Stalking Horse Loses Acquisition Bid Over Value of Proposed PPP Loan Assumption


M&A Stories

November 17, 2020


A financially distressed company often ends up selling its business in bankruptcy. The sale is conducted in an auction based upon a negotiated asset purchase agreement with a stalking horse.

The deal

The bankrupt company in this deal operated a lamb processing plant facility in Wyoming. It was distressed and had filed for bankruptcy in Wyoming.

The company owed a bank $3.95 million that it took out under the Payroll Protection Program. An insider to the company had formed a company to serve as the stalking horse for a bankruptcy auction of the company. The company and the stalking horse negotiated a $10 million cash asset purchase agreement where the stalking horse would also assume certain liabilities, including the PPP loan.

The PPP loan had a forgiveness feature and the selling company valued the $3.95 million PPP loan at $1.25 million for purposes of evaluating auction bids. The winning bid at the auction for the company was for $14.25 million cash.

The lawsuit

The stalking horse bidder challenged the seller’s determination of the value of its proposed assumption of the PPP loan, arguing that its value should be its face value of $3.95 million. The court rejected the challenge finding that the seller’s valuation of the loan value was within the realm of good business judgment: “In determining whether to approve a proposed sale under section 363, courts generally apply standards that, although stated various ways, represent essentially a business judgment test. … Under the business judgment standard, the court examines the sale’s process and procedure and gives deference to Debtor’s choice of the winning bid.”

This case is referred to as In Re Mountain States Rosen, Case No. 20-20111, United States Bankruptcy Court, D. Wyoming, (July 21, 2020) 


PPP loans were a new feature in section 363 bankruptcy sales in the summer of 2020. Nevertheless, in 20/20 hindsight the stalking horse should have tied down the value of the PPP loan in the acquisition documents so as to given it a baseline to judge overbids.

By John McCauley: I help people manage M&A risks involving privately held companies.



Telephone:      714 273-6291 

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Posted in bankruptcy sale, distressed business acquisitions, PPP loan assumption, Section 363 sale Tagged with: ,

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