A recorded right of first refusal survived a “free and clear” sale because the holder of the right had inadequate notice, Chief Bankruptcy Judge Susan V. Kelley of Milwaukee held in her Feb. 17 opinion.
The question arose at the “delicate intersection of an important bankruptcy policy and a party’s due process rights,” Judge Kelley said. On one hand, a creditor has the right to notice under the Bankruptcy Code and Rules. On the other, a purchaser is protected by the “strong policy” of finality in bankruptcy sales, as expressed in Section 363(m).
The creditor had a right of first refusal that was recorded in the land records. The creditor was not listed in the schedules and received no formal, written notice about the impending confirmation of the debtor’s chapter 11 plan and the sale of the property that purportedly extinguished the creditor’s first refusal right.
Several years after the bankruptcy sale, the creditor sued the purchaser to enforce the right of first refusal when the purchaser was on the brink of selling the property.
With key policies in competition, the outcome was determined by the facts.
During the bankruptcy, Judge Kelley said that the creditor had “some inkling that a sale may be in the works.” One week before the sale, the creditor’s attorney spoke with the debtor’s counsel over the telephone and was told to protect his client’s rights. Still, the creditor was not given formal, written notice of the sale. The creditor did not appear at the sale hearing, nor did it take action to assert its right of first refusal.
The purchaser had a title report and knew about the creditor’s interest in the property before the sale, but the purchaser “chose not to ensure that [the creditor’s] interest was dealt with in the sale,” Judge Kelley said. Consequently, Judge Kelley said that the purchaser, rather than the creditor, “was more aptly . . . characterized as the ostrich in this case.”
On the law, Judge Kelley was guided by the Seventh Circuit’s Edwards decision from 1992 instructing lower courts to employ a balancing test rather than a formula under Rule 60(b)(4) when someone aims to upset a free and clear sale order.
Judge Kelley decided that the “ambiguous information in a telephone call” one week before the sale did not give the creditor “sufficient notice before its right of first refusal purportedly was eliminated” to “satisfy due process.”
On the other side of the fence, Judge Kelley decided that the purchaser was not a bona fide purchaser entitled to enforce the free and clear sale order because the title report gave constructive notice of the first refusal right. Similarly, the purchaser “could easily have determined” that the creditor had not been given notice of the sale.
A factual distinction led Judge Kelley to a result opposite from Edwards, where a lienholder’s address in the schedules was incorrect. In that case, Judge Kelley said that the “purchaser would not have known that the lienholder did not receive notice.”
Finally, Judge Kelley was persuaded to invoke Rule 60(b)(4) because the creditor was seeking a “much more limited remedy.” Rather than attempting to set aside the bankruptcy sale, the creditor only wanted the right to buy the property when the purchaser put it back on the market.
Although her decision to modify the free and clear order came years after the sale, Judge Kelley said the motion did not come too late because “Rule 60(b)(4) contains no time limit.”