The Supreme Court’s Espinosa decision does not stand “for the broad proposition that some informal notice always satisfies due process,” according to District Judge Brett H. Ludwig of Milwaukee. [Emphasis in original.]
In his February 19 opinion, Judge Ludwig held that informal notice of a pending bankruptcy did not enable a purchaser to buy property from the debtor free and clear of the creditor’s right of first refusal.
Judge Ludwig was a bankruptcy judge in Milwaukee from 2017 to 2020, when he was elevated to the district court bench. He was one of the judges appointed by former President Trump who upheld the results of voting in his state. Two days before the meeting of the Electoral College, Judge Ludwig dismissed a lawsuit asking for the Wisconsin legislature, not the voters, to determine the winner of the state’s electoral votes.
The Defective Notice
The creditor had a right of first refusal, or ROFR, to purchase real property owned by the chapter 11 debtor. The creditor had properly filed the ROFR with the land records. The ROFR would have shown up on a title report, Judge Ludwig said.
The debtor filed a plan calling for the sale of the property free and clear of all liens, claims and interests. The creditor did not receive written notice of the bankruptcy, the plan, the disclosure statement, the confirmation hearing or the motion to sell free and clear.
According to Judge Ludwig, the creditor received “informal” notice of the sale motion after approval of the disclosure statement. The creditor’s counsel both called and wrote to the debtor’s lawyers but received no response. One week before the sale and confirmation hearing, counsel for the debtor had a telephone call with the creditor’s counsel and relayed information about the sale and hearing date.
The creditor did not appear at the sale and confirmation hearing. The bankruptcy judge, not having been apprised of the ROFR, approved the plan and the sale.
About four years later, the purchaser arranged a sale of the property and filed a motion in the bankruptcy court seeking a declaration that the ROFR was ineffective in view of the plan confirmation and the sale free and clear.
Now-retired Bankruptcy Judge Susan V. Kelley, who had presided over confirmation, denied the motion to enforce the confirmation order. In what Judge Ludwig called a “thorough decision,” she ruled that the informal, last-minute notice was insufficient to overcome due process violations.
Judge Ludwig affirmed.
No Protection from Espinosa
The purchaser argued that actual notice of the bankruptcy overcame due process shortcomings. The argument, according to Judge Ludwig, “reflects a fundamental misunderstanding of both the importance of bankruptcy procedure and due process.”
On a sale free and clear, Section 363(f) and Bankruptcy Rules 6004(c) and 9014(b) require serving anyone with an interest in the property in the same “manner provided for service of a summons and complaint.”
“None of these rules was complied with here,” Judge Ludwig said. Instead, the parties “utterly disregarded the procedural protections necessary to strip [the creditor] of its interest in the . . . Property.” The “procedural lapses” here were “immense,” he said. “The absence of this higher notice was not a trifling error.”
The lack of notice resulted in giving the bankruptcy court no personal jurisdiction over the creditor, Judge Ludwig said.
The purchaser did not succeed in fobbing the procedural shortcomings off on the debtor. The purchaser was “heavily interested” in confirmation and “had a responsibility to ensure compliance with the Bankruptcy Code and Rules if it wanted to be sure it was taking clean title.”
Similarly, Espinosa gave the purchaser no protection. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).
Citing Espinosa, the creditor argued that “that these procedural failings can be wiped clean because [the creditor] received ‘actual notice’ of the potential sale.” Judge Ludwig disagreed.
Espinosa, he said, was not “an attempt to bind a party that was not brought within the bankruptcy court’s jurisdiction,” nor did it stand “for the broad proposition that some informal notice always satisfies due process.” [Emphasis in original.]
In Espinosa, the creditor had received the required notice of the confirmation hearing and the plan where student loans would be discharged. In addition, the creditor had filed a proof of claim, Judge Ludwig said.
Espinosa was different “in several material respects,” Judge Ludwig said. The creditor in the appeal before him “was not subject to the bankruptcy court’s jurisdiction,” meaning that the “resulting order [was] not binding against it.”
Furthermore, the “number and level of procedural violations inflicted” on the creditor “dwarfs the procedural deficiency in Espinosa,” Judge Ludwig said.
Significantly, Judge Ludwig said that “Espinosa . . . did not hold . . . that actual notice is sufficient to satisfy due process in all contexts” and was not a “blank check to disregard procedure, especially procedure enacted for the protection of third parties’ property rights.”
The Buyer Was Not a ‘Good Faith Purchaser’
Judge Ludwig also upheld Judge Kelley’s findings that the purchaser was not a good faith purchaser. He said that the purchaser had received the title report and thus had “constructive notice” of the ROFR.
In addition, the purchaser “knew or should have known” that the holder of the ROFR was not on the service list, Judge Ludwig said. He therefore ruled that Judge Kelley “had correctly determined that [the purchaser] could not invoke the good faith purchaser defense.”
Judge Ludwig upheld the bankruptcy court’s order denying the motion to enforce the confirmation order.
The Supreme Court’s Espinosa decision does not stand “for the broad proposition that some informal notice always satisfies due process,” according to District Judge Brett H. Ludwig of Milwaukee. [Emphasis in original.]
In his February 19 opinion, Judge Ludwig held that informal notice of a pending bankruptcy did not enable a purchaser to buy property from the debtor free and clear of the creditor’s right of first refusal.
Judge Ludwig was a bankruptcy judge in Milwaukee from 2017 to 2020, when he was elevated to the district court bench. He was one of the judges appointed by former President Trump who upheld the results of voting in his state. Two days before the meeting of the Electoral College, Judge Ludwig dismissed a lawsuit asking for the Wisconsin legislature, not the voters, to determine the winner of the state’s electoral votes.
The Defective Notice
The creditor had a right of first refusal, or ROFR, to purchase real property owned by the chapter 11 debtor. The creditor had properly filed the ROFR with the land records. The ROFR would have shown up on a title report, Judge Ludwig said.
The debtor filed a plan calling for the sale of the property free and clear of all liens, claims and interests. The creditor did not receive written notice of the bankruptcy, the plan, the disclosure statement, the confirmation hearing or the motion to sell free and clear.
According to Judge Ludwig, the creditor received “informal” notice of the sale motion after approval of the disclosure statement. The creditor’s counsel both called and wrote to the debtor’s lawyers but received no response. One week before the sale and confirmation hearing, counsel for the debtor had a telephone call with the creditor’s counsel and relayed information about the sale and hearing date.