Buyer's Bad Faith In Failing To Inform Court Of Right Of First Refusal Precludes Statutory Mootness Of Bankruptcy Sale

Published date29 July 2022
Subject MatterInsolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
Law FirmJones Day
AuthorMr T. Daniel Reynolds and Mark Douglas

The finality of asset sales in bankruptcy is an indispensable feature of U.S. bankruptcy law designed to maximize the value of a bankruptcy estate as expeditiously as possible for the benefit of all stakeholders. To promote the finality of bankruptcy sales, section 363(m) of the Bankruptcy Code prohibits reversal or modification on appeal of an order approving a sale to a good-faith purchaser unless the party challenging the sale obtains a stay pending appeal. Section 363(m) has also been read broadly to protect the interests of any good-faith purchaser in the purchased assets.

The U.S. Court of Appeals for the Seventh Circuit recently examined the scope of 363(m) in Archer-Daniels-Midland Co. v. Country Visions Cooperative, 29 F.4th 956 (7th Cir. 2022). The court of appeals affirmed lower court rulings denying a motion to bar an entity holding a right of first refusal on property purchased from a debtor "free and clear" of all interests pursuant to section 363(f) from continuing state court litigation seeking to enforce its right. In doing so, the Seventh Circuit appears to have placed an affirmative obligation on asset purchasers to notify the bankruptcy court of any notice deficiencies discovered during the sale process. According to the Seventh Circuit, because the buyer had actual and constructive knowledge of a right of first refusal held by a party who had not received notice of the bankruptcy, yet never informed the bankruptcy court, the buyer had not acted in good faith and was not entitled to the protections of section 363(m).

The Breadth of Section 363(m)

Section 363(m) of the Bankruptcy Code is a powerful protection for good-faith purchasers because it limits appellate review of a consummated sale irrespective of the legal merits of the appeal. See Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors of Made in Detroit, Inc. (In re Made in Detroit, Inc.), 414 F.3d 576 (6th Cir. 2005); see also In re Palmer Equip., LLC, 623 B.R. 804, 808 (Bankr. D. Utah 2020) (section 363(m)'s protection is vital to encouraging buyers to purchase the debtor's property and thus ensuring that adequate sources of financing are available).

Section 363(m) has also been read to go further than simply limiting appellate review- broadly protecting the interests of any good-faith purchaser by subjecting any collateral attack made against a section 363 sale to a good-faith purchaser to the requirements of Rule 60(b) of the Federal Rules of Civil Procedure, which governs motions for reconsideration of or relief from prior court judgments or orders. See In re Edwards, 962 F.2d 641 (7th Cir. 1992) (holding that a collateral attack on sale to a good-faith purchaser must be made pursuant to Fed. R. Civ. Proc. 60(b)); In re Veg Liquidation, Inc., 572 B.R. 725, 737 (Bankr. W.D. Ark. 2017) ("To the extent the trustee is alleging that fraud was involved, his remedy is under Rule 60, not...

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