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News at 11 II
The recent confirmation of the chapter 1 1 plan in In re Sltilion Casinos Inc. in the District of Nevada1 is one of the latest examples of a case that focused attention on the fairness of the §363 sale process that allows insiders to acquire a business as a going concern while creditors are left unsatisfied. The press reports and news releases from the debtors tout the fact thiii Frank and Lorenzo Perlina will continue to control the business founded by their father 30 years ago and will be the largest shareholders of the new company formed to succeed the debtors. The plan met with vigorous opposition from the unsecured creditors and a dissident secured lender group until compromises were reached following the completion of the íj 363 sale. Secured creditors of the operating company received substantial recoveries, but were not paid in full. Unsecured creditors will see no recovery at all except to the extent they realize value from warrants to acquire a small interest in the new holding company. How is it that the controlling shareholders managed to preserve the enterprise's going-concern value and repurchase the assets for their own benefit at a fraction of the company's debts?
The answer lies in the degree of scruliny applied to insider sales and the court's assessment of the fairness of the sale process and the price paid by the insiders. Fairness of insider transactions outside of the bankruptcy arena typically requires that (he transaction be "entirely fair" to a corporation and its stakeholders. Should bankruptcy courts be bound by that same standard, or will a lower threshold be acceptable where a sale to insiders appears as the only viable alternative lo liquidation? By requiring a sale to insiders to meet the entire fairness doctrine, public perception of the bankruptcy process will be enhanced, and the appearance of insiders reaping the benefits of chapter I I at the expense of creditors can be avoided.
Heightened Scrutiny for Insider Transactions
The normal rule in sales of assets under § 363(b)(1) is that the bankruptcy courts will not substitute their own views regarding a proposed sale as long as it is supported by a reasonable exercise of the debtor's business judgment.-1 Where...