Eighth Circuit Affirms Dismissal of Lawsuit Attacking Approved Bankruptcy Sale

It is common in a corporate Chapter 11 bankruptcy to sell substantially all of a debtor’s assets. When the sale is supervised and approved by a bankruptcy court, purchasers will be protected from subsequent attacks on the sale or its process.

In their most recent article for The Legal Intelligencer and Law.com, titled “Eighth Circuit Affirms Dismissal of Lawsuit Attacking Approved Bankruptcy Sale,” Chairman and CEO Andrew Kassner and senior attorney Joe Argentina discuss the issues surrounding the finality of a bankruptcy sale recently reviewed by The U.S. Court of Appeals for the Eighth Circuit in In re Veg. Liquidation, Inc. (f/k/a Allens, Inc.), Case No. 18-1786 (July 26, 2019).

In this case the debtor, an Arkansas food-canner, selected an entity formed by a group of second leinholders as the winning bidder for substantially all of its assets, and the bankruptcy court entered an order approving the sale. The order was not appealed and the sale closed. A few months later, the case was converted to a Chapter 7 liquidation, and the Chapter 7 trustee filed a complaint alleging that one of the largest creditors entered into a secret side agreement with the winning bidder, by which the creditor received a lucrative contract from the bidder. The trustee also alleged that the Debtor’s financial advisors manipulated the bid valuations to ensure success of the desired bidder. The bankruptcy court dismissed the complaint, partly ruling that the claims were barred by the finality of the sale order; and on appeal the Eighth Circuit affirmed the dismissal.

This decision is a reminder of the extent to which courts respect the finality of court-approved bankruptcy sales that have closed and funded, and of the power of section 363(m) of the U.S. Bankruptcy Code to promote finality that a good-faith purchaser—as determined by the bankruptcy court—will receive the benefit of its bargain if no stay pending appeal is obtained.