See also: RCD Law- North Carolina Business Court Opinions, December 3–16, 2025 (discussing the earlier dissolution proceedings involving C-Gas).
Summary
In Cherry v. Mauck, the North Carolina Business Court approved a receiver's proposed stalking horse auction of assets belonging to C-Gas, LLC, a dissolved family-owned business, expressly adopting the business judgment standard used under 11 U.S.C. § 363(b) to evaluate sales of receivership property outside the ordinary course of business.
The dispute arose from disagreements over the management and ownership of two family businesses, AJAL Investments, LLC and C-Gas, LLC. The Business Court previously determined that C-Gas was dissolved pursuant to its operating agreement and placed it into receivership to liquidate its assets and wind up its affairs.
C-Gas primarily functioned as a holding company, owning propane tanks, vehicles, equipment, and customer lists that it leased to Cherry Oil Company, Inc., a related business now owned by the Cherry family, under a long-term master lease.
The receiver proposed selling these assets through a stalking horse auction, using an approximately $1.8 million offer from Jay Cherry as the opening bid.
Armistead Mauck objected, arguing that the master lease with Cherry Oil was C-Gas's most valuable asset and that the receiver should market those leasing rights along with the underlying physical assets. He also maintained that the proposed bidding procedures would discourage competitors and allow Cherry to acquire the assets at a discount.
Judge Adam Conrad observed that North Carolina's Receivership Act, N.C.G.S. § 1-507.46, requires court approval for sales outside the ordinary course of business but provides no express standard for evaluating them. Finding no controlling North Carolina appellate authority, the Court turned to § 363(b) of the Bankruptcy Code and decisions applying the business judgment rule.
Under that standard, the Court asks whether the receiver's judgment is reasonable and supported by a sound business justification rather than substituting its own assessment of the best possible transaction.
The Court found several factors supporting the receiver's proposal:
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Cherry's approximately $1.8 million offer resulted from arm's-length negotiations and established a minimum recovery while permitting competing bids.
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The stalking horse bidder would receive no break-up fee if outbid.
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The auctioneer agreed to receive only half its commission if there were no competing bidders.
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The receiver had consulted an experienced auctioneer and developed a marketing process intended to attract interested purchasers.
The Court also rejected Mauck's principal argument that marketing the master lease would necessarily produce a greater return.
Although the receiver estimated that selling the leasing rights might yield as much as $400,000 more than Cherry's offer, that possibility involved considerable uncertainty. Pursuing the alternative would require abandoning the existing stalking horse bid, incurring additional expenses, and confronting the risk that Cherry Oil might not continue performing under the lease.
Most significantly, Cherry Oil had threatened to file bankruptcy and reject the master lease if a third party acquired the leasing rights.
The Court concluded that the receiver had reasonably weighed these risks against the certainty of Cherry's offer.
It approved the sale process, with modifications establishing an initial overbid of $1.9 million, subsequent bid increments of $100,000, and a 60-day due diligence period. The auction must occur by January 19, 2027, with closing no later than February 19, 2027.
Commentary
This decision is noteworthy for bankruptcy practitioners because it explicitly imports the § 363(b) business judgment standard into North Carolina receivership proceedings, further illustrating the influence of federal bankruptcy law on the state's Receivership Act.
As the Business Court observed, North Carolina took guidance from the Bankruptcy Code in developing its receivership statutes. This decision extends that relationship by adopting the bankruptcy standard for determining whether a receiver's proposed sale should be approved.
Under that standard, a reasonable business justification generally creates a strong presumption in favor of the proposed transaction. An objecting party must show more than simply the possibility that some alternative might generate a higher price.
The Court's approval of the stalking horse procedures also parallels the familiar bankruptcy practice of using an initial bid to establish a price floor while preserving an opportunity for competitive bidding. The absence of a break-up fee and the reduced auctioneer commission were additional factors favoring approval.
The Bankruptcy Threat as a Means of Depressing Asset Value
The more interesting bankruptcy issue, however, is Cherry Oil's threat to file bankruptcy and reject the master lease if the receiver sold the leasing rights to a third party.
The Court treated that threat as a legitimate economic risk that could discourage bidders and diminish the value of the lease, particularly because the agreement was between closely related businesses and arguably provided above-market rental payments.
There is a particular irony in using the threat of bankruptcy as a justification for approving a receivership sale that avoids obtaining the potentially greater value of an existing contractual lease. In recent years, there has been a growing trend in North Carolina toward using state court receiverships rather than Chapter 11 bankruptcies to liquidate distressed businesses, often with the expectation that receiverships will be less expensive, faster, and less procedurally burdensome.
Yet here, the threatened use of bankruptcy by a company controlled by the proposed purchaser was itself a significant factor in the receiver's decision not to pursue a potentially more lucrative disposition of assets. The possibility of bankruptcy, rather than an actual petition or judicial determination that rejection would be permitted, was sufficient to influence the sale process.
There is a further irony when this is compared to ordinary consumer debt collection. Consumer creditors and their debt collection attorneys routinely reject non-bankruptcy settlement offers, even when the alternative may be a Chapter 7 bankruptcy in which they receive little or nothing. In those circumstances, the threat of bankruptcy is frequently discounted or ignored, with creditors insisting on continued collection efforts rather than accepting a certain, if reduced, payment.
Here, by contrast, the possibility that Cherry Oil might file bankruptcy and reject its lease was treated as a substantial commercial risk justifying the receiver's decision to forgo a potentially greater return.
Apparently, the threat of bankruptcy carries considerably more weight when made by a business controlled by a prospective purchaser than when made by an individual debtor attempting to settle a collection account.
Of course, the circumstances are not identical. A receiver has fiduciary responsibilities to the receivership estate and must weigh the risks of competing liquidation strategies, while an individual creditor may have its own reasons for declining a settlement. Nonetheless, the contrast is striking: the same potential bankruptcy that consumer creditors frequently disregard became an important consideration in approving the disposition of millions of dollars in business assets.
Under 11 U.S.C. § 365, a debtor in bankruptcy generally may seek to reject an executory contract or unexpired lease, subject to applicable limitations and court approval. Rejection, however, constitutes a breach rather than a rescission of the contract and ordinarily leaves the nondebtor party with a claim for damages.
The Court did not determine whether Cherry Oil could successfully reject the lease, whether a bankruptcy filing motivated principally by avoiding that agreement would satisfy applicable good-faith requirements, or what remedies C-Gas might retain following rejection.
Nor did it need to resolve those questions under the deferential business judgment standard. The threatened bankruptcy was a commercial risk that the receiver was entitled to consider, regardless of whether such a filing or rejection would ultimately succeed.
That raises a potentially troubling issue: Can a related party use the threat of bankruptcy to suppress the value of an asset and then acquire that asset at a reduced price?
Here, the potential purchaser, Jay Cherry, controlled Cherry Oil, the company threatening bankruptcy if anyone else purchased the leasing rights. The effect of that threat was to make the receiver's alternative of marketing the lease appear less attractive and more speculative.
The Business Court did not find that Cherry or Cherry Oil had acted improperly, and the receiver had independently evaluated the alternatives. Nonetheless, the relationship between the stalking horse bidder and the company threatening bankruptcy makes the circumstances quite different from a conventional third-party sale.
A bankruptcy court considering a similar transaction might examine insider relationships, the good faith of the purchaser, whether bidding procedures genuinely encourage competitive offers, and the extent to which threatened conduct by the purchaser or its affiliates artificially affects asset values.
Free and Clear Sales Outside Bankruptcy
Another important aspect of the decision is the Court's authorization of a sale free and clear of all liens, claims, encumbrances, rights, and interests.
This resembles the authority under 11 U.S.C. § 363(f), although the Court's analysis focused on § 363(b)'s business judgment standard rather than independently examining the requirements that would apply to a free-and-clear sale in bankruptcy.
For creditors, secured lenders, contract counterparties, and other interest holders, that distinction may be important. While the Receivership Act borrows substantially from bankruptcy concepts, state court receiverships do not automatically incorporate all the procedural and substantive protections found in the Bankruptcy Code.
The extent to which a state court receiver can extinguish interests through a sale, and what protections affected parties must receive, may therefore require separate analysis.
The Chapter 13 Best Interests of Creditors Test: Hypothetical Liquidation Costs and Reduced Asset Values
There is another interesting parallel between the Business Court's analysis and consumer bankruptcy practice, particularly the hypothetical liquidation analysis required by 11 U.S.C. § 1325(a)(4), commonly called the Best Interests of Creditors Test.
Under that provision, unsecured creditors in a Chapter 13 case must receive at least as much through the plan as they would receive if the debtor's estate were liquidated under Chapter 7. Importantly, that calculation does not simply total the fair market value of the debtor's nonexempt assets. It considers what would actually remain available for unsecured creditors following a hypothetical Chapter 7 liquidation.
That ordinarily requires accounting for expenses that would reduce the net proceeds available for distribution, including:
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The Chapter 7 trustee's statutory commission under 11 U.S.C. § 326;
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Attorney's fees incurred by the trustee in administering the estate;
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Auctioneer commissions, broker fees, and other costs of selling assets;
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Other professional fees, including accountants retained to prepare estate tax returns or address other tax issues;
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Costs of preserving, transporting, storing, insuring, and maintaining property pending sale; and
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Other appropriate administrative expenses and claims entitled to priority before general unsecured creditors receive a distribution.
These expenses can substantially reduce the hypothetical liquidation value that must be paid to unsecured creditors through a Chapter 13 plan. The amounts should reflect reasonable, supportable expenses of a hypothetical Chapter 7 administration, rather than automatically assuming the maximum permissible fees or commissions.
In Cherry, the Business Court engaged in a comparable economic analysis. Although selling the master lease might theoretically generate an additional $400,000, the receiver concluded that the additional brokerage expenses, potential break-up fee, extended receivership costs, and risks associated with Cherry Oil's threatened bankruptcy could consume much or all of that additional value.
The Court accepted the receiver's conclusion that the relevant consideration was not the highest conceivable gross sale price, but the reasonable expectation of net proceeds after accounting for the costs and risks of liquidation.
That is fundamentally the same distinction bankruptcy courts must recognize when applying § 1325(a)(4): The value of property is not necessarily the amount that creditors would receive from liquidating it.
There is, however, an important distinction. In Chapter 13, the hypothetical liquidation analysis establishes a statutory minimum distribution to unsecured creditors, while the Business Court was reviewing an actual proposed sale under the business judgment standard. The former requires a determination of what creditors would receive in a hypothetical Chapter 7 liquidation; the latter asks whether the receiver reasonably selected a sale strategy among competing alternatives.
Nonetheless, the underlying economics are remarkably similar.
For consumer bankruptcy attorneys, this is a useful reminder that the Best Interests of Creditors Test should be based on a realistic net liquidation analysis, not simply the gross nonexempt equity shown on the debtor's schedules. A Chapter 7 trustee liquidating an estate would incur expenses, and those expenses should be considered in determining the minimum amount payable to unsecured creditors under a Chapter 13 plan.
There is also a final irony: When businesses seek to reduce liquidation values by accounting for transaction costs, professional fees, uncertainty, and risks, those deductions are recognized as sound business judgment. Consumer debtors should receive equally careful consideration of the real-world costs of liquidation when determining how much they must pay unsecured creditors in Chapter 13.
Receiverships as Alternatives to Chapter 11
The decision also raises a broader question about the increasing reliance on state court receiverships as alternatives to Chapter 11 proceedings.
Receiverships may offer meaningful advantages, particularly in smaller business liquidations where the expense and complexity of Chapter 11 could consume much of the remaining value. But bankruptcy provides a well-developed statutory framework for dealing with executory contracts, insider transactions, competing bids, and the protection of creditors and other interested parties.
In this case, the Business Court borrowed the business judgment standard from bankruptcy law while simultaneously treating the possibility of a separate bankruptcy filing as a justification for limiting the assets being marketed.
If a related party can threaten bankruptcy to influence the disposition of assets in a receivership, are creditors and other interested parties actually better protected outside bankruptcy, where the more developed safeguards governing insider transactions, executory contracts, and sales under § 363 may not apply?
The Court did not need to answer that question, but Cherry illustrates why the distinction between receiverships and Chapter 11 bankruptcies can matter considerably.
Practical Implications
For bankruptcy and creditors' rights attorneys, Cherry v. Mauck provides useful authority for applying the bankruptcy business judgment standard to North Carolina receivership sales, including stalking horse auctions.
It also reinforces that a receiver is not necessarily required to pursue the alternative with the highest theoretical return when that alternative presents materially greater risk, expense, or delay.
For Chapter 13 practitioners, the case offers an additional analogy supporting careful consideration of hypothetical liquidation expenses under § 1325(a)(4), including trustee compensation, attorney and accountant fees, auctioneer commissions, and other reasonable administrative costs. While the legal standards differ, both contexts recognize that gross asset value and net recoveries for creditors are not the same thing.
More provocatively, the decision demonstrates that even the threat of a bankruptcy filing can influence asset valuations and sale procedures in litigation outside bankruptcy. That stands in marked contrast to consumer debt collection, where the possibility of bankruptcy often does little to persuade creditors to accept reasonable non-bankruptcy settlements.
Whether this reflects an appropriate consideration of commercial reality or creates opportunities for insiders to influence liquidation values will depend on the circumstances. Here, the Court deferred to the receiver's independent business judgment, but the underlying tension between maximizing value and accommodating a bankruptcy threat deserves attention from both receivership and bankruptcy practitioners.
The ultimate lesson may be that bankruptcy's influence on North Carolina receiverships extends beyond the application of § 363's business judgment standard. Whether in a business receivership, a Chapter 11 liquidation, or the hypothetical Chapter 7 liquidation required in Chapter 13, the amount creditors can actually recover depends not merely on what assets are theoretically worth, but on the costs, risks, and practical realities of turning those assets into money.
To read a copy of the transcript, please see:
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