On an issue under Section 363(m) where the circuits are split, the Third Circuit is in the minority, aligned with the Sixth and Tenth Circuits by holding that an appeal from an order approving a sale to a good faith purchaser is not automatically moot.
In an opinion on Oct. 24, the Third Circuit fleshed out the circumstance in which an appeal will not be moot, even though the bankruptcy court approved the lease or sale of property and there was no stay pending appeal.
The sale was contentious and factually complex, but for the purpose of analysis, the circumstances were not unusual. A chapter 7 trustee was selling the estate’s claims against insiders. The first bid of $125,000 came from a group of creditors. In addition to paying the purchase price, they agreed to contribute proceeds from lawsuits to the estate for distribution to all creditors.
After the insiders submitted a competing bid, the bankruptcy court authorized the trustee to hold an auction. The creditors submitted a bid of $180,000 and won the auction. In conjunction with their opposition to approval of the sale to the insiders, the insiders offered as much as $220,000.
The bankruptcy court approved the sale to the creditors for $180,000, theorizing that the creditors’ offer was higher because they would contribute recoveries to the estate and because the insiders had not complied with auction rules.
On appeal, the district court dismissed the insiders’ appeal as moot under Section 363(m). That section provides that reversal or modification of an order approving a sale or lease “does not affect the validity” of the sale or lease “to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.”
Circuit Judge Kent A. Jordan synthesized the Third Circuit’s precedent on Section 363(m) in a 37-page opinion upholding the lower courts and declaring that the appeal was moot. He explained that the section is designed to promote finality of sales and thereby attract investors and “effectuate debtor rehabilitation.” If the section “is to have teeth,” Judge Jordan said, “any reasonably close question” should be resolved in favor of finding the appeal to be moot.
Previously, the Third Circuit had held that an appeal will be moot if three conditions are met: (1) There was no stay pending appeal, (2) reversal would affect the validity of the sale, and (3) the sale was to a good faith purchaser.
Judge Jordan found “no clear error” in the bankruptcy court’s findings that the parties were in good faith because there was no collusion; the creditors followed the auction rules; and there was no evidence to “suggest that the bidding took place at less than arm’s length.”
Having found that the sale was conducted in good faith, Judge Jordan then addressed the other two issues, first confirming there was no stay pending appeal. Before dismissing the appeal as moot, the pivotal issue became the ability of the appellate court to modify or reverse without affecting the validity of the sale.
Judge Jordan said that appellate rights are preserved “only in those rare circumstances where collateral issues not implicating a central or integral element of a sale are challenged.”
The insiders argued that they were not challenging the validity of the sale, only the ability of the creditors to pursue claims of the estate. Agreeing with the trustee’s contention, Judge Jordan said it would have made no sense for the creditors to purchase the estate’s claims if they could not pursue them.
Judge Jordan therefore dismissed the appeal as moot, because the circuit court could not give the creditors a remedy “without affecting the validity of the sale.”
Of significance, the ability of the creditors to prosecute the estate’s claims was not resolved either in the sale order or by dismissal of the appeal, because the sale did not obviate any of the insiders’ defenses. Back in bankruptcy court, the insiders were moving to dismiss the creditors’ suit against them on the theory that the creditors were not entitled to prosecute estate claims. The bankruptcy court held the dismissal motion in abeyance pending the outcome of the appeal.
For ABI’s discussion of a recent Sixth Circuit opinion widening the split on Section 363(m), click here.