In In re Olsen, 563 B.R. 899 (Bankr E.D. Wisc. 2017), the United States Bankruptcy Court for the Eastern District of Wisconsin was faced with an interesting dilemma: should it overturn a previously-confirmed 363 Sale of real property that was not formally-noticed to a creditor with a right of first refusal on the property? As the Olsen court noted, this question “lies at the delicate intersection of an important bankruptcy policy and a party’s due process rights.” And the court’s holding has implications for representatives of both debtors and purchasers in 363 sales.
The debtors in Olsen sold real property (the “Property”) to Archer-Daniels-Midland Company (“ADM”) pursuant to a chapter 11 plan that had been approved by the debtors and their creditors—at least those creditors who noticed and participating in the chapter 11 case. However, the Property was subject to a right-of-first-refusal (the “ROFR”) held by Country-Visions-Cooperative (“CVC”)—which CVC had recorded in the appropriate land records. CVC was never listed as a creditor in the debtors’ creditors matrix, never received service of any notices during the chapter 11 case, and specifically was never given notice of the sale of the Property.
CVC first learned of a “potential” sale of the property one week prior to the scheduled confirmation hearing when CVC’s counsel called debtors’ counsel. Debtors’ counsel informed CVC’s counsel that the property was “subject to a potential sale, and that if he or his clients wished to assert any rights, under the ROFR or otherwise, they should do so prior to or at the hearing.” When CVC did not object or otherwise appear at the hearing, the court confirmed the sale and ADM purchased the property. ADM later sold the Property, at which point CVC sued ADM in state court, asserting its right of first refusal. ADM moved the bankruptcy court to reopen the debtors’ bankruptcy case and declare that the CVC’s ROFR had not survived the 363 sale.
The bankruptcy court reopened the bankruptcy case and took to analyzing the parties’ positions. The bankruptcy court recognized that CVC had not been given proper 21 days’ notice, as required by section 363 and Rules 2002(a)(2) and 6004(a) of the Federal Rules of Bankruptcy Procedure. Despite the informal, one-week notice that CVC did receive, this notice was insufficient, in the view of the court, to satisfy CVC’s due process rights.
Further, the court rejected ADM’s argument that CVC buried its head in the sand after learning of the potential sale and, instead, turned that argument on ADM. The Court noted that ADM had, at a minimum, constructive notice of the ROFR because CVC had properly recorded the ROFR. In the court’s mind, this notice weighed against ADM’s position, because this record notice established that ADM could not take the place of a bona fide purchaser without notice of prior adverse claims.
Ultimately, the court held that ADM could not enforce the confirmation order against CVC in the state court action because ADM was not a bona fide purchaser in good faith.
This case presents an important lesson on the limits of the scope of 363 sales. Despite this provision’s broad powers allowing debtors to sell assets free and clear of encumbrances, such powers are tempered by parties’ constitutional due process rights. Debtors’ counsel should note that even the broadest provisions of the bankruptcy code can be nullified by a failure to provide proper notice. Transparency is key. And purchasers’ counsel cannot assume that a prior property interest will always be removed through a confirmed 363 sale. The powers of the Bankruptcy Code do not absolve a purchaser from performing its due diligence.
While in most instances, a 363 sale will extinguish all prior property interests, parties on both sides should work together to make sure that any potentially-interested party is properly noticed to avoid any potential problems.