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Seventh Circuit Bars Bad Faith Asset Buyer Protection
"Good-faith purchasers enjoy strong protection under [Bankruptcy Code ("Code")] §363(m)," but the silent asset buyer ("B") with "actual and constructive knowledge of a competing interest" lacks "good faith," held the U.S. Court of Appeals for the Seventh Circuit on April 4, 2022. Archer-Daniels-Midland Co. ("ADM") v. Country Visions Cooperative, 2022 WL 998984 (7th Cir. Apr. 4, 2022). Affirming the lower courts' denial of B's motion to enforce a "free-and-clear sale" provision in a plan confirmation order, the Seventh Circuit cited the bad faith of both the debtors and B, the asset purchaser.
Relevance and Context
Bankruptcy court-approved asset sales are common. To encourage its participation in bankruptcy sales, Code §363(m) provides that a purchaser of a debtor's assets will be protected from reversal of the sale on appeal so long as the purchaser acted in "good faith." But the Code does not define "good faith" purchaser. See, In re Gucci, 126 F.3d 380, 390 (2d Cir. 1997). According to the traditional equitable definition, a good faith purchaser is "one who purchases the assets for value, in good faith and without notice of adverse claims." Id., quoting Willemain v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985). A buyer's good faith is evidenced "by the integrity of [its] conduct during the course of the sale proceedings." Id. In Gucci, a fiercely litigious competitor of the Chapter 11 debtor bought the debtor's assets (trademark and licensing rights). The court held the buyer to be a "good faith" purchaser under Code §363(m), explaining how the "good faith" principle applied to asset sales.
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