The U.S. Court of Appeals for the Seventh Circuit issued a rare ruling regarding invalidating a “free and clear” sale order insofar as it permitted a pre-petition claimant with a right of first refusal to assert rights against the buyer that purchased the assets from a Chapter 11 debtor in a bankruptcy sale. Archer-Daniels-Midland Co. v. Country Visions Coop., 29 F.4th 956 (7th Cir. 2022). The court ruled that the buyer in this case was not good faith purchaser entitled to the strong buyer protections afforded by Bankruptcy Code §363(m). The record revealed that the buyer knew a third party held a right of first refusal on the parcel of land it purchased from the debtor, but neither the debtor nor the buyer made an effort to inform the court or give the third party notice of the sale or Chapter 11 case. The court made it clear that a purchaser who knows of competing interests but does not provide or insist that the debtor provide notice to such interest holder cannot rely on a bankruptcy court’s order purporting to extinguish those interests as part of a “free and clear” sale.

Background

This dispute concerns a right of first refusal held by Country Visions Cooperative in a parcel of land, which, by 2010, belonged to the estates of a group of related Chapter 11 debtors. The debtors marketed the parcel for sale during their Chapter 11 cases. Country Visions did not receive notice of or participate in the auction. In fact, other than informal notice one week before the confirmation hearing, the facts of which were disputed, neither the debtors nor any other party provided notice of the bankruptcy proceedings to Country Visions. This was despite the fact that the title search for the parcel reviewed by the debtors and the buyer revealed that Country Visions’ interest was recorded in the land records.