A New Risk to Bankruptcy Sales – Unwinding of the Sale Due to a Bad Faith Filing

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Authors: Lenard M. Parkins and Karl D. Burrer of Haynes and Boone, LLP

Parkins_Lenny HeadshotBurrer_Karl headshotRecently, the Eleventh Circuit rendered its decision in the Wortley v. Chrispus Venture Capital, LLC case unwinding a four-year old sale order based on a finding that the underlying bankruptcy case was filed in bad faith. The decision injects a new risk for buyers of distressed assets – the potential reversal of a sale order years after the closing of the transaction.

While the Wortley opinion clearly provides that a finding of “bad faith” with respect to the filing of a bankruptcy case can result in its dismissal (even) years later, it is unclear whether the holding requires the unwinding of all sales that transpired prior to dismissal of a bankruptcy case subsequently deemed to have been filed in bad faith. As a general matter, a dismissal for a bad-faith filing is a matter of court discretion under section 1112(b) – not a matter of jurisdiction.  Further, section 349 seems to provide that dismissals are not per se intended to unwind sales to good faith purchasers in a bankruptcy case. Accordingly, it can be argued that the Wortley holding should be limited to circumstances in which the purchaser is also the party found to have unclean hands with respect to the debtor’s bankruptcy filing.  Notwithstanding this analysis, the decision will require a new (and potentially amorphous) aspect of diligence for bankruptcy purchasers: the original motivation for the bankruptcy filing.

See here for a more detailed discussion of the Wortley decision.