If You Know Something, Say Something, or Lose Good-Faith Protection in a Bankruptcy Sale

Section 363(m)’s protections, however, are not limitless. A purchaser seeking those protections must show that it acquired estate property in good faith and without knowledge of any competing interests. This is true even where the competing interest holder knew of the sale, did not take steps to stop it, and did not appeal from the sale order, as the Seventh Circuit recently held in Archer-Daniels-Midland Co. v. Country Visions Cooperative, No. 21-1400, 2022 WL 998984 (7th Cir. Apr. 4, 2022).

Background

Country Visions Cooperative (Country Visions) held a right of first refusal (the Right) on a parcel of land, allowing Country Visions to buy the parcel by matching any offer received by the property’s owner, Olsen Brothers Enterprises (OBE). OBE eventually dissolved, but the dissolution did not extinguish the Right. After OBE’s dissolution, its partners (the Debtors) filed for bankruptcy and, pursuant to section 363(f), sold the parcel to Archer-Daniels-Midland (ADM), free and clear of liens and claims.

The Debtors, although aware of the Right, did not notify Country Visions of their bankruptcy, nor offer Country Visions the opportunity to match the proposed sale price of the parcel, nor inform the bankruptcy court of the Right. Despite these failures, Country Visions learned of the sale, retained counsel and explored how it might vindicate the Right, but ultimately did nothing in the bankruptcy. A free and clear sale order was entered, and no appeal was taken. Thereafter, ADM arranged to resell the parcel. When Country Visions learned of the proposed resale, it sued ADM in state court, seeking compensation for violation of the Right.

ADM petitioned the bankruptcy court to enforce the free and clear aspect of the sale order, arguing that, because it was a good-faith purchaser, section 363(m) barred Country Visions’ lawsuit. The bankruptcy court rejected that argument, ruling that ADM was not a good-faith purchaser because (a) ADM had actual and constructive knowledge of the Right from a title report in its possession; (b) ADM could easily have discovered the Right from a “cursory” review of the recorded land records; and (c) ADM had somehow learned, about a week before the sale, that Country Visions was exploring how to protect its Right. While the bankruptcy court declined to set aside the sale order, it permitted Country Visions to continue its state court damages action.

The district court affirmed, and ADM appealed to the Seventh Circuit. There, the parties framed the issue as whether Country Visions received constitutionally sufficient notice of the bankruptcy sale proposing to sell the parcel free of claims and liens, like its Right, so that it was bound by the free and clear sale order, which it did not oppose or appeal. The Seventh Circuit rejected that framing of the issue, ruling instead that the case turned on a statutory question—whether ADM bought the parcel in good-faith pursuant to section 363(m)—not a constitutional one. “If ADM did not buy the parcel in ‘good faith’ . . . then it loses no matter what the Constitution has to say about the sort of notice Country Visions should have received.”

Having made ADM’s good faith the focus of its analysis, the Seventh Circuit agreed with the lower courts that ADM was not a good-faith purchaser because it had actual and constructive knowledge of the Right and knew of Country Visions’ inquiries before the bankruptcy sale yet failed to inform the bankruptcy court. For these reasons, ADM was ordered to defend the state court lawsuit.

Observations

Country Visions demonstrates that a purchaser seeking the protections of section 363(m) must demonstrate its own actual, objective good faith. Although the term “good-faith purchaser” is not defined in the Bankruptcy Code, the term is understood to mean “one who purchases the assets for value, in good faith, and without notice of adverse claims.” In re Rock Industries Machinery Corp., 572 F.2d 1195, 1197 (7th Cir. 1978) (emphasis added). And the Seventh Circuit has made clear that having actual or constructive notice of adverse claims and doing nothing to get the bankruptcy court to address those adverse claims deprives a purchaser of good-faith status, even where the failure to advise the bankruptcy court also falls on the debtor.

This is another in our series of client alerts related to the intersection of bankruptcy and real estate.