On March 7, 2012, Cano Petroleum, a Forth Worth–based, independent oil and gas company filed chapter 11 bankruptcy in Dallas. The Company announced that the cause was its continued losses and loan defaults, rendering it unable to raise capital and thereby creating a liquidity problem. Cano lists assets of $63.3 million and approximately $116.3 million in liabilities.
As an exit strategy, Cano announced that it plans to sell itself to a “stalking horse,” bidder NBI Services, in a $47.5 million deal. Through section 363(f) of the Bankruptcy Code, a debtor in bankruptcy may sell its assets, free and clear of liens, provided the proceeds are paid to the secured lenders. This section is what enabled Chrysler and General Motors to emerge from bankruptcy quickly.
Bankruptcy courts usually require debtors to sell their assets in bankruptcy after auctions, which includes other potential buyers, are conducted. The rationale is that the auctions set the best market values for the assets. The “stalking horse” is generally the first bidder at the auction, who has set the base purchase price and therefore is entitled to certain “bidder” protections.
In the recent years, through the Pacific Lumber and Philadelphia Newspaper cases, the Fifth and Third Circuit Courts of Appeal have even held that debtors may sell their encumbered assets through chapter 11 plans, without providing secured lenders opportunities to credit-bid their debt towards the potential purchase price for the assets. Even so, in these Circuits, the debtor still must provide the secured lender with indubitably equivalent value of its liens.
The Pacific Lumber and Philadelphia Newspapers cases represent a significant break from historical practice. For now, these Circuits permit assets sales without allowing secured lenders to credit-bid. The Seventh Circuit, on the other hand, has honored the historical practice of preserving this valuable credit-bidding right, thereby tee’ing up this important issue for Supreme Court to decide.
In Cano’s case, given the book value of the debtor’s assets ($63.3MM), at first blush, the stalking horse bid is seemingly favorable to the buyer. However, the market will determine whether this is truly the case. But, as this case is in the Fifth Circuit, the market may not include the credit-bid of Cano’s secured lenders.