In re Farmland Industries, Inc., 02-50557-JWV.

• Decision Date: 17 September 2002
• Docket Number: No. 02-50557-JWV.,02-50557-JWV.
• Citation: 284 B.R. 111
• Parties: In re FARMLAND INDUSTRIES, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Western District of Missouri

284 B.R. 111

In re FARMLAND INDUSTRIES, INC., et al., Debtors.

No. 02-50557-JWV.

United States Bankruptcy Court, W.D. Missouri.

September 17, 2002.

COPYRIGHT MATERIAL OMITTED

Cynthia Dillard Parres, Laurence M. Frazen, Mark G. Stingley, Robert M. Thompson, Bryan Cave, LLP, Kansas City, MO, Frank W. Lipsman, Bryan Cave, LLP, Overland Park, KS, Ronald S. Weiss, Berman, DeLeve, Kuchan & Chapman, Kansas City, MO, for Farmland Industries, Inc.

Jerry L. Phillips, Paula C. Acconcia, Kansas City, MO, for Office of U.S. Trustee.

Bruse E. Strauss, Thomas N. Lane, Merrick, Baker & Strauss, Kansas City, MO, Robert S. Blanc, Houston, TX, for American Plant Food Corp.

Thomas M. Franklin, Kansas City, MO, for Equalizer, Inc.

Christopher A. Artzer, Akin, Gump, Strauss, Hauer & Feld, Houston, TX, Christopher J. Redmond, Gary D. Barnes, Husch & Eppenberger, Kansas City, MO, Henry J. Kaim, S. Margie Venus, Houston, TX, for Official Committee of Unsecured Creditors of Farmland Industries, Inc.

Daniel J. Flanigan, James E. Bird, Polsinelli, Shalton & Welte, PC, Kansas City, MO, Kathleen R. Pasulka-Brown, Mark L. Prager, Michael J. Small, William J. McKenna, Foley & Lardner, Chicago, IL, for Official Committee of Bondholders of Farmland Industries, Inc.

MEMORANDUM OPINION AND ORDER

JERRY VENTERS, Bankruptcy Judge.

On September 10, 2002, the Court held a hearing on the Motion (Document # 602) filed by the Debtor, Farmland Industries, Inc., ("Debtor") for Court approval of the sale of a fertilizer warehouse in Greenville, Mississippi, to American Plant Food Corp. ("American") for $2,120,500. However, at the hearing, United Agri Products, Inc., d/b/a UAP-MidSouth ("UAP"), by counsel, informed the Court and all parties present that UAP had a contractual right of first refusal to purchase the warehouse property, that UAP had not received notice of the Debtor's auction procedures to sell the property, and that UAP desired to exercise its right of first refusal and would match American's $2,120,500 bid. The Court heard arguments by counsel for the numerous parties present at the hearing, gave counsel an opportunity to submit legal citations to the Court for consideration, and took the matter under advisement.¹

A brief background is helpful to an understanding of the present situation. On August 16, 2002, the Debtor filed its Motion (the "Sale Procedures Motion") for approval of sale of the warehouse property in Greenville to ConAgra Trade Group, Inc., ("ConAgra Trade Group") for $1,420,000. The Sale Procedures Motion proposed the adoption of certain auction and bid procedures that were to be followed by the Debtor in soliciting additional bids from prospective purchasers and possibly obtaining a higher price for the warehouse property. The auction and bid procedures were approved by the Court on August 29, 2002. (Document # 691). Those procedures provided that, if any additional written bids ("overbids") were received for the property, an auction would be conducted by the Debtor's attorneys in their law firm's offices on September 9, 2002, and the highest and best bid would be submitted to the Court for final approval at an omnibus hearing scheduled on September 10, 2002.

Two overbids were, indeed, received for the warehouse property, and counsel for the Debtor conducted an auction at his offices in the afternoon of September 9, 2002. According to counsel, the bidding was vigorous and competitive. There were 100 rounds of bids received, with the final bid being that of American for the above-mentioned $2,120,500, an increase of $700,500 over the lead bid of ConAgra Trade Group. A representative and counsel for ConAgra Trade Group were present and participated in the auction, although ConAgra Trade Group dropped out of the bidding at about the $1,700,000 level. At the conclusion of the bidding on September 9, there was no question that American had made the highest bid at $2,120,500.

However, on the morning of September 10, 2002 — just three or so hours before the scheduled hearing for approval of the sale — counsel for the Debtor became aware of UAP's right of first refusal. The right of first refusal was contained in a contract titled "Farmland Industries, Inc. Fertilizer Handling Agreement" entered into by Farmland Industries and UAP-MidSouth on August 14, 2001. Paragraph 17 of that Agreement provided:

"PURCHASE OPTION: During the initial term of this agreement [or the extended 3-year term], Farmland may not Transfer the Property (as respectively hereafter defined) to a person or entity other than UAP — Midsouth without first giving written notice to UAP — Midsouth 40 days before such Transfer that a Transfer will occur unless UAP — Midsouth exercises its right of first refusal within 30 days (`the Notice'). The Notice will disclose the terms and conditions upon which the Transfer will occur. Upon receiving the Notice, and only upon receiving the Notice, UAP — Midsouth may within the time prescribed above elect to compel Farmland to Transfer the property to UAP — Midsouth on the same terms and conditions. Farmland is not liable for any alleged failure to give the Notice with respect to any proposed Transfer which does not occur. The `Property' shall consist of substantially all of the real property (to the extent Farmland owns it) and the buildings and equipment at Farmland's facility located at Greenville, Mississippi. A `Transfer' consists of any sale or transfer of the Property for cash or its equivalent, by Farmland to any party other than a corporate affiliate of Farmland, including without limitation, Agriliance LLC. A Transfer excludes any assignment for the purpose of granting a security interest to a lender, and any resulting enforcement of such interest. A Transfer excludes any transaction in which the Property is less than the majority of the property included in the transaction, as determined by Farmland's depreciated book value of such property."

Counsel for the Debtor acknowledged that notice of the pending Motion and of the auction and bid procedures had not been given to UAP at any time, though he did not know if UAP had received actual knowledge of the bid procedures. Counsel for UAP — who also represents ConAgra Trade Group — advised the Court that he did not believe that UAP had any knowledge, actual or constructive, of the Debtor's Motion or the sale procedures, or even that the Debtor was contemplating selling the warehouse property. At the conclusion of the hearing, the Court directed counsel for UAP to obtain and submit to the Court within 24 hours an affidavit from an authorized officer of UAP stating whether UAP had received notice of the sale procedures or whether UAP had actual knowledge of the pending sale and the sales procedures. The affidavit of Christopher K. Hildreth, vice president of UAP, was received by the Court by facsimile transmission on September 11, 2002. In it, Hildreth stated that, to his knowledge, neither UAP nor the individual designated in the Fertilizer Handling Agreement to receive notice for UAP (a person named Moses Vernon) had received a service copy of the Debtor's original Motion or a copy of the Court's Order approving the auction and bid procedures. Hildreth further stated that, to his knowledge, UAP did not have notice of the sale of the Greenville warehouse property until September 10, 2002, the day after the auction was conducted by Debtor's counsel.²

Despite the apparent lack of notice to UAP, several counsel urged the Court to approve the sale of the warehouse property to American at its bid of $2,120,500. Others urged the Court to reopen the bidding and allow further opportunity for bidding before approving the sale. After hearing arguments, the Court took the matter under advisement and promised the parties a prompt ruling, inasmuch as all parties seemed in agreement that time was of the essence.³ The Court has reviewed the affidavits submitted by the parties, has reviewed the cases cited by the parties, and has conducted its own research and is now prepared to rule on the issues before it.

DISCUSSION

It is generally accepted that it is an abuse of discretion for a bankruptcy court to refuse to confirm an adequate bid received in a properly and fairly conducted sale merely because a slightly higher offer has been received after the bidding is closed. In re Gil-Bern Industries, Inc., 526 F.2d 627, 629 (1st Cir.1975), and cases cited therein. It is even more firmly established in our law that a person or entity may not be deprived of his or its liberty or property interests without due process of law; generally, actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party. In re Center Wholesale, Inc., 759 F.2d 1440, 1448 (9th Cir.1985). It is these two principles that have come into conflict in this case.

With respect to the first issue, the Eighth Circuit Court of Appeals has provided guidance in cases such as this in Four B. Corporation v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107 F.3d 558 (8th Cir.1997) ("Food Barn"). As a general rule, the Court of Appeals observed that, "[t]ypically, a court will reopen bidding, and thereby upset the results of a properly conducted judicial auction, only if `there was fraud, unfairness or mistake in the conduct of the sale...or...the price brought at the sale was so grossly inadequate as to shock the conscience of the court.'" Food Barn, 107 F.3d at 564, quoting In re Stanley Eng'g Corp., 164 F.2d 316, 318 (3rd Cir.1947), cert. denied, 332 U.S. 847, 68 S.Ct. 351, 92 L.Ed. 417 (1948). Additionally, the Court stated that "an unwavering adherence to formality" was not desirable, and that a bankruptcy judge should not be "`shackled with unnecessarily rigid rules when exercising the undoubtedly broad administrative power granted him under the Code.'" Food Barn, 107 F.3d at 564, quoting Committee of Equity Sec....