DIANE WEISS SIGMUND, Bankruptcy Judge.
Before the Court is the Debtor's Motion for Reconsideration (the "Reconsideration Motion") of my Order dated August 13, 1999 ("Sale Order") denying the Debtor's Motion for an Order Approving the Final Sale of Assets Pursuant to 11 U.S.C. § 363(b)(f) and (m) and Approving Assumption and Assignment of Executory Contracts Pursuant to 11 U.S.C. § 365 (the "Sale Motion") to Medsmart Heathcare Network, Inc. ("Buyer" or "Medsmart"). The basis of my denial of the Sale Motion was a provision in the Sale Agreement that linked the royalty payment component of the purchase price to the Buyer's control of the Debtor. As noted in the Sale Order, the potential value to creditors from the sale is the royalty payments since the minimal cash component will be used to satisfy an existing bank lien and repay Buyer for its post-petition advances.
As noted in the Sale Order:
The assets are all the tangible and intangible property relating to the Debtor's POWERx health care card. Presently the Debtor sells a card to consumers who do not have health care insurance. The card allows them to access health care services at a discount from providers who have contractual relationships with Debtor. It is this network of health care providers that Buyer is principally interested in acquiring. The Buyer and Debtor believe that the Buyer's technological expertise and ability to access capital will allow the successful development of the POWERx concept.
Sale Order at 3 n. 7. For these assets (as defined in the Sale Agreement, the "Acquired Assets"), Buyer agreed to pay cash of $150,000 in quarterly installments and a future stream of royalty payments based on the number of cards sold or the net revenues from the use of these cards.
The royalty payment in the Sale Agreement gave the Buyer the option of paying a flat fee per card sold ($5.00 new card, $2.00 renewal card) or a percentage of its use (20% Net Revenue new card, 8% Net Revenue renewal card). However, that schedule was to be reduced by 50% if there was a "change of control" as defined in the Agreement. Change of control would occur if (1) any person or group other than the Buyer Group (i.e., Buyer and certain affiliates owned and/or controlled by Jimmy Nix) own more than 50% of the voting stock of the Debtor and (2) if the Debtor's Board of Directors is controlled by anyone other than Debtor's President Dennis Bowers or the Buyer Group.
In response to this ruling, the Reconsideration Motion was filed seeking approval of an amended Agreement wherein Buyer eliminated the objectionable change of control provision. While that might have been viewed as a rehabilitative act, Buyer coupled that proposal with a reduction in the purchase price. With the change of control provision excised, one basis for my denial of the Sale Motion was cured. The terms of the sale no longer dictate the ultimate reorganization. However, as the purchase price has been reduced, there is a new sale proffered for Court approval which I must now consider.
Whereas under the prior Agreement the contractual royalty payments would be paid to the Debtor only if the Buyer secured control of the reorganized company, leaving creditors with an untenable choice in negotiating a plan of reorganization, the amended Agreement simply withdraws the possibility of receiving that consideration. Presumably Buyer had decided that it was only willing to pay the proposed royalties if it secured back at least 50% of the value it paid for the Assets.
At the second Sale hearing, testimony was elicited from the Debtor's principal, Dr. Dennis Bowers, and Richard Watkins, a representative of Buyer, about the value of the royalty stream. According to Dr. Bowers, the Jessup Group had performed a valuation and fixed an $8,000,000 value on the stream of royalty payments. Watkins' valuation was somewhat more modest. Notably there was no evidence on the value of the Assets being sold, a fact I noted in the Sale Order. Indeed, it was the Debtor's view at that time, as memorialized in the Debtor's Schedules, that the Assets had no ascertainable value. However, as there had been an auction, I could find consistent with Abbott's Dairies, that the price offered by the Buyer was the "minimum value for the Assets that would be fair and reasonable." Sale Order at 5 n. 14.
Strangely they were not listed at all. In comparison, a License Agreement with Longport, Inc. is disclosed with a value "unknown."
Recognizing that my finding that the original purchase price was "the minimum value for the Assets that would be fair and reasonable" would stand in the way of approval of the Amended Agreement that now offered 50% less in royalty payments, the Debtor came to the reconsideration hearing with evidentiary support for the new deal. The United States Trustee ("UST") objected to the new evidence as being inappropriate to a motion for reconsideration (i.e., it was available at the last hearing) and/or in furtherance of not a motion for reconsideration but in effect a new sale motion given the change of terms to the purchase price. He also noted the failure to afford other bidders an opportunity to further bid. Debtor's counsel responded that the evidence was in furtherance of the amended Agreement which was the new evidence that supported reconsideration. On that basis, I allowed the testimony subject to it being connected up to that proffer. I do not find fatal the procedural package the Debtor has employed to advance the sale of the Assets. The amended Agreement is a change of circumstance that would allow me to revisit my decision, and the evidence is relevant to the new Agreement. The problem arises because the purchase price has been reduced and, as noted by the UST, the Assets were sold subject to a Bidding Procedures Order that contemplated competitive bids. In the Sale Order, I found that Buyer was the sole qualified bidder. I noted that the Debtor had received one other offer of $150,000 cash for the Assets from Megashops.com, Inc. but the bidder had failed to make the requisite deposit with the offer. When notified of that deficiency, Megashops did not respond or appear at the Sale Hearing to press its bid. Whether Megashops would have responded differently had it been bidding against the amended purchase price (i.e. 10% (new cards) and 4% (renewal cards) of net revenues as opposed to the original doubled royalty is pure speculation. Whether any other prospective bidder would have submitted a bid is also unknown. At the Reconsideration Motion hearing, Bowers testified that he had received an offer from Megashops' predecessor, Zulu Tech within the last year. His recollection was that the cash component was $100,000 and the royalty payments 2% of net revenues (defined similarly to the Agreement). He also testified that he had received an offer from Pan American Bank Corp. during this time frame. Its proposal was $150,000 cash and royalties of 5% of net revenues. Its counsel appeared at the first hearing and indicated an interest in the Assets. No bid was made. While I am inclined to agree with Debtor's counsel that the overstatement of the intended purchase price did not stifle bidding based on the bidding that occurred, I am nonetheless unable to find that the procedure that has been employed has been fair absent some notice of the change in price to other bidders. A contrary view would sanction the proffer of a high offer in the face of competitive bidding with a reduction to that offer when it became apparent that no competition surfaced.
On reconsideration, Debtor contends that the purchase price, as reduced, is still a fair and reasonable value for the Assets. In support of that contention, he produced the testimony of Dr. Bowers who opined that the Assets had an estimated value of $1,000,000. The Debtor has amended its Schedules to so provide. Dr. Bowers' valuation was based on the previous offers he had received for the Assets. Likewise Ross Jessup of the Jessup Group, an expert in the purchase and sale of businesses retained by the Buyer, proffered a value for the Assets in a supplement to his original report. He concludes that the Assets are worth $136,000 consisting primarily of the customer base and provider contracts which he believes, based on discussions with Debtor's personnel, would cost $100,000 for four persons to replicate over a three month period. Exhibit D-10. I give no weight to this analysis. It is hard to conceive of why Buyer would be interested in acquiring these contracts and customers if they could be replicated in three months at a cost of $100,000. Such value is inconsistent with the investment Buyer has made to date in pursuing this acquisition and supporting the Debtor's operations through post-petition financing in excess of that amount pending approval of the sale. Indeed the testimony has consistently been that the Debtor's networks developed over six years are the asset Buyer seeks. While it may be possible to quantify the value of this asset by measuring the cost and time to replicate it, the expert's opinion is nothing more than an arithmetic exercise based on "discussions with Debtor's management." Notably, Bowers did not testify as to these values, rather relying on the $1,000,000 number referred to above. Jessup also stated without much elaboration his calculation of the value of the contingent royalty payments, estimating their value at $3.9 to $4.6 million. Exhibit D-8. After examination by both Marks and the UST, I found myself in no better position to understand the value of the Assets or the contingency purchase price. Built on assumption layered over assumption and contemplating a product that is priced differently than the existing POWERx card, the conclusions reached by Jessup have no utility in this proceeding.
Apparently the Debtor's ability to value the Assets now is born of necessity, the omission of any value for the Assets having been noted in the Sale Order. Otherwise it is hard to reconcile Debtor's counsel's statement two weeks ago that they were incapable of valuation.
Furniture and equipment is stated at book value of $6000; future accounts receivable are estimated at $6000 per month for five months and the customer base and provider contracts are valued at $100,000.
Fixing a value of the Assets for purposes of determining whether the sale consideration is fair and reasonable is difficult in this case because, as Bowers noted, the Assets could be worth nothing or millions of dollars. Because the Debtor does not have the financial resources to further develop the POWERx business, the Assets to it are not generating profits. Critically, if financing or a sale is not accomplished fairly soon, the estate may secure no value for them. Thus, this Court is faced with a decision on whether to approve a sale to a purchaser whose conduct in these proceedings has raised questions about its good faith but who, it would appear, is the only show in town. All of these issues have been raised at the various hearings at which the only creditor with an interest in the outcome to appear has been Louis Marks, Esquire ("Marks"), the largest non-insider unsecured creditor. In this situation, it is appropriate that I give considerable deference to Marks' position since disapproval of the sale puts at risk the unsecured creditors' present potential for recovery in a case that is on the brink of liquidation and loss of the intangible assets sought to be sold. At the conclusion of the second hearing, Marks appeared willing to accept the sale at the proffered consideration based on his assumption that it was the only source of recovery for creditors but only if he had some assurance that the Debtor would receive it. Accordingly, the Debtor, Buyer and Marks engaged in post-hearing negotiations which resulted in a new condition to the Agreement providing the security sought by Marks. Marks has now consented to the Sale Motion, as amended, based on the Buyer's agreement to grant a security interest in the Acquired Assets in favor of the Debtor. Given Marks' concurrence, the UST has withdrawn her objection.
Specifically, I am concerned about the managed emergencies which have been an impediment to full and fair notice, and the managed information which has been an impediment to the Court's and other parties' understanding of the transaction and the parties to it. For example, while other bidders were required to establish their creditworthiness by supplying their financial statement, it was not revealed when that reasonable requirement was imposed that Buyer has never been capitalized and the Debtor was (and is) relying on affiliates who are not parties to the Agreement to perform. While there was a valuation report prepared, that report was never disclosed to the Court until the reconsideration hearing and notably was not made available to other bidders even though Buyer had secured a topping fee if it did not prevail.
It was Marks' objection that was sustained in the Sale Order. Royal Bank of Pennsylvania's counsel has also appeared but acknowledges that its interest is merely to ensure that its lien is paid out of the cash sale proceeds. There is no Creditors' Committee in this case.
Abbotts Dairies teaches that an auction may be sufficient to establish that one has paid "value" for the assets of a debtor. 788 F.2d at 148. As I am unable to find credible evidence of value, I rely as I did before on the auction by which the purchase price was established. In the Sale Order, I concluded that the price offered was the minimum value for the Assets that would be fair and reasonable since a bidder would be matching this offer. As noted above, that price has been reduced. While the Debtor assures and Marks assumes, that there will be no better offer than the reduced price, I am unable to rely on the "auction" as establishing value due to the amendment which was rushed through on one day's notice with no opportunity for competitive bidding. However, in recognition of the Debtor's precarious financial predicament as a result of Buyer's refusal to finance continued operations, I am prepared to approve the Reconsideration Motion on the consent of the parties and the conditions contained in the accompanying Order that will allow me to make the findings required by Abbotts Dairies which the Buyer seeks.
ORDER
AND NOW this 2nd day of September 1999, upon consideration of the Debtor's Motion for Reconsideration (the "Reconsideration Motion") of my Order dated August 13, 1999 ("Sale Order") denying the Debtor's Motion for an Order Approving the Final Sale of Assets Pursuant to 11 U.S.C. § 363(b)(f) and (m) and Approving Assumption and Assignment of Executory Contracts Pursuant to 11 U.S.C. § 365 (the "Sale Motion") to Medsmart Heathcare Network, Inc. ("Buyer" or "Medsmart"), and the consent of the parties to the terms of this Order, and for the reasons stated in the accompanying Memorandum Opinion, it is hereby ORDERED that:
1. The Reconsideration Motion is GRANTED. However, to the extent not inconsistent with the findings of fact and conclusions of law set forth herein and in the accompanying Memorandum Opinion, all findings of fact and conclusions of law set forth in the Sale Order are incorporated herein.
2. Subject to the following conditions, Debtor is authorized to sell the Acquired Assets, as defined in the Asset Purchase Agreement, to Medsmart free and clear of lien, claim and encumbrance pursuant to 11 U.S.C. § 363, such liens attaching to the proceeds of sale.
3. The Debtor be, and it hereby is, authorized to and shall execute and deliver any and all documents and to do all things necessary to effectuate the purpose of this Order and to carry out the terms and conditions of the Asset Purchase Agreement.
4. The Assumed Contracts are executory contracts subject to assumption by the Debtor and assigned to Medsmart pursuant to 11 U.S.C. § 365. Except as stated in the Sale Order, no defaults currently exist under the Assumed Contracts and no cure payment or action is required. Subject to the undertakings and representations made by the Debtor and Medsmart at the Sale hearing, assumption by the Debtor and assignment to Medsmart of the Debtor's rights, title and interest in the Assumed Contracts is hereby authorized pursuant to 11 U.S.C. § 365, and shall be effective on Closing.
5. The Debtor's obligations under the Asset Purchase Agreement at Closing are conditioned upon Medsmart's execution at Closing of a Security Agreement in form and substance as set forth in Exhibit "A" attached hereto, which shall create a first priority security interest in the Acquired Assets in favor of the Debtor. Such lien shall by law follow the assets if they are sold to a third party, including an affiliate of Medsmart. The obligation to make the payments under Paragraph 1(d) of the Asset Purchase Agreement shall not be affected by any transfer of the Assets permitted under the agreement or otherwise.
6. Medsmart or any successor to Medsmart shall be obligated to render quarterly reports to the Debtor with a copy to the United States Trustee until the Debtor's case is closed and thereafter to the person designated in the Debtor's plan of reorganization or otherwise containing all information necessary to calculate the royalty payments. Debtor or Debtor's representative shall have the right to audit the books and records of Medsmart or any successor to Medsmart to verify the accuracy of such reports.
7 On or before September 2, 1999, Debtor shall mail a copy of this Order and accompanying Memorandum Opinion by overnight mail to the parties who have expressed an interest to management in the past one year in purchasing any or all of the assets of the Debtor. To the extent any party wishes to present a higher and better bid for the Acquired Assets conforming to the Bidding Procedures Order dated July 14, 1999, it may do so by submitting same to the Debtor, with a copy to Medsmart, Marks and the Court, accompanied by a $75,000 certified or bank check deposit and the Credit Information required by the Bidding Procedures Order, by September 13, 1999. In the event no such conforming bid is made, the condition of this Order will be satisfied and the Buyer and Debtor may close the sale transaction. In the event a bid is received, the Court shall examine same for conformity to the Bidding Procedures Order and determine whether competitive bidding shall be reopened. Subject to the foregoing, the Court is satisfied that a sale consistent with the requirements of Abbotts Dairies will have occurred and that the Buyer is a good faith purchaser within the meaning of 11 U.S.C. § 363(m) of the Bankruptcy Code.
The Bidding Procedures Order requires that such bid include Minimum Payments, as described in Section 1(d)(ii)(A) of the Asset Purchase Agreement, of not less than a total of $180,000.
If, as Debtor urges, the change in price is not material to the legal outcome here because there is no other bona fide potential buyer for the Acquired Assets, then Medsmart should have no problem waiting the outcome of this notice period. Moreover, the terms of the Bidding Procedures Order which would apply in the unlikely event of another bid, including the cash deposit and Break-up Fee, continue to protect Medsmart.
EXHIBIT A