Can messy be good? Sometimes the answer is yes. The chapter 11 case filed by Limetree Bay Services, LLC and five of its affiliates (“Limetree Bay”) is one example of auction disorder actually bringing increased creditor recoveries. Bankruptcy professionals, financially distressed companies and acquirers of distressed assets can learn valuable lessons from this odd bankruptcy auction process, which shows the importance of (1) debtors preserving their flexibility during an auction, and (2) investors having appropriate expectations and resources before bidding on a debtor’s assets. Contentious auctions are nothing new, but the unique facts in Limetree Bay highlight these critical principles.
The Initial Auction
Limetree Bay owned an oil refinery business in the U.S. Virgin Islands. The refinery business was shuttered by prior owners in 2012, but was acquired in 2015 by Limetree Bay out of a bankruptcy auction. Limetree Bay ultimately invested approximately $4.1 billion in an effort to modernize the refinery to bring operations into regulatory compliance. On July 12, 2021, Limetree Bay and affiliates filed for chapter 11 bankruptcy protection in the Southern District of Texas after experiencing significant operational issues.
Limetree Bay’s bankruptcy strategy was to sell substantially all of its assets for the benefit of its stakeholders. The auction process was initially typical of bankruptcy auctions. On August 11, 2021, the bankruptcy court approved bidding procedures and scheduled an auction for substantially all of Limetree Bay’s assets. The deadline for bidders to make a 10% deposit of their offering price was November 12, 2021 and an auction was held on November 18, 2021. The bidding procedures permitted Limetree Bay, in consultation with certain notice parties, to re-open the auction at any time before the sale hearing or reject any bid that was contrary to Limetree Bay’s best interests.
On November 30, 2021, Limetree Bay announced that St. Croix Energy, LLLP (“St. Croix”) was the winning bidder with a going concern bid of $33 million bid ($20 million cash). Sabin Metal Corporation (“Sabin”) and Bay, Ltd. (“Bay”) were collectively designated as back-up bidders with an approximate $39 million bid that contemplated liquidation of the assets. On December 2, 2021, Bay filed an objection to Limetree Bay’s designation of St. Croix as the winning bidder, arguing that Sabin and Bay had in fact offered more cash than St. Croix based on potential future liquidation sales, and that St. Croix intended to liquidate the Limetree Bay assets and not maintain the business as a going concern.
Auction Process Reopened
On December 6, 2021, Limetree Bay filed an emergency motion to reopen the auction to allow West Indies Petroleum Limited (“WIPL”) to acquire substantially all of their assets for $30 million ($10 million more cash than St. Croix’s bid), with a projected December 22, 2021 closing date. Although WIPL had timely submitted a bid in accordance with the bidding procedures, WIPL had failed to make the required 10% good faith deposit by the November 12th deadline. Limetree Bay explained that the reason WIPL did not submit its deposit was because WIPL’s CEO had “a sudden and unforeseen medical emergency” that left him incapacitated. The CEO, Charles Chambers, was the only person at WIPL who had (1) sufficient knowledge of the Limetree Bay transaction, and (2) authorization to make the deposit or execute an asset purchase agreement.
That evening, Judge David Jones granted the emergency motion and reopened the auction based upon the unforeseen medical crisis of Mr. Chambers, and Judge Jones’ conclusion that WIPL’s story was not a strategic maneuver. Judge Jones found that the facts presented a “compelling reason to veer from past practice.”
The Second Auction
On December 18, 2021, Limetree Bay announced that the new winning bid was a joint bid submitted by WIPL and Port Hamilton Refining and Transportation (“Port Hamilton”) for substantially all of the assets for $62 million and a projected closing date of January 21, 2022. St. Croix was designated the back-up bidder, with a bid of $57 million.
In response, St. Croix and Bay, along with two other parties in interest, filed objections to the sale. Bay argued that the second auction process was invalid by permitting a “late and nonqualified entrant” to bid and also relied on arguments from their first objection. St. Croix argued that the proposed sale was contrary to the initial bidding procedures order, that the auction should not have been reopened based on the inaccurate statements presented by Limetree Bay on December 6th since the winning bidder was both WIPL and Port Hamilton (not just WIPL) and the sale is scheduled to close by January 21st (not December 22nd), and that there were additional regulatory hurdles that the winning bidder may have difficulty obtaining as a non-U.S. Virgin Islands entity.
On December 21, 2021, Judge Jones overruled the objections filed by Bay and St. Croix and approved the $62 million sale to WIPL and Port Hamilton. Judge Jones held that the WIPL/Port Hamilton bid was the “highest and best” offer and that Limetree Bay had exercised its prudent business judgment in choosing the bid. St. Croix and Bay separately appealed both the order reopening the auction and the order approving the sale to WIPL/Port Hamilton. That appeal remains pending as of the date of this article, as does the emergency motion filed by St. Croix for a stay pending appeals of both orders.
A debtor must always preserve its flexibility during an auction process to maximize asset value. As demonstrated by Limetree Bay, this would include ensuring that the debtor maintains the ability to re-open the auction. Furthermore, debtors should always ensure that the assets have been fully marketed and should follow-up with prospective buyers until the sale has concluded. If Limetree Bay had failed to take either of these steps, it may not have received the second offer for its refinery, substantially increasing recovery to the estates.
Potential acquirers of distressed companies should avoid WIPL’s procedural missteps (even though those missteps were ultimately rectified). To avoid missing bid and other deadlines, an acquirer should have multiple people involved in the potential deal, each of whom have knowledge about the transaction and authority to submit bids and execute necessary documentation. Furthermore, having access to the necessary financing is critical. St. Croix reportedly had to seek approximately $40 million in additional financing once the auction process was reopened. The time between reopening the auction and the announcing the winning bidder was 12 days, and it is unclear whether St. Croix’s bidding efforts during the second auction were negatively impacted by having to secure access to additional financing during this abbreviated time period. Immediate and continuing access to capital is critical to competitively bid in bankruptcy auctions, where time is of the essence.
Finally, the Limetree Bay auction saga is a reminder that sometimes the highest bid is not always the best bid. In the initial auction process, Bay and Sabin may have bid the highest amount with a $39 million bid that envisioned liquidation of the assets. However, St. Croix’s lower going concern bid, which contemplated on-going business operations, including most importantly hundreds of continuing jobs, was ultimately determined to be the “best” bid during the first auction. All parties in interest should take note that bankruptcy courts and debtors will often times consider matters apart from dollar amounts, including for instance the interests of employees and surrounding communities, when determining the “highest and best” bid.