Summary of a Recent
Judicial Development in
Bankruptcy

BAP Affirms that Party with Right
of First Refusal Must Receive Notice of Sale

Gaby R. Jabbour
National AgLaw Center Research Assistant

In an action brought by a corporation that submitted the highest bid at the auction of a debtor's assets alleging that the bankruptcy court abused its discretion by ordering the reopening of the bidding process and by approving a compromise and a settlement that governed the procedures for the final auction, the Bankruptcy Appellate Panel (BAP) for the Eighth Circuit has ruled that the bankruptcy court did not err in finding that the party with the right of first refusal had not received sufficient notice of the proposed sale and that it did not abuse its discretion in continuing the auction and in approving the compromise regarding the terms to govern the continued auction. In re Farmland Industries, Inc., 289 B.R. 122, 124, 128 (B.A.P 8th Cir. 2003).

Farmland Industries, Inc. (Farmland), debtor, "filed a motion to establish bid procedures and to approve the sale of a fertilizer warehouse to ConAgra Trade Group, Inc. (ConAgra) . . . ." Id. at 124. The bankruptcy court "approved [the] auction and [the] bid procedures, pursuant to which the Debtor was to solicit additional bids and conduct an auction on September 9, 2002, if necessary." Id. It also "scheduled a hearing for September 10, 2002, to determine whether to approve a sale pursuant to the highest bid." Id.

Farmland conducted an auction and American Plant Food Corporation (American) submitted the highest bid. See id. However, at the September 10, 2002, hearing, United Agri Products, Inc., d/b/a UAP-MidSouth (UAP), "appeared . . . and asserted a right of first refusal with respect to the fertilizer warehouse," alleging that it did not have notice of the sale. Id. Farmland "had not served a copy of the motion or notice of the sale or bid procedures on UAP." Id. at 125. Thus, the bankruptcy court concluded that "UAP had not received notice of the proposed sale" and entered an order on September 17, 2002, "reopening the bidding, scheduling an auction in court on September 24, 2002, and authorizing American to submit higher bids and UAP to match any such bids at such final auction." Id.

At the September 24, 2002, hearing, "all parties except American reached a settlement pursuant to which UAP agreed to waive its right of first refusal, ConAgra agreed to waive its right to a break-up fee, and American, UAP, and Equalizer, Inc. would be allowed to participate in a reopened auction." Id. The bankruptcy court found the settlement reasonable and entered an order approving the settlement on September 25, 2002. See id. American appealed the September 17, 2002, and the September 25, 2002, bankruptcy court orders reopening the bidding and approving the compromise, arguing that the bankruptcy court had abused its discretion. See id.

The BAP first examined the nature of the orders entered by the bankruptcy court and noted that "[t]he orders at issue schedule a judicial auction" and that "[t]he bankruptcy court has not effectively resolved the controversy and its remaining tasks are more than mechanical or ministerial." Id. at 125-26. It concluded that the orders are interlocutory, stating that "[t]his court has discretion to consider interlocutory appeals" and chose to exercise this discretion. Id. at 126 (citation omitted).

Next, the BAP considered the issue of UAP's right of first refusal and noted that "[t]he evidence that UAP had not received a copy of the motion or notice was undisputed." Id. It concluded that "[e]vidence supports the conclusion that UAP was not given notice of the proposed sale as required by the terms of the right of first refusal," therefore upholding the bankruptcy's court finding. Id.

Next, the BAP examined the order of the bankruptcy court that reopened the bidding process and noted that "[a] bankruptcy court has considerable discretion in approving assets sales and is granted ample latitude to strike a balance between fairness, finality, integrity, and maximization of assets." Id. (citing In re Wintz Co., 219 F.3d 807, 812 (8th Cir. 2000) and In re Food Barn, Inc., 107 F.3d 558, 565-66 (8th Cir. 1997)). It added that "the [bankruptcy] court must be mindful of the interests of unsecured creditors and the goal of maximizing the value of the bankruptcy estate." Id. (citation omitted).

The BAP stated that "[h]ere, the bankruptcy court carefully considered the countervailing interests of the bidders, including the expectations of American, and those of the Debtor and the creditors in maximizing price." Id. Concerning the expectations of American, the BAP noted that American "knew that the sale could not be final until approved by the bankruptcy court" and that "its justifiable expectations as a purchaser could not have crystalized to the point of certainty prior to the entry of an order approving the sale." Id. at 127. Concerning the interests of the creditors, the BAP noted that "[t]he court addressed the interests of the creditors in maximizing estate value by continuing the auction to provide the possibility of greater recovery as a result of the sale of this asset." Id. With respect to the interests of UAP, the BAP stated that "[t]he bankruptcy court struck a reasonable balance, honoring UAP's right of first refusal while granting American the right to increase its bid in light of this new development." Id. It concluded that "[t]he [bankruptcy] court did not abuse its discretion and its decision must be affirmed." Id.

Finally, the BAP examined the order of the bankruptcy court approving the compromise and stated that "American [was] unhappy because the price of the fertilizer warehouse may increase as a result of the continued auction, resulting in American either paying more than its existing bid or deciding not to increase its bid to exceed another bidder's higher offer." Id. It added that "American's unhappiness [was] not sufficient legal ground to reject the compromise" and that "[t]he bankruptcy court did not abuse its discretion in approving the compromise which itself furthered the goals underlying bankruptcy sales: fairness, finality, integrity, and maximization of assets." Id. at 127-28.

The BAP concluded that "[t]he bankruptcy court did not err in finding that UAP had not received sufficient notice of the proposed sale as required by the right of first refusal" and that it "did not abuse its discretion in continuing the auction nor in approving the compromise regarding terms to govern the continued auction." Id. at 128.

The case was decided on February 5, 2003; this summary was posted June, 2003