On July 6, 2018, Bankruptcy Judge Kevin Carey issued an opinion in connection with the Katy Industries Inc. bankruptcies that dismissed claims against the sole bidder (and ultimately successful asset purchaser) and others seeking to recharacterize or subordinate, avoid and recover a portion of the bidder's credit bid used to purchase the debtors' assets.   A copy of the opinion may be found here.

“Given the lack of alternative qualified bidders, $55.5 million would still have been the successful bid,” the opinion said. “Accordingly, reshaping the economics of the deal to reflect a hypothetical reduction of $7.5 million in [credit bid amount] would have no tangible, ameliorative effect for the committee.”

Judge Carey determined that questions about the committee’s ability to bring the claims did not have to be answered, since neither recharacterizing nor subordinating the $7.5 million lending would create any distribution for creditors.

The committee had argued that its claims were challenges to the secured liens of Victory Park and that its rights to bring such a challenge were preserved in the sale order. Victory Park had argued that the committee’s complaint amounted to a claim objection and was barred by the terms of the sale order.

 The committee’s argument that Jansan’s bid as allowed was high enough to deter other bidders was not supported by the factual record in the case, Judge Carey said, and there was no evidence to back up the theory that if the bid was reduced by $7.5 million, other bidders would have made offers.

The court’s decision dismissed all six counts of the complaint with prejudice, saying that the claims for recharacterization and subordination failed adequately to state a claim, and that three subsequent counts for clawback of the $7.5 million failed because they did not meet the criteria of the relevant sections of the bankruptcy code. A sixth count was lodged against Katy's chairman, Charles Asfour, for allegedly breaching his duty of loyalty by negotiating prepetition with Highview, as a representative of Victory Park, to form Jansan and make a packaged offer to to provide debtor-in-possession funding and serve as a stalking horse bidder.