By Jason Burke, Blackwell Burke & Ramsey PC
On April 4, 2022, the United States Court of Appeals for the Seventh Circuit published its Opinion in Archer-Daniels-Midland Company v. Country Visions Cooperative, 2022 WL 998984. In this case, the debtor issued a right of first refusal to Country Visions in 2007 allowing Country Visions a right to match any other person's offer for the purchase of certain real estate. The term of the right of first refusal was ten years.
Three years later, in 2010, a bankruptcy was filed listing the real estate as property of the estate. No one notified Country Visions of the bankruptcy and Country Visions was not listed as a creditor in the proceeding. In 2011, the bankruptcy court approved the plan, which provided for a sale of the real estate free and clear of all interests. Archer-Daniels-Midland (ADM) was the successful buyer. Country Visions was not offered an opportunity to match the price that ADM paid.
Subsequently, in 2015, ADM sought to re-sell the real estate without offering it to Country Visions. Country Visions became aware of the sale and filed a suit in state court demanding compensation for the violation of the right of first refusal. ADM returned to the bankruptcy court seeking to enforce the free and clear aspect of the 2011 sale.
The Seventh Circuit upheld the ruling of the bankruptcy court and the district court denying ADM's request. There was no question as to debtor's bad faith, but that was not the relevant question. Instead, the focus was on buyer's bad faith.
The court reasoned that ADM had purchased the real estate in bad faith given that it had both constructive knowledge and actual knowledge of the right of first refusal but, nevertheless, failed to provide actual notice of the sale to Country Visions. Specifically, the Seventh Circuit found that ADM had constructive knowledge of the right of first refusal because Country Visions had recorded the right in the real estate records. Further, ADM was in actual possession of a title search report showing the right of first refusal and ADM knew that counsel for Country Visions had started making inquiries as to how to protect Country Visions’ rights vis-à-vis the right of first refusal prior to the 2011 bankruptcy court sale. The fact that Country Visions was obviously on notice of the sale was of no consequence. "[S]omeone who has both actual and constructive knowledge of a competing interest, yet permits the sale to proceed without seeking the judge's assurance that the competing interest-holder may be excluded from the proceeding, is not acting in good faith."
As ADM was not a good faith purchaser, the provisions of 11 U.S.C. §363(m), which provide:
The reversal or modification on appeal of an authorization . . . of a sale or lease of property does not affect the validity of a sale or lease . . . to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization of such sale or lease were stayed pending appeal
were not invoked. Here, as Country Visions had not been made a party to the original bankruptcy, Country Visions was not obligated to appeal the bankruptcy court's order authorizing the sale in 2011. Further, the Seventh Circuit reasoned that as ADM was a bad faith purchaser, the terms of 11 U.S.C. §363(m) were inapplicable.
The Seventh Circuit concluded stating, "Good faith purchasers enjoy strong protection under §363(m). But ADM is not a good faith purchaser. It must defend the state court litigation."
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