To avoid having an appeal from a sale order declared moot under Section 363(m), the Bankruptcy Appellate Panel for the Sixth Circuit described the hurdles facing a disappointed bidder.

Notice of an adverse claim to the property can be a factor leading to a finding that the successful purchaser was not in good faith. Of perhaps most importance in its January 21 opinion, the BAP said that a competing bidder is not an adverse interest. Were it otherwise, the BAP said that “no winning bidder could ever be considered a good faith purchaser entitled to the protections of § 363(m).”

The Contested Sale

The corporate debtor in Subchapter V owned several parcels of real property. When the debtor was unable to find a buyer with a price acceptable to the secured lender, the debtor proposed and confirmed a plan giving the Subchapter V trustee authority to sell the properties in a private sale.

The trustee located buyers with committed financing to purchase the properties for a total of $810,000. At the hearing for sale approval, an entity affiliated with the debtor’s owners offered to purchase the properties for $15,000 more.

We shall refer to the owners’ affiliated entity as the competing bidder. Neither the owners nor the competing bidder filed written objections to the sale to the buyer with the $810,000 offer.

After several hearings where the competing bidder was unable to produce committed financing, Bankruptcy Judge Alan C. Stout of Louisville, Ky., approved the sale to the original bidder for $810,000. The sale order specifically said that the buyer purchased “in good faith” and “shall be afforded the protections of Section 363(m) of the Bankruptcy Code.”

The owners and the competing bidder appealed the sale order. By the time there was a hearing on a stay pending appeal, the sale had closed.

As appellee in the BAP, the Subchapter V trustee argued that the appeal was moot under Section 363(m).

Standing

In his opinion for the BAP, Bankruptcy Judge Randal S. Mashburn first addressed the appellants’ standing. Under the “person aggrieved” doctrine, he concluded that the owners had standing because a higher sale price would have reduced the deficiency they would owe the secured lender.

With regard to the competing bidder, Judge Mashburn said that a complaint about “unfairness” in the sale process “is not, by itself, sufficient for standing in a private sale context where there is no required process and there are no bidding rights.”

However, the competing bidder claimed to have had an enforceable contract to buy the properties from the trustee. On that basis, Judge Mashburn found standing to appeal.

Mootness

In bankruptcy cases, statutory mootness results from Section 363(m), which says:

The reversal or modification on appeal of an authorization . . . of a sale or lease of property does not affect the validity of a sale or lease . . . whether or not [the buyer] knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

Judge Mashburn said that Section 363(m) “does not automatically moot all appeals of unstayed sale orders.” However, he quoted the Sixth Circuit for saying that statutory mootness kicks in “when the party ‘alleging statutory mootness under § 363(m) [proves] that the reviewing court is unable to grant effective relief without affecting the validity of the sale.’”

Because the appellants were aiming for a “full reversal” of the sale to set aside a “consummated” sale, Judge Mashburn said that Section 363(m) applies. Therefore, “the only reviewable issue is whether the sale was to a good faith purchaser.”

Judge Mashburn spent the remainder of his opinion explaining why the appellants had not preserved “their limited appellate challenge” because “they failed to object to [the finding of good faith] when that issue was before the bankruptcy court.” In other words, an appeal about a buyer’s good faith cannot be raised for the first time on appeal.

Citing the Fifth Circuit and the Tenth Circuit Bankruptcy Appellate Panel, among other authorities, Judge Mashburn said that courts “can apply doctrines of waiver and forfeiture when evaluating § 363(m) issues.” He said that the owners “clearly waived any appellate challenge to the buyers’ good faith by not first raising it before the bankruptcy court.” The analysis was more complex with regard to the competing bidder.

Judge Mashburn said that the competing bidder “did not object in the bankruptcy court proceedings to any factor of the good faith finding: good faith, value, or notice of adverse claims” to the property being sold. He said that having “a competing bid does not constitute an ‘adverse interest.’ If it did, no winning bidder could ever be considered a good faith purchaser entitled to the protections of § 363(m).”

Parsing the exact words used by the competing bidder at the sale hearing in bankruptcy court, Judge Mashburn found that the competing bidder “never expressly objected to the Trustee’s request that [the buyers] be found to be good faith purchasers.” Therefore, he held that the competing bidder’s “appellate challenge to the good faith finding was waived.”

“By not raising any argument as to the purchasers’ good faith before the bankruptcy court,” Judge Mashburn ruled that the owners and the competing bidder “have waived any right to assert such arguments on appeal.”

“With no reviewable issue on appeal,” Judge Mashburn affirmed the sale order.