Overbid? What is that?

Posted by Yosina M. Lissebeck, Esq. on February 4, 2015

Guest Post By Yosina M. Lissebeck, Esq.
Lissebeck Law

Overbid? What is that? The short and easy answer is that an overbid is an auction conducted during a hearing to approve a bankruptcy sale. You see Bankruptcy Code § 363 authorizes a debtor-in-possession or Trustee, to sell property of the estate other than in the ordinary course of business. A proposed sale of estate property will be approved if it is in the best interests of the estate, based on the facts and history of the case.[1] Before the Court can approve such a proposed sale, the Court must find that there is a valid business justification for the sale.[2] In addition to a sufficient business reason for the sale, the Court must find (1) the sale is in the best interest of the estate; (2) is fair and reasonable; (3) the assets to be sold were adequately marketed; and (4) was negotiated in good faith; and (5) that the buyer is proceeding in good faith; and (6) the sale is an “arms-length” transaction.[3] Lastly, the Court must find that the debtor-in-possession gave adequate and reasonable notice of the sale.[4]

There are various types of sales that can take place, but the two most typical are a private sale, and a sale subject to overbid. A private sale is a sale between just the Estate and the purchaser. A sale subject to overbid is a sale between the Estate and the purchaser; but a third party can come into the process and state that it is willing to purchase the asset for more than the sale price, and then there will be bidding between the parties, like at an auction.

The reason why bankruptcy sales are most often subject to overbid is because of the Estate’s duty to maximize the value of the asset for the benefit of creditors. A sales price achieved at auction (or presumably subjecting the sale to overbid) is ordinarily assumed to approximate market value when there is competition by an appropriate number of bidders.[5]

So how does it work? Let’s say the Estate is selling a commercial office building. The Trustee/DIP has marketed the building and has had a lot of interest from potential purchasers. It has entered into a purchase agreement with a buyer for a price of $1,500,000, subject to overbid. The Trustee/DIP will then file a motion with the bankruptcy court to approve overbid procedures. The overbid procedures will vary, but basically they will state that the purchase agreement is the controlling document, that the price is $1,500,000, that the initial overbid will be $1,525,000, and that the bidding increments will be $10,000. The Trustee/DIP will set a deadline for all interested overbidders to participate, usually 7 days before the hearing, and require a deposit and a writing stating the intent to overbid. The Trustee/DIP may also require proof of the ability to close, and will usually also require that the overbidders do their own due diligence prior to the hearing.  While the deposit for the successful overbidder is non-refundable, as it will be applied to the purchase price, the non-successful bidders will receive the deposit back. The Trustee/DIP will file the documents with the bankruptcy court and notice the sale with overbid procedures to all creditors, other parties who showed an interest in the property, and whomever else may want to overbid.  That sale motion is also now picked up by Inforuptcy, which is a great new marketing tool for the Estates.

Now What? If you are interested in participating as an overbidder you follow the directions in the notice. You provide your deposit, you state your intent, and you do your due diligence. You also show up at the hearing and get prepared to participate in a live auction. The attorney for the Trustee/DIP or the court will generally hold that auction, the rules and procedures will be stated in open court, the overbidders will be asked to identify themselves, and the auction will start. Once the bidding has stopped, the court will confirm the sale to the highest overbidder, and ask the next highest overbidder to be the “back up” just in case the sale doesn’t close to the highest overbidder.

What if it is a private sale and you are interested in purchasing the asset? The best thing to do is to contact the Trustee/ DIP and find out if you can purchase the asset for a higher amount. If there is another party who is interested, the Trustee/DIP may then decide to set it for an overbid hearing. If the Trustee/DIP doesn’t respond to you and you really want to purchase the asset for a higher amount, then you can always hire an attorney to object to the sale and tell the Court you want to purchase the asset for a higher amount. The Motion will set forth what the deadline is to file an objection with the Court. As stated above, the Trustee/DIP and Court has to make sure that the sale is in the best interest of the Estate, and a higher price for the asset is usually better. Now I say usually because it could be a complicated sale with a lot of moving parts – then price might not be the only factor the Trustee/DIP is looking at. For example, let’s say the Trustee is selling residential real property, which is owned by the Debtor and a tenant in common, and the Trustee is selling the property back to the tenant in common. In this case, it would most likely be a private sale, not subject to overbid, because of the title issues.

That’s it. Easy right! Now of course, this is just a quick overview of a typical overbid sale. That means there may be factual circumstances, local bankruptcy court preferences, and procedural requirements that may differ. Thus, it is always best to contact a bankruptcy practitioner to answer any questions or assist you with the sale and overbid process.


[1] In re American West Airlines, 166 B.R. 908, 912 (Bankr. D. Ariz. 1994), citing In re Lionel Corp., 722 F.2d 1063, 1071 (2nd Cir. 1983).

[2] See, e.g., In re 240 North Brand Partners, Ltd., 200 B.R. 653, 659 (9th Cir. BAP 1996).

[3] In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 842 (Bankr. C.D. Cal. 1991).

[4] Ibid.

[5] In re Fitzgerald, 428 B.R. 872, 883 (B.A.P. 9th Cir. 16 2010) (citing In re Lahijani, 325 B.R. 282, 289 (B.A.P. 9th Cir. 2005).


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You May Also Be Interested In:
The 363 Bankruptcy Sale Procedure – Broken Down and Simplified
Property of the Estate Under 11 U.S.C. § 541
The Automatic Stay
In Which District/Venue Should You Purchase the Asset?
Why U.S. Bankruptcy Acquisitions Make Good Sense For Foreign Investors

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