The only thing certain in bankruptcy cases seems to be uncertainty.
"Bankruptcy strategies and alliances change hourly," says Larry Comegys, managing director of the Algon group, a financial analysis and advisory firm.
That's why Comegys was not inordinately surprised when Orleans Homebuilders changed its mind and decided to restructure itself in Chapter 11 bankruptcy rather than to auction off its assets.
He was, however somewhat surprised when NVR, which had struck an agreement with Orleans to be the leading bidder on the company's assets with a starting bid of $170 million, sued Orleans in bankruptcy court over the change that left it empty handed after spending time and money on due diligence for the bid.
"It's very unusual to see any litigation in this area," said Comegys, who hasn't seen the lawsuit. After all, companies that become "stalking horse" bidders, setting the floor for asset purchases in bankruptcy court, regularly don't end up with the land.
"They may feel like they were used," Comegys postulated.
Actually, that is one of the claims NVR makes in the lawsuit filed by NVR as an adversarial action in U.S. Bankruptcy Court's Delaware District on May 28.
"OHB (Orleans Homebuilders) was enriched as the result of NVR's having agreed to act as OHB's stalking horse bidder," the company says in the lawsuit. "OHB retains the benefit of NVR having set a 'floor' value for the purchased assets."
In addition, NVR claims, its bid led to interest from others in Orleans assets. Specifically, Orleans clams in the lawsuit that an unnamed private equity firm bought some of Orleans bond debt from banks, gaining control of the company and its assets. It was that purchase, NVR alleges, that caused Orleans to abandon its plans to reorganize rather than sell off its assets in an auction.
Orleans did not have a comment regarding the lawsuit.
In the lawsuit, NVR asks the bankruptcy court to award it damages or pay it a termination fee and/or reimbursement for its expanses. The company says that it incurred sizable costs in the due diligence it performed in order to make the $170 million bid as well as the costs of doing title work on the assets and environmental research.
Specifically, NVR alleges Orleans breached its contract with NVR, committed promissory estoppel because it assured the company that it would not consider offers for Orleans' assets outside the bankruptcy auction process. "Implicit in those representations was OHB's intention not to pursue a stand alone reorganization plan."
The "unjust enrichment" claim is count three and count four is a clam seeking a termination fee and expense reimbursement if the judge rules that the company did not have a valid contract. Under the stalking horse agreement, NVR would be entitled to a termination fee of $3.4 million as well as expense costs up to $1 million if another bidder other than NVR won Orleans assets at auction.
However, a judge had not approved the stalking horse agreement that had been struck, or the terms of the auction. Orleans called off the hearing before it came before the judge. Nevertheless, NVR said it had an agreement with Orleans and that, under the terms, Orleans could not and has not terminated it.
If the court determines that NVR and Orleans did not have a binding agreement, NVR asked the judge to invoke an award under the unjust enrichment allegation
"OHB (Orleans) may pursue a stand-alone reorganization plan it perceives to be in its best interests; however, as a matter of equity, justice and fairness, the Court should require IHB to pay NVR the substantial damages it has sustained in reliance on OHB's repeated representations and assurances concerning its commitment to the auction process and the APA (asset purchase agreement) and bidding procedures order."