Vol 19 (2022) - Issue 5

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The Fine Line Between Collaboration and Collusion in US Chapter 11 Sales

Synopsis
Section 363 of the US Bankruptcy Code provides an effective mechanism to sell the debtor's assets. Purchasing assets through a section 363 sale can be attractive for potential buyers because, among other things, the assets may be sold free and clear of liens, claims, and encumbrances, and the buyer can rely on the protections in the bankruptcy court's sale order in the event of any challenges to the sale. A section 363 sale often involves an auction with multiple bidders, which may include parties bidding jointly. As a general matter, collaboration in such auctions is allowed, and may even be encouraged as it can provide a higher and/or better bid.
A collusive bid, on the other hand, can cause serious harm to the estate and can lead to the avoidance of the sale, the recovery of actual and punitive damages, and criminal liability. Understanding how not to cross the line is important for every potential bidder.