April 28, 2011

The Fog of War Bankruptcy Sales

Wilmington and Philadelphia partner Andy Kassner and associate Joe Argentina have co-authored an article for the Legal Intelligencer titled, “The Fog of War, Bankruptcy Sales.” The article highlights the expedited “quick sale” of the Lehman Brothers Holdings Inc. (LBHI) investment banking and capital markets business to Barclays Capital Inc.  A year after the closing of the sale under Section 363 of the Bankruptcy Code, the U.S. Bankruptcy Court for the Southern District of New York was asked by the official committee of unsecured creditors and the trustee of Lehman Brothers Inc. (the challengers) for relief from the sale order under Federal Rule of Civil Procedure 60(b), and in doing so address the disposition of about $13 billion of cash and assets.  The challengers based their motion on various grounds, including mistake or excusable neglect, newly discovered evidence, fraud, misrepresentation or misconduct. 


After two years of litigation and hearings over a 34-day period, the bankruptcy court denied relief under Rule 60(b) but also ruled that assets worth billions of dollars were not included in the sale to Barclays.  In its opinion, the court reasoned that the "fog" of chaos and confusion surrounding the sale, something akin to the "fog of war," impacted both the expedited approval of the sale in 2008 and the decision not to revisit the sale in 2011. The sale process was at a speed the opinion states "takes ordinary transactional coping skills to the breaking point and beyond."


After a detailed consideration of the circumstances involved in the case Andy and Joe conclude that it remains to be seen whether "quick sales" like the ones approved in 2008 of large-scale businesses within a week or two of a bankruptcy filing will be allowed to proceed in normal economic times for large or small companies, or if these "quick sales" ultimately will be viewed as a necessary response during a short period of economic freefall in 2008. In the end, the time-honored policy of promoting finality in bankruptcy sales will favor not vacating a final 363 sale order, except in the most extraordinary circumstances, even (or perhaps especially) as was the case here, when billions of dollars are at issue.


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