer, we never want to cancel an auction but hopefully this gives some understanding as to what is going on behind the scenes.