Bankruptcy courts paid the first bidder to attract more bidders

A bankruptcy sale under Section 363 of the Bankruptcy Code is supposed to work like a real auction: the more genuine bidders compete, the higher the price a bankrupt company's creditors recover. But going first is expensive and one-sided — the initial bidder has to fund real due diligence, negotiate a real purchase agreement, and set a real price, all of which then becomes public once the sale is filed with the court.

The obvious fix — simply require or hope for competitive bidding, or keep the process quiet so rivals can't free-ride — does not work: bankruptcy sales are legally required to be transparent and court-supervised, so there is no way to hide the first bidder's price once it is filed, and nothing stops a rival from waiting for exactly that number before bidding a dollar more. Every party in the room understood the incentive ran backwards; no single participant in a single deal could fix it alone.

Paid the first bidder a breakup fee plus expenses, even if they lose, making going first rational and drawing in more bidders.

Going first costs real money and gives rivals a free floor price to beat, so no one wants to.

A breakup fee guarantees the first bidder gets paid even if outbid, making going first rational.

A credible first bid with a real price attracts other serious bidders, raising the final price.

Courts keep the fee small enough to compensate the first mover without scaring off later bidders.

If going first is costly and free-ridable, pay the first mover a guaranteed fee to make it rational, even if they lose.

The mechanism became a near-universal fixture of Section 363 distressed-asset sales rather than an occasional accommodation. Courts developed and still apply a three-part test to police it — whether the fee was the product of honest arm's-length dealing rather than insider self-dealing, whether it is proportionate to the purchase price, and whether it invites rather than chills further bidding — the same framework Integrated Resources established, still cited in bankruptcy sale approvals today.