In re Abbotts Dairies, Inc.

Abbotts Dairies, Inc., and related entities (collectively, Abbotts) (debtors) filed for Chapter 11 bankruptcy. The same day, Abbotts filed motions seeking the bankruptcy court’s approval of two agreements: (1) an interim agreement under which ADC, Inc., would effectively take control of Abbotts’ business and (2) an agreement for ADC’s purchase of Abbotts’ assets under 11 U.S.C. § 363(b)(1). At an emergency hearing on the interim agreement, Abbotts executive Richard Gwinn testified that Abbotts had no excess inventory or working capital and would have to stop operating the next day if the agreement were not approved. On cross-examination, Gwinn admitted that ADC had made a lucrative employment offer to him contingent on the bankruptcy court’s approval of the interim agreement and the purchase agreement. The bankruptcy court ultimately approved the interim agreement. Some of Abbotts’ creditors subsequently objected to the purchase agreement, asserting that the interim agreement had chilled competitive bidding for Abbotts’ assets and that the value ADC had proposed to pay for Abbotts’ assets was insufficient. The bankruptcy court refused to hear evidence on the objections and approved the sale, finding, among other things, that the sale price was fair and reasonable. The bankruptcy court did not explicitly find that ADC had acted in good faith during the sales proceedings. The National Farmers’ Organization, Inc. (NFO), and Cumberland Farms Dairy, Inc. (Cumberland), appealed the sale order in district court without seeking a stay pending appeal of the sale order. ADC and Abbotts subsequently closed the sale, and the district court dismissed the appeals as moot under 11 U.S.C. § 363(m), finding that NFO and Cumberland had not shown a lack of good faith by ADC that justified their failure to seek a stay. NFO and Cumberland appealed.