Seventh Circuit Bars Bad Faith Asset Buyer Protection

Relevance and Context

Bankruptcy court-approved asset sales are common. To encourage its participation in bankruptcy sales, Code §363(m) provides that a purchaser of a debtor's assets will be protected from reversal of the sale on appeal so long as the purchaser acted in "good faith." But the Code does not define "good faith" purchaser. See, In re Gucci, 126 F.3d 380, 390 (2d Cir. 1997). According to the traditional equitable definition, a good faith purchaser is "one who purchases the assets for value, in good faith and without notice of adverse claims." Id., quoting Willemain v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985). A buyer's good faith is evidenced "by the integrity of [its] conduct during the course of the sale proceedings." Id. In Gucci, a fiercely litigious competitor of the Chapter 11 debtor bought the debtor's assets (trademark and licensing rights). The court held the buyer to be a "good faith" purchaser under Code §363(m), explaining how the "good faith" principle applied to asset sales.

A disgruntled bidder had appealed from the bankruptcy court's order approving the sale in Gucci, but failed to obtain a stay pending appeal, resulting in the consummation of the sale. According to the court, the buyer's "conduct during the course of the sale proceedings" was entirely proper. Good faith could be lost, however, by "fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders." Id. The court rejected the disgruntled bidder's arguments in Gucci that the buyer had acted in bad faith by waging a worldwide litigation strategy against the debtor for the purpose of devaluing the debtor's trademarks as assets. The buyer's litigation and alleged harassment campaign, said the court, was not aimed at "controlling the sale price or taking unfair advantage of the bidders." Id. at 391. Instead, the successful purchaser was a competitor who had adopted "an aggressive litigation strategy" before bankruptcy "to protect its own trademarks from infringement," and the litigation was a continuation of its "established business strategy." Id. According to the court, "aggressive protection of trademarks is the reality of the designer retail business," not "flagrant misconduct" during the sales transaction. Id. at 392. See also, In re Old Cold LLC, 819 F.3d 376 (1st Cir. 2018) (good faith purchaser must not have knowledge of adverse claims); In re R.B.B., Inc., 211 F.3d 475 (9th Cir. 2000) (good faith status may be negated if "shell game" conducted); In re Burgess, 246 B.R. 352 (8th Cir. BAP 2000) (bad faith shown by misconduct surrounding the sale).