Stalking Horse Bidder Whose Bid Did Not Prevail At An Asset Foreclosure Sale Gets An Allowed Claim Against The Secured Party For The Break-up Fee, But No Other Damages
In re Finova Capital Corp., 356 B.R. 609 (Bankr. D. Del. 2006) (Judge Peter J. Walsh)
This case presents the bankruptcy court’s detailed findings and conclusions following a trial on a claim objection. The debtor, Finova Capital, a former middle market lender, objected to the proof of claim filed by Olsen Industries, a company which had been the initial but unsuccessful bidder for the assets of a company to which Finova had been an undersecured lender. The issues revolved around competing interpretations of a March 2000 letter agreement by which Olsen Industries agreed to serve as the stalking horse bidder in the public foreclosure sale of the assets of the company, Consolidated Industries, which manufactured and distributed gas furnaces. Olsen claimed that Finova breached the letter agreement and that it was thereby entitled to millions of dollars in damages. The court found no breach, apart from Olsen being entitled to its $100,000 break-up fee.
This case went to trial with three live witnesses and deposition testimony from five other witnesses, as well as various relevant documents being presented. The principal issue was whether Finova had, by the letter agreement, waived its right to credit bid at the foreclosure sale on Consolidated’s assets, or its right to sell its security interest in the assets of Consolidated to a third party who could then credit bid at the foreclosure sale. At the time of the letter agreement, Consolidated owed Finova $4.1 million. The debt was secured by all of Consolidated’s assets. Finova had tried to sell its rights in the Consolidated debt prior to the foreclosure sale, including to Olsen, but it was not satisfied by the price offered by Olsen.Under the March 2000 letter agreement, Olsen agreed to submit an opening bid of $2.5 million for the assets in a foreclosure sale to be conducted pursuant to the UCC. Finova then sold its rights to the Consolidated debt to another prospective purchaser of those assets for $3.225 million. That company in turn was the successful bidder at the foreclosure sale.
To the extent that Olsen’s representatives pursuing Olsen’s claim in the Finova bankruptcy case were sincere in their mistaken belief that Finova had given up its right to credit bid when Olsen agreed to open the bidding, the case presents a cautionary tale. The court found that any such belief on Olsen’s part was not reasonable, especially as there was no express waiver of the right to credit bid in the letter agreement. Olsen did wind up being allowed its break-up fee as the unsuccessful stalking horse bidder.
