The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

The Seventh Circuit Court of Appeals (the Court) recently ruled that an asset purchaser who knew of but ignored a third party’s right of first refusal was not a good-faith purchaser protected by §§ 363(f) and (m) of the Bankruptcy Code. Archer-Daniels-Midland Company v. Country Visions Cooperative, 2022 WL 998984 (7^th Cir. April 4, 2022).

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FACTS

In 2007 Country Visions Cooperative’s predecessors was granted a right of first refusal (the “Right”) on a parcel of land in Wisconsin by owner Olsen Brothers Enterprises, LLP. The Right had a ten-year term and entitled Country Visions to buy the parcel by matching any offer should Olsen Brothers decide to sell. Olsen Brothers dissolved, distributing its assets to the partners, an event which did not trigger the Right but did not extinguish it.

In 2010 the former partners filed bankruptcy without notifying Country Visions or listing it as a creditor. An agreed plan, which called for sale of the parcel free and clear of all interests, was approved in 2011. Archer- Daniels-Midland (ADM) was the buyer. No one offered Country Visions an opportunity to match the ADM offer. In 2015 ADM attempted to sell the parcel, again without giving Country Visions the right to match the offer, which resulted in Country Visions suing in state court for compensation for violation of the Right.

ADM returned to the bankruptcy court, asking it to enforce the free and clear aspect of the bankruptcy sale by barring Country Visions from seeking state court relief, relying on § 363(m), which assures the finality of a sale unless an appeal is taken and appellant seeks a stay pending appeal. Such finality has been construed to apply to any good-faith purchaser at a free and clear bankruptcy sale. The bankruptcy court and the district court on intermediate appeal denied ADM’s request, concluding that it had not acquired the parcel in good faith. ADM appealed to the Court, which affirmed.

REASONING

The evidentiary record developed in the bankruptcy court showed that Country Visions had filed a copy of the Right in the local real estate records, such that it gave constructive notice of the cloud on title to the public. During the sale proceeding, ADM received a copy of a title report which revealed the recorded Right. ADM also knew that Country Visions was not a party to the bankruptcy. Moreover, counsel for ADM learned before the sale concluded that counsel for Country Visions was inquiring what he could do to protect his client’s Right.

The Court’s decision in favor of Country Visions did not turn on a denial of Constitutional due process rights required by the Fifth Amendment. Instead, the Court found that statutory questions preceded the constitutional one and that the relevant statute – § 363(m) – required a purchaser to be in “good faith” to receive its protections. Because the bankruptcy court found that ADM had both constructive notice (from the recording of the document) and actual notice (from the title report and knowledge of counsel’s inquiries), ADM could not challenge that it knew it was buying without honoring the Right. Without notice, Country Visions had no opportunity to appeal and seek a stay. Therefore, ADM was not a good-faith purchaser, so § 363(m) did not assure the finality of the sale in its favor. The state court action could proceed.

AUTHOR’S COMMENTS

This has to be the correct decision. If the Court had not decided this matter on statutory grounds, it seems that due process rights would have compelled the same result. The practice pointer is clear: if any buyer at a bankruptcy sale who would rely on the free and clear aspect of the sale and/or the subsequent protections of § 363(m) is aware of a cloud on title which is not addressed in the sale proceedings, that buyer needs to make certain it is operating in good faith. Good faith may mean that the buyer with knowledge of a cloud must raise the issue itself with the court, even if the holder of the interest does not, and assure that the order approving the sale free and clear explicitly addresses the claim. Only then can the buyer receive the anticipated protections of § 363(m).

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member Meredith King of Higgs Fletcher & Mack (kingm@higgslaw.com).