The First Circuit is receptive to the notion that estate professionals in some circumstances can purchase estate property.
In a receivership, the receiver had hired a sales agent to market some of the estate’s intellectual property. After two years, the agent was able to negotiate a sale of only a portion of the intellectual property.
Ultimately, the receiver proposed selling several parcels of real property, the remaining intellectual property, and some other assets to an affiliate of the agent. The receiver disclosed the relationship between the agent and the proposed buyer and told the district judge that the affiliate was in the business of purchasing property for resale.
The district court approved the sale, but the individual whose property was in receivership appealed to the First Circuit.
Circuit Judge Sandra L. Lynch upheld the sale in an opinion on Oct. 17, holding that the agent’s affiliate was a permissible purchaser.
The appellant argued that the transaction amounted to the prohibited sale of estate assets to a fiduciary. Judge Lynch narrowly defined the types of fiduciaries who are prohibited from purchasing estate property.
She began by citing First Circuit precedent saying that “a full-fledged fiduciary, such as a trustee or court-appointed receiver,” is “normally” prohibited from purchasing estate property, “even if the terms are fair.”
The agent, however, was not a “full-fledged fiduciary” who would be subject to automatic disqualification, Judge Lynch said.
Fiduciaries, she said, are disqualified because “there is no one else who can similarly protect the estate’s interest.” In the case at bar, the receiver “had control over the receivership assets and protected the estate’s interests,” Judge Lynch said. She also said that the agent “did not have effective control over the estate’s [intellectual property]; it was merely responsible for marketing them.”
The precedential value of the opinion may be limited because the appellant was an unattractive litigant. As the target of the receivership, the appellant had “obstructed” the receivership “throughout,” according to findings by both the appeals court and the district court. Since the receivership was seven years old, the district judge had instructed the receiver to conclude the sale quickly and close the receivership.
Thus, the appellant’s own actions may have contributed to ending up with a less-than-ideal buyer.
Judge Lynch’s opinion demonstrates why Section 363(m) is a necessary component of the Bankruptcy Code. That section provides that reversal of a sale-approval order does not affect the validity of the sale to a good-faith purchaser, as long as there was no stay pending appeal.
The receiver had argued that equitable mootness should result in dismissal of the appeal, without reaching the merits. Judge Lynch rejected the receiver’s reliance on a First Circuit decision, saying that case pertained “only to statutory mootness under [Section 363(m)], which does not apply here.”
Judge Lynch said that the appeal was not equitably moot because the affiliate was still in possession of the purchased property, and no third parties would be harmed if the sale were set aside.