the Debtors’ had acted within the bidding procedures when they held
a second auction, that the bid results of the second auction were
in the best interests of the estate, Ex. 6 at 22, and that CAI did
not have a reasonable expectation that its first bid was final in
light of the discretion given to the Debtors under the bidding
procedures, id. at 24.

The bankruptcy court relied specifically on the “modification”
provision of the bidding procedures, which I quote above, and held
that reopening the auction fell within the Debtors’ broad
discretion to “impose such other terms and conditions as it may
determine to be in the best interest” of the bankruptcy estate and
its creditors. Id, at 23. The court also noted that Bolling had not
received notice of a change in the asset purchase agreement
relating to the deadline for the removal of assets until the
commencement of the auction, but other bidders had learned of it
before, and that Bolling did not have an opportunity to contact any
of its members who were not participating in the auction to
reconsider the bid in light of this new information. Under the
circumstances, the court concluded that the second auction provided
“the most level playing f{ieJld for the parties involved.” Id. at
25. The bankruptcy court concluded that fundamental fairness did
not require an award of administrative expenses. Id. at 26.

II.

CAI appeals both the confirmation of the second auction sale


fraud or gross inadequacy standard described in Food Barn.

The second auction was also in the best interests of the
bankruptcy estate and its creditors. Although Bolling’s upset bid
was only approximately nine percent higher than CAI’s highest bid
at the first auction, the ultimate price for the assets was nearly
sixteen percent greater. The Seventh Circuit has suggested that
these differences would be insufficient to demonstrate that the
original bid was “grossly inadequate,” Chung King, 753 F.2d at 550
(8.6% to 12.5%), but I have already determined that the “grossly
inadequate” standard does not apply here. A sixteen percent
increase is a significant boon to the estate. See, e.g., In re
Muscongus Bay Co., 597 F.2d 11, 13 (1st Cir. 1979) (“It is not an
inappropriate use of hindsight to note . . . that the bankrupt
estate gained a 21.5% [p]rice increase by the extension of the
bidding period.”). The bankruptcy court did not abuse its
discretion by concluding that the benefit to the estate outweighed
the bidders’ expectations and the interest in finality and
confirming the sale based on CAI’s bid from the second auction.

Ordinarily, a debt is afforded administrative priority under
11 U.S.C. § 503 only if it both arises from a transaction with the
debtor and is beneficial to the debtor in the operation of its
business. In the Matter of Jartran, Inc., 732 F.2d 584, 587 (7th
Cir. 1984). “Bankruptcy courts have discretion in awarding

administrative expense priority, but this discretion is limited by


its discretion in refusing to confirm an adequate bid from an
auction and accepting a slightly higher “upset bid” offered at the
confirmation hearing, after the bidding had closed. 526 F.2d at
629. There the notice of the sale established a deadline for bids,
and the upset bid was received after the deadline. Id. at 628. The
Second Circuit has interpreted Gil-Bern to apply to “relatively
straight-forward asset sales with simple cash offers from rival
bidders in which one party emerged clearly victorious at the
auction, and the losing party then made a belated attempt to trump
the winning bid.” In re Financial News Network Inc., 980 F.2d 165,
169 (2d Cir. 1992). CAI argues that this is such a case. In
Financial News, however, the court warned that Gil-Bern, though
soundly reasoned, “should not be blindly applied so as to reduce
the broad discretion and flexibility a bankruptcy court must
necessarily have to enhance the value of the estates before it.”
Id. The Financial News court held that there was no abuse of
discretion in accepting an upset bid “where the bidding scenario

(wa]s complex and fluid,” and the upset bid “was consistent
with both the rules by which th[e] particular auction was conducted
and the reasonable expectations of the bidders.” Id. at 170.

The Eighth Circuit has adopted a “sliding scale” approach,
applied by the bankruptcy court here, recognizing that “the
importance of estate enhancement diminishes as an auction

participant’s reasonable expectations, and the gravity of finality,


price and the denial of administrative expenses. I review the
bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. In re Food Barn Stores, Inc., 107 F.3d
558, 562 (8th Cir. 1997). I will reverse the bankruptcy court’s
confirmation or refusal to confirm a sale only if it abused its
discretion. In the Matter of Chung King, Inc., 753 F.2d 547, 549
(7th Cir. 1985).

A bankruptcy court asked to confirm an auction sale of assets
is faced with two competing considerations: the integrity and
finality of public auctions and the best interests of the
bankruptcy estates’ creditors. Food Barn, 107 F.3d at 564. Of
these, the second is the primary consideration: “[t]he governing
principle at a confirmation proceeding is the securing of the
highest price for the bankruptcy estate.” Chung King, 753 F.2d at
549. Nonetheless, although “the highest bidder in a judicial sale
has not even equitable title until the sale is confirmed by the
court . . . it is important that the bidder receive what he had
reason to expect, and that nothing impair public confidence in the
regularity of judicial sales.” In re Gil-Bern Indus., Inc., 526
F.2d 627, 628 (lst Cir. 1975). See also Chung King, 753 F.2d at 550
(“‘[I]£ parties are to be encouraged to bid at judicial sales there
must be a stability in such sales and a time must come when a fair
bid is accepted and the proceedings are ended.’”).

In Gil-Bern, the court held that the bankruptcy court abused


estate and its creditors up to and during the sale hearing before
the bankruptcy judge. Ex. 7. Unlike Gil-Bern, the procedures here
did not include a cut-off for accepting bids. See also J.J.
Sugarman Co. v. Davis, 203 F.2d 931 (10th Cir. 1953) (holding that
“a high bidder at a judicial sale, whose bid has not been accepted,
could not object” to reopening the bidding, “especially [where the
sale] order expressly permitt[ed] the right to reject all bids”).
The bankruptcy judge correctly concluded that the Debtors acted
within the rules of the game by reopening bidding for a higher
offer after the first auction but before the first offer by CAI had
been confirmed.

The sale also complied with the bidders’ reasonable
expectations. All bidders had received copies of the bidding
procedures before the auction, Ex. 4 at 7, and the Debtors’ counsel
stated at the auction that he could not “give . . . 100 percent
assurances” that the bids at the conclusion of the auction would be
final and would not be upset by higher bids before the sale hearing
before the bankruptcy judge, id. at 15-16. Although CAI, as the
highest bidder, had a pretty good chance of having its bid
approved, the Debtors made clear before and at the auction that
nothing was cast in stone until the bankruptcy court confirmed the
sale. Under the circumstances, any expectation that the highest bid
at the auction would be accepted and confirmed was unreasonable.

CAI’‘s expectation was not “adequately solidified” to invoke the


“ oF

Mintte Order Form (06/97)

United States District Court, Northern District of Illinois

UL

Assigned Judge

Riss
Mgzistrate Judge

Sitting Judge if Other
than Assigned Judge

Elaine E. Bucklo

eae

02 C 2056 DATE 7/10/2002

CASE
TITLE

Corporate Assets, Inc. vs. Paloian, et al.

[In the following box (a) indicate the party filing the motion, c.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.]

MOTION:

DOCKET ENTRY:

qd) o Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due

(3) o Answer brief to motion due. . Reply to answer briefdue___.

(4) Oo Ruling/Hearingon ss setfor___— at

(5) Oo Status hearing[held/continued to] [set for/re-set for] on setfor at.

(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on setfor at

(7) im Trial{set for/re-set for] on at

(8) Oo [Bench/Jury trial] [Hearing] held/continued to__—_aat

(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) OGeneral Rule21 OO FRCP41(a\(1) O FRCP41(a)(2).

ao) [Other docket entry] | Enter Memorandum Opinion and Order affirming bankruptcy court’s
confirmation of the sale and denial of administrative costs. Any pending motion in this case is terminated
as moot.

a1) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

Decibient

Notices mailed by judge’s staff.

Notified counsel by telephone.

Y | Docketing to mail notices.
Y | Mail AO 450 form. 44na9 bo
ADS, ,
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the Bankruptcy Code’s requirement that the debt be an actual and
necessary cost of preserving the estate.” In re Lunan Family
Rests., 194 B.R. 429, 449 (Bankr. N.D. Ill. 1996). Legal expenses
may sometimes be recovered under § 503 as a matter of “fundamental
fairness” where, for example, the party making the administrative
claim has had to defend against frivolous litigation by the
trustee. See In re Met-L-Wood Corp., 115 B.R. 133, 135-36 (N.D.
Tll. 1990). CAI sought an administrative claim for attorneys’ fees
and for the difference between its first and second bid. As I have
already explained, the Debtor’s position was not frivolous, and the
bankruptcy court properly accepted the higher bid. Fundamental
fairness is not implicated here, and the bankruptcy court did not
abuse its discretion in denying CAI’s claim for administrative
expenses.

The decision of the bankruptcy court is AFFIRMED.

ENTER; OGRDER:
Se PI pp
ECL the kSaalh._o
Elaine E. Bucklo
United States District Judge

Dated: July /g, 2002

10


increase.” Food Barn, 107 F.3d at 565. After a sale has been
confirmed by the bankruptcy judge, or the bidder’s expectations are
otherwise “adequately solidified,” therefore, it is generally
“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.” Id. at 565 & n.13. Where there is
no similarly “solidified” expectation in the result of the auction,
however, “a reviewing court should evaluate the bankruptcy judge’s
decisions on a case by case basis, with due regard both for the
parties’ expectations and the judge’s broad discretion to weigh the
multifarious interests involved.” Id. at 565.

“(T]he important notions of finality and regularity in
judicial auctions are appeased if the court acts consistently with
the rules by which the particular sale is conducted and in
compliance with the bidders’ reasonable expectations.” Food Barn,
107 F.3d at 565. The bidding scenario here was somewhere between
the simple, fixed bidding deadline in Gil-Bern and the “complex and
fluid” auction in Financial News. Although the procedures here
contemplated only one auction, the rules of bidding were subject to
the discretion of the Debtors to reject any bid that was not in the
best interest of the estate and its creditors, to consider the bids
and the best interests of the estate before making a recommendation
to the bankruptcy court, and to “impose such other terms and

conditions as it may determine to be in the best interests” of the


today, they will take the lead bidder who has provided all of

the necessary information to be a qualified bidder and will

present tat to the Court to approve.

So I guess I can’t give you 100 percent assurance that
someone can’t walk into court on Wednesday and try to outbid
whoever wins today, but I think that that is a very slim
possibility.

Ex. 4 at 15-16. At the end of the auction, CAI was the highest
bidder with a bid of $2.25 million. Myron Bolling Auctioneers
(“Bolling”) was the second highest bidder with a bid of $2.075
million. The Debtors closed the auction and said that they would
present all of the bids to the bankruptcy court. Ex. 4 at 34.

The following day, the day before the confirmation hearing in
the bankruptcy court, Bolling told the Debtors that he had
misunderstood when the assets had to be removed from the facility
and that he wanted to up his bid to $2.45 million. The Debtors told
CAI that they intended to reopen the bidding and hold a second
auction, and they received approval from the bankruptcy court to do
so. Ex. 10. The second auction was held on January 24, 2002; CAI
participated under objection and was the highest bidder with a bid
of $2,602,500 ($352,500 higher than its bid at the first auction).

The sale hearing was held on January 29, 2002. CAI filed a
written objection and asked the bankruptcy court to ignore the
results of the second auction and award administrative fees. Ex. 5;
Ex. at 12-16. The bankruptcy court overruled the objection, denied

administrative fees and confirmed the sale results from the second

auction. Ex. 6 at 17-26; Exs. 1-2. The bankruptcy court held that


Debtors’ bankruptcy case, the Debtors held a public auction of
personal property from their facility in Cedar Rapids, Iowa. Before
the auction, the bankruptcy court approved bidding procedures for
the auction, Appendix to CAI’s Brief Exhibit (“Ex.”) 3, which
included a provision that the Debtors could, “reject at any time
before entry of an order of the Bankruptcy Court approving a
Qualified Bid, any bid that is... contrary to the best interest
of Goss, its estates, and its creditors.” Ex. 7 at 5-6. The bidding
procedures, which were distributed to the bidders prior to the
auction, Ex. 4 at 7, also provided that “[Ta]t or before the Sale
Hearing [before the bankruptcy court to confirm the sale], Goss may
impose such other terms and conditions as it may determine to be in
the best interests of Goss’ estate, its creditors, and other
parties in interest.” Ex. 7 at 5. The procedures also allowed the
Debtors to evaluate the bids after the conclusion of the auction
and determine which was the best bid. Id. at 4.

At the auction on January 21, one of the other bidders asked
whether the results of the auction would be final, or whether
someone could submit a higher bid at the sale hearing. Debtors’
counsel responded:

Well, the Court’s order provides that today is the day
for the auction, and when we close the auction it will be
final. I cannot obviously state that someone can’t walk into
court on Wednesday [the day scheduled for the confirmation
hearing] and offer 10 million dollars for the stuff and have
the Court say that it’s not going to accept their bid; but

under the procedures, today is the day for the auction.
The debtors anticipate that when they close the auction


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

IN RE GGSI LIQUIDATION, INC. et

al.,
Debtors.

DOCKETED

JUL 1 1 2002

CORPORATE ASSETS, INC.,

Appellant, No. 02 € 2056

v. Appeal from No. 01 B 31751
GUS A. PALOIAN, Chapter 7 Trustee
of GGSI LIQUIDATION, INC. and
GOSS HOLDINGS, INC.,

Appellee.

MEMORANDUM OPINION AND ORDER

Corporate Assets, Inc. (“CAI”) was a bidder at an auction sale
in the Chapter 11 bankruptcy case of Goss Holdings, Inc. and Goss
Graphic Systems, Inc. (“Debtors”). It submitted the highest bid at
an auction, but Judge Carol A. Doyle of the bankruptcy court
allowed the Debtors to re-open the bidding when a higher bid came
in. CAI was the highest bidder at the second phase of the auction,
but its winning bid was $352,500 higher than its original bid. It
appeals the bankruptcy court’s confirmation of the sale and denial

of administrative costs. I affirm.
I.

On January 21, 2002, during the Chapter 11 phase! of the

1 The Debtors’ case has since been converted to a Chapter 7
case.