After the debtor filed a chapter 7 bankruptcy, his mortgage company file a motion for relief in order to start foreclosure proceedings. The court denied the motion for relief because the mortgage company could not show which rights the company has in the note and the failure of properly document the transfer of both the note and the mortgage raised the questions whether the bank had standing to file the motion for relief. The Mortgage company could not show that they actually received the note or was in possession of it. (In re Lippold, 2011 Bankr. Lexis 3282)

The Southern District of Texas has proposed several local rules for public comment. One of the interesting proposals is a model plan to be used by individual chapter 11 debtors. You can find the announcement with links to related documents here.You can find the link to the proposed model plan here.

One of the legacies of the Works Progress Administration was the construction of majestic federal courthouses and courtrooms. When you walk into the en banc courtroom of the Fifth Circuit Court of Appeals in New Orleans or Judge Leif Clark's courtroom in San Antonio or any one of dozens of other courtrooms, it is hard not to be filled with reverence for the important work which goes on there. However, several recent incidents of judicial incivility prompted the Above the Law blog to ask the question:Can you enforce civility by being… uncivil? That’s the question being raised, over and over again, by federal judges from Texas these days.Above the Law's query was prompted by three incidents: an order dated August 26, 2011 from U.S. District Judge Sam Sparks inviting lawyers to a "kindergarten party," an email reprimand from Chief Judge Edith Jones dated August 30, 2011 and Chief Judge Jones's own comments telling fellow Circuit Judge Dennis to "shut up" in oral argument on September 20, 2011. Act I: An Invitation to a Kindergarten PartyThe series of highly unfortunate events began when non-parties to a civil action sought to quash deposition notices addressed to them. This prompted an order from Judge Sparks which included the following language:Greetings and Salutations!You are invited to a kindergarten party on THURSDAY, SEPTEMBER 1,2011, at 10:00 a.m. in Courtroom 2 of the United States Courthouse, 200 W. Eighth Street, Austin, Texas.The party will feature many exciting and informative lessons, including:• How to telephone and communicate with a lawyer• How to enter into reasonable agreements about deposition dates• How to limit depositions to reasonable subject matter• Why it is neither cute nor clever to attempt to quash a subpoena for technical failures of service when notice is reasonably given; and• An advanced seminar on not wasting the time of a busy federal judge and his staff because you are unable to practice law at the level of a first year law student.Invitation to this exclusive event is not RSVP. Please remember to bring a sack lunch! The United States Marshals have beds available if necessary, so you may wish to bring a toothbrush in case the party runs late.Morris v. Coker, et al, No. A-11-MC-712-SS (W.D. Tex.). The order was disturbing on several levels. First, it pre-judged the dispute as frivolous and implicitly threatened imprisonment without having heard the merits. Second, the order castigated the objecting parties for wasting the court's time when Fed.R.Civ.P. 45 dictates that failure to comply with a subpoena is punishable by contempt, thus requiring a party to act promptly to avoid waiving an objection, even a technical objection. Finally, the order gave little concern to the fact that the subpoenas were addressed to non-parties who were involuntarily drawn into the dispute.Act II: The Email Heard Round the DistrictChief Judge Edith Jones of the Fifth Circuit Court of Appeals responded promptly, critiquing Judge Sparks for his "cute" orders. Dear Sam, It has not escaped my attention, or that of my colleagues or, I am told, nationally known blog sites that you have issued several ‘cute’ orders in the past few weeks. The order attached below is the most recent. Frankly, this kind of rhetoric is not funny. In fact, it is so caustic, demeaning, and gratuitous that it casts more disrespect on the judiciary than on the now-besmirched reputation of the counsel. It suggests either that the judge is simply indulging himself at the expense of counsel or that he is fighting with counsel in what, as Judge Gee used to say, is surely not a fair contest. It suggests bias against counsel. No doubt, none of us has been consistently above reproach in our professional communications with counsel. We are all prone to human error. But no judge who writes an order should allow such rhetoric to overcome common sense. Ultimately, this kind of excess, as I noted, reflects badly on all of us. I urge you to think before you write. Sincerely, Edith Jones.When contacted by the Texas Lawyer, Judge Jones stated that she was "saddened that somebody breached the intended limited scope of the intended distribution." However, the fact that she copied all of the District Judges of the Western District of Texas on the email virtually guaranteed that it would be leaked. Act III: Judge Dennis Gets a Talking To for Talking Too MuchIn United States v. Delgado, No. 07-11401 (5th Cir. 1/19/11), a panel of the Fifth Circuit reversed a criminal conviction. Judge James L. Dennis, joined by Judge Wiener, wrote the opinion, while Judge Clement dissented. On September 20, 2011, the en banc court heard oral arguments. At 47:40 in the argument, which you can listen to here, the following exchange took place:MR. TURNER: I think the amount of drugs in that truck supports the intent to distribute. And the jury….JUDGE DENNIS: Well, we’ve said over and over that the amount…. this court, no court has said that you can infer….CHIEF JUDGE JONES: Judge Dennis….JUDGE DENNIS: … just on the basis of the amount of drugs …CHIEF JUDGE JONES: Judge Dennis!JUDGE DENNIS: Can I, can I, can I ask a question?CHIEF JUDGE JONES: You have monopolized, uh, uh, seven minutes….JUDGE DENNIS: Well, I’m way behind on asking questions in this court. I have been quiet a lot of times, and I am involved in this case….CHIEF JUDGE JONES slams her hand down on the table (loudly), stands halfway up out of her chair, and points toward the door.CHIEF JUDGE JONES: Would you like to leave?JUDGE DENNIS: Pardon? What did you say?CHIEF JUDGE JONES: I want you to shut up long enough for me to suggest that perhaps….JUDGE DENNIS: Don’t tell me to shut up….CHIEF JUDGE JONES: … you should give some other judge a chance to ask a question …JUDGE DENNIS: Listen, I have been in this courtroom many times and gotten closed out and not able to ask a question. I don’t think I’m being overbearing….CHIEF JUDGE JONES: You’ve been asking questions for the entire seven minutes….JUDGE DENNIS: Well, I happen to be through. I have no more questions.CHIEF JUDGE JONES: I just want to offer any other judge an opportunity to ask a question. Some may support your position. If nobody else chooses to ask a question, then please go forward.(I am relying on Above the Law's transcription. Please listen to the argument yourself to ensure the accuracy of the statements quoted). It is not surprising that the author of the panel opinion would take an active role in the en banc argument. Indeed, when I appeared before the en banc court earlier this year, Judge Jones engaged me in spirited questioning throughout most of my allotted time. I found that the opportunity to engage the strongest opponent of my position to be quite rewarding. Civility Begins at the TopThe media is full of images of lawyers behaving badly in court, whether it is Arthur Kirkland screaming "You're out of order, this whole trial is out of order" in "And Justice for All," Captain Harmon Rabb discharging an automatic weapon in the courtroom in the TV series JAG and Louis Litt (in my favorite new lawyer show Suits) berating a deponent who later suffers a heart attack. That is how the world of entertainment portrays us.In the real world, judges have a right to expect a high standard of conduct from the lawyers appearing in front of them. In Matter of First City Bancorporation, 282 F.3d 864 (5th Cir. 2002), the Fifth Circuit not only upheld but increased an award of sanctions against a lawyer who repeatedly abused opposing counsel and parties. The court rejected the defense that his hyper-obnoxious approach brought results.However, civility begins at the top. Serving as a federal judge (whether under Article I or Article III) is one of the highest honors an attorney can receive. Federal judges should treat the high office they hold with respect, even when attorneys engage in unnecessary discovery disputes or a colleague monopolizes oral argument. To her credit, Chief Judge Jones did apologize at the conclusion of the session's arguments. However, it would have been better if she had held her tongue in the first instance. Post-ScriptI have made intemperate remarks in the past and will, no doubt, do so again. I live in a glass house and sometimes I throw stones when I shouldn't. When that happens, please feel free to through my own words back at me.

The National Association of Consumer Bankruptcy Attorneys created an online petition for the White House to reduce foreclosures. The plan is called Principal Paydown Plan (PPP). Someone in a chapter 13 bankruptcy case would apply all of their monthly mortgage payment towards the prinicpal of the loan and nothing towards the interest. This would greatly decrease interest payments and would lead to more equity for the houseowner. A mortgage loan that is underwater, meaning you owe more on your loan that the value of your house, would change to equity for the houseowner. The mortgage payment would be lower and it would be easier for the houseowner to refinance the loan to lower interest rates. If you want to support the petition follow the link below.https://wwws.whitehouse.gov/petitions/%21/petition/help-families-avoid-foreclosure-stabilize-housing-market-and-boost-economy-adopt-principal-paydown/Yj4rq2l8

Call me crazy, but I believe that trial should be about each side presenting their case within the limits of the Rules of Evidence. I tend to be very skeptical about what I call trial by exclusion, the use of procedural rules to prevent the other guy from putting on his evidence. It does not take much legal skill to win a case when the other guy has to stand there gagged and silent. That is why I was heartened to see a recent opinion out of the Texas Third Court of Appeals which struck down an improper request for admission. Lucas v. Clark, No. 03-10-00474-CV (Tex. App.--Austin, 6/15/11). You can find the opinion here.Under the Texas Rules of Civil Procedure, a party may serve discovery requests together with the petition. In this case, the Plaintiff included a request for admission which stated:Request for Admission 2: As a proximate result of your breaching the contract made the basis of this suit, the Plaintiffs have suffered consequential damages in an amount not less than ten million dollars.The defendant did not answer the lawsuit or the requests for admissions. As a result, the Plaintiff requested a default judgment. The only evidence of damages offered was the deemed admission. The Court awarded damages of $10 million.On appeal, the Court of Appeals (in an opinion written by Justice Henson and joined by Chief Justice Jones and Justice Goodwin) said not so fast.The primary purpose of requests for admissions is to “simplify trials by eliminating matters about which there is no real controversy.” (citation omitted). They were never intended to be used as a demand upon a plaintiff or defendant to admit that he had no cause of action or ground of defense. Id. Courts have cautioned that litigants should not be allowed to use requests for admissions as a tool to trap their opposition. (citation omitted). The rule regarding requests for admissions “was designed, not as a trap to prevent the presentation of the truth in a full hearing but as a tool for the fair disposition of litigation with a minimum of delay.” (citation omitted). When a party uses deemed admissions to try to preclude presentation of the merits of a case, however, due process concerns may arise. Therefore, overly broad, merits-preclusive requests for admissions are improper and may not result in deemed admissions. (citations omitted).Opinion, pp. 6-7.As a result, the Court of Appeals found that the request for admission should not be given evidentiary effect and found that there was no evidence as to damages. The Court of Appeals reversed and remanded for a new hearing on damages.This is a good opinion, indeed a courageous opinion. I applaud the Austin Court of Appeals for their ruling.

While the paparazzi followed every move of Anna Nicole Smith during her tragically shortened life, those of us of the legal paparazzi now stalk every new development in the case which bears her legal name, Stern v. Marshall. Some commentators have asked whether the newly emphasized limitations on the jurisdiction of U.S. Bankruptcy Judges to enter final judgments will apply to U.S. Magistrates as well. The Fifth Circuit has indicated that it will soon be considering this issue.On September 9, 2011, the Fifth Circuit directed the parties to submitletter briefs of not more than six pages addressing whether the reasoning of Stern applies to magistrate judges, which, like bankruptcy judges, are not Article III judges, and whether, under Stern, a magistrate judge can enter final judgment in a case tried to a magistrate judge by consent under 28 U.S.C. § 636(c) where jurisdiction is based on diversity of citizenship and state law provides the rule of decision.Technical Automation Services Corp. v. Liberty Surplus Insurance Corporation, No. 10-20640 (5th Cir. 9/9/11), Order, p. 2.Thus, it looks like there may be a circuit-level opinion on Stern v. Marshall sooner rather than later.Hat Tip to Prof. Ken Klee.You can read the order in full below.

Dealing with mortgage servicers can be frustrating. Sometimes it is difficult or impossible to get a clean chain of title or a good accounting. In a new opinion by Judge Stacey Jernigan, the Court was faced with a request for fees incurred by a chapter 13 debtor's counsel in dealing with two motions for relief from stay over a three year period, one of which was withdrawn and the other one of which was denied for failure to prove standing. Counsel sought to recover fees based on 28 U.S.C. Sec. 1927 and the court's inherent authority. In a well-reasoned opinion, Judge Jernigan concluded that Rule 9011 was the proper vehicle for seeking fees based on deficient pleadings and that the present case did not rise to the high standard necessary to award fees under Sec. 1927 or the Court's inherent authority. In re Pastran, No. 06-34728 (Bankr. N.D. Tex. 9/20/11). You can find the opinion here. While the twenty-two page opinion is worth reading in its entirety, I will leave you with the conclusion:The court is certainly cognizant of the fact that the mortgage servicing industry does not always show itself to be the perfect, well-oiled machine that one would hope it to be. As more and more individuals have gone into default on their home mortgages and resorted to seeking bankruptcy protection, bankruptcy courts have seen certain problems that exist in the home mortgage servicing industry, particularly issues when it comes to chain of title and other documentation. Some of these cases may require bankruptcy courts to take action and issue appropriate orders to ensure that such practices do not continue; however, in this case, the court does not believe it to be a good exercise of discretion to do so.The court would conclude by stating that Rule 11 seems to be the more appropriate tool to use when requesting sanctions or fee shifting, not only because it allows a party an opportunity to remedy any mistakes it may have made, but also because it seems to make parties engage in a dialogue which could ultimately facilitate settlement. The court found it very enlightening to read Debtor’s Exhibit G, which was a myriad of emails that were exchanged between Debtor’s Counsel and HWALLP over the approximately 3-year period that this matter was pending. From the court’s review of these emails, there was certainly no evidence of inappropriate behavior by HWALLP, AHMSI, or Citi. In fact, the overall tone of the emails was quite professional and courteous. If anything, this case appeared to be one primed for settlement, as there were significant discussions about a possible loan modification. However, settlement and/or a loan modification never happened. Instead, HWALLP filed the Citi Stay Lift Motion and the AHMSI Stay Lift Motions with certain chain of-custody gaps and documentation errors (first no indorsement; then ultimately an indorsement-in-blank supplied but not offered into evidence). While this was sloppy and bad form (which justified denying stay relief), this, in and of itself, did not rise to the level of bad faith or vexatious litigation that would legitimize fee shifting. (emphasis added).Opinion, pp. 20-22.

Here at Shenwick & Associates, we keep a close eye on the news related to bankruptcy, and one news story that caught our eye was about the recent drop in bankruptcy filings. In New York and New Jersey, bankruptcy filings were down by 5 percent from May 2011 to June 2011. Although filing for Chapter 7 or Chapter 13 bankruptcy is usually the best solution for our clients, there are two alternatives to bankruptcy for debtors: 1. Do nothing. Although this isn’t really a viable solution, it’s a path commonly taken by debtors who think that inaction and time will make their debt magically disappear. In actuality, what will likely happen is that the creditor will commence an action against the debtor in civil court. If the action is not answered, a default judgment will be entered against the debtor. In New York State, a judgment is valid for 10 years (which can be renewed once for another 10 years), and can be enforced against a judgment debtor’s income and assets. 2. An out–of–court workout with the creditor. An out–of–court workout is a voluntary or consensual negotiation with the creditor to reduce the amount of debt the debtor owes to the creditor. In our experience, the biggest discounts can be gained by agreeing to pay the creditor a lump sum, rather than making monthly payments over a year to 18 months. The agreement between the creditor and the debtor should always be memorialized in writing, and should always provide fixed terms for payments (i.e. twelve payments of $500 made each month by the debtor to the creditor), rather than requiring payments in perpetuity from the debtor to the creditor. There are a number of pros and cons to attempting an out–of–court workout: Pros: • The debtor can save the legal fees in filing a bankruptcy petition (which could range from $2,000-$4,000) and the Bankruptcy Court filing fees ($299 for a Chapter 7 case). • A workout may be a less negative factor on the debtor’s credit report and lower their FICO score less than filing for bankruptcy would. • A workout provides psychological relief to the debtor in not filing for bankruptcy and lessens the “embarrassment or failure” factor. Cons: • Bankruptcy provides a solution for all of a debtor’s creditors, but in an out–of–court workout, each creditor has to be negotiated with individually-what if an agreement can’t be reached with all creditors? • Who will do the negotiating with the creditor-the debtor, a CPA or an attorney? (CP As and attorneys will charge a fee for this work) • It takes substantial time and effort to draft, review and revise and file the documents needed to expedite a workout: a settlement agreement, a release, a satisfaction of judgment and a stipulation of settlement or stipulation of discontinuance of the action (if the creditor has commenced litigation). • Under § 108 of the Internal Revenue Code, debt relief is considered income and is taxable. This is “phantom income,” for which the creditor will have to file a Form 1099-R with taxing authorities. For example, if a debtor owes $10,000, and reaches an out–of–court workout with a creditor for $4,000. The $6,000 difference between the original debt and the settlement is taxable debt relief income, which must be included in the Debtor’s tax return for the year in question. To discuss the best strategies for dealing with your personal and business debt and to avoid judgments that will encumber your income and assets, please contact Jim Shenwick.

The Fifth Circuit has upheld a Texas bankruptcy court's order recharacterizing the ostensible debt of a non-insider as equity. Matter of Lothian Oil Incorporated, No. 10-50683 (5th Cir. 8/9/11). Unlike other circuits to consider the issue, the Fifth Circuit relied on Sec. 502(b) and Texas state law rather than the Court's equitable powers under Sec. 105. You can find the opinion here. What Happened Israel Grossman advanced $350,000.00 to Lothian Oil pursuant to two ambiguous documents. The documents stated that Grossman "loans" or "shall loan" a sum of money to the company. In return for the "loans," he would receive a royalty from certain oil wells "without further investment" and would receive repayment of the funds advanced from certain equity placements. When Lothian filed for Chapter 11, Grossman filed numerous proofs of claim. Some were allowed. However, the Bankruptcy Court denied the two claims making up the $350,000 on the basis that they were equity rather than debt. The District Court reversed, holding that recharacterization could only be applied to insiders. The Fifth Circuit's Approach to Recharacterization The Fifth Circuit upheld the Bankruptcy Court's recharacterization order, but did not rely on the Court's equitable powers under Sec. 105(a). In doing so, the Court broke with the Third, Fourth and Sixth Circuits. The opinion, authored by Chief Judge Edith Jones, relied on a seductively simple logic. Under Sec. 502(b)(1), a claim shall be allowed unless it is "unenforceable against the debtor . . . under any agreement or applicable law." The term "applicable law" refers to State law. Thus, if state law would classify an instrument as equity rather than debt, the Court should disallow the claim and recognize the interest as equity. Taken together, Butner and § 502(b) support the bankruptcy courts’ authority to recharacterize claims. If a claim asserts a debt that is contrary to state law, the bankruptcy court may not allow the claim. Moreover, where the reason for such disallowance is that state law classifies the interest as equity rather than debt, then implementing state law as envisioned in Butner requires different treatment than simply disallowing the claim. The Fourth Circuit identified the inadequacy of traditional disallowance in noting that “[w]hen a bankruptcy court disallows a claim, the claim is completely discharged. By contrast, recharacterization is appropriate when the claimant has some rights via-a-vis the bankrupt.” In re Dornier Aviation, Inc., 453 F.3d 225, 232 (4th Cir. 2006) (internal citation omitted; emphasis in original). These rights, fixed by state law, are not irrelevant to the court’s decision to disallow a claim. To the contrary, recharacterizing the claim as an equity interest is the logical outcome of the reason for disallowing it as debt.Opinion, p. 6. Because Sec. 502(b) and state law provided a direct route to determining the issue, it simply was "unnecessary" to resort to Sec. 105. Similarly, equitable subordination under Sec. 510(c) was not implicated. Equitable subordination and recharacterization, although sometimes based on the same facts, are directed at different conduct and have different remedies.Id. Applying the Test Turning to Texas state law, the Court found that Texas uses a sixteen factor test imported from federal tax law. Thus, it was a case of a federal court turning to state law which redirected the Court back to federal law. The Court also noted that the Fifth Circuit has also applied a thirteen-factor test and an eleven-factor test. Fortunately, the confluence of these tests does not require the Court to weigh the sixteen, thirteen and eleven factors together in a forty-point balancing test. Instead, it is a more organic exercise of asking: Does this look more like debt or equity? (Ed.--my characterization, not the Court's). In the specific case, although the documents used the word "loan" in them, they did not provide for an interest rate, terms of repayment or a maturity date. Instead, they would be paid from royalties and "equity placements." Critical to the Court's ruling "was the inclusion of a royalty payment, which depended on the success of Lothian's business, instead of a prescribed interest rate." Opinion, p. 8. An Objective Test This brief opinion is a welcome addition to bankruptcy jurisprudence. In my practice, I have often seen equitable subordination and recharacterization applied interchangably as a rule against recognizing insider debt. The Lothian opinion helpfully distinguishes between the two doctrines and applies an objective test for determining recharacterization. The opinion also diminishes the relevance of insider status. While insiders may face greater scrutiny, they do not face automatic recharacterization.

The Fifth Circuit has ruled that, under the facts of the specific case, that bidders could recover their costs without a showing of direct benefit to the estate. Matter of ASARCO LLC, No. 10-40930 (5th Cir. 8/16/11). The specific holding was that reimbursement of costs incurred in submitting a bid were governed by the business judgment standard under 11 U.S.C. Sec. 363(b) rather than the benefit to the estate standard under 11 U.S.C. Sec. 503(b). You can find the opinion here. A Billion Dollar Judgment And An Auction That Wasn't This was a case about a big judgment and a unique procedure to auction off that judgment. In 1999, Grupo Mexico S.A.B. de C.V. (Grupo Mexico) purchased ASARCO. ASARCO owned 260 million shares of Southern Peru Copper Company (SCC). Through a series of transfers, the SCC shares were transferred from ASARCO to a subsidiary of Grupo Mexico. After ASARCO filed for chapter 11 relief in 2005, it sued the transferee, which was a subsidiary of Grupo Mexico. ASARCO won big. It obtained a judgment for actual fraudulent transfer, aiding and abetting a breach of fiduciary duty and conspiracy. ASARCO LLC v. Americas Mining Corp., 396 B.R. 278 (S.D. Tex. 2008). Not only did it get the shares back, but it also recovered a judgment for $1.4 billion. ASARCO LLC v. Americas Mining Corp., 404 B.R. 150 (S.D. Tex. 2009). (I have included the citations here because they are informative opinions for fraudulent transfer litigation). Having a valuable asset in hand, ASARCO proposed a plan of reorganization. Its plan was to be funded in part by selling the SCC Judgment. It proposed a two-stage bid solicitation process. In the first stage, its financial adviser identified potential bidders for the judgment. In a variant on the typical auction process, ASARCO invited a select group of bidders to proceed to the second phase of the process. In order to entice the bidders to perform the expensive legal due diligence necessary to evaluate the asset, ASARCO sought and obtained an order from the Bankruptcy Court authorizing it to reimburse qualified bidders for their due diligence expenses. The Bankruptcy Court granted the motion finding that ASARCO had demonstrated a "compelling and sound business justification" for the order. Grupo Mexico appealed the reimbursement order which was stayed. Meanwhile Grupo Mexico confirmed a plan of reorganization which paid all creditors in full, released the judgment and gave it control of ASARCO. Since Grupo Mexico now controlled ASARCO, ASARCO was not interested in defending the appeal. However, two of the bidders were granted leave to intervene and defend the order. The Appeal On appeal, the Appellants argued that because the sale was never concluded, there was not a benefit to the estate and the bidders expenses could not be reimbursed under Sec. 503(b). The bidders argued that the Bankruptcy Court could authorize the payment under the business judgment standard of Sec. 363(b). The business judgment test was a lower bar since it looked at whether the order was reasonable at the time it was sought; on the other hand, the benefit to the estate standard would have analyzed the benefit in hindsight. The Fifth Circuit distinguished two Third Circuit cases which had disallowed break-up fees. While the Third Circuit had rejected break-up fees on the ground that they chilled the bidding, here the Fifth Circuit found that the reimbursement order sought to increase competition and was offered to all bidders invited to the second round. The Fifth Circuit also distinguished the break-up fee cases on the basis that the auction involved a "very unique and very valuable but possibly worthless asset." The Ruling In upholding the order, the Fifth Circuit wrote:On this record, we conclude that the business judgment standard is the better fit for assessing ASARCO’s reimbursement motion. Section 363 addresses the debtor’s use of the estate property, and in its motion ASARCO sought authorization to make discretionary use of the estate’s funds. Section 503, in contrast, generally applies to third parties that have already incurred expenses in connection to the debtor’s estate. The unsuccessful bidders in O’Brien and Reliant Energy sought payment for expenses incurred without the court’s preapproval for reimbursement, and thus section 503 was the proper channel for requesting payment. In ASARCO’s case, however, the bankruptcy court issued the Reimbursement Order before any potential qualified bidders, including the Intervenors, had incurred due diligence and work fees. In this context, application of the business judgment standard is appropriate.Opinion, pp. 11-12. Having concluded that the business judgment standard applied, the court had no difficulty finding that the standard had been satisfied. In a final footnote, the Court hinted that it would have upheld the award under the benefit to the estate standard as well, noting that the District Court had found that the auction process "was perhaps the final impetus needed to encourage the Parent to file its plan which pays creditors in full." Why It Matters This case is important for two reasons. One is that large bankruptcy cases are increasingly being resolved by Sec. 363 sales. There are not many circuit level opinions on 363 sales, since most appeals are rendered moot by the sale closing. As a result, any opinion which explains the Sec. 363 process is useful. Second, this particular opinion, while very fact specific, provides some useful pointers. First, reimbursement orders should be obtained before any due diligence expenses are incurred. Second, the complexity of the asset will influence the advisability of reimbursing due diligence costs. There is a big difference between a tract of raw land and a billion dollar judgment. Finally, and perhaps most importantly, reimbursement orders are justifiable when they will increase competition. In the typical case, a stalking horse bidder is granted reimbursement if it is outbid. This encourages the stalking horse to invest in the due diligence necessary to submit a bid. Conversely, it can be used to tilt the auction procedures in favor of the stalking horse. Here, the unique aspect of the process was that all bidders invited to the second round were granted a right of reimbursement. Thus, the process was even-handed and fostered competition rather than inhibiting it.