The First Circuit held that a sale in possible violation of the Supreme Court’s Jevic decision in 2017 does not allow an appellate court to examine the merits of a sale when the sale-approval order otherwise is statutorily moot under Section 363(m).
The appeal involved a typical bankruptcy sale where the purchaser who prevailed at auction was composed of some of the debtor’s insiders. Utilizing Bankruptcy Rules 6004(h) and 6006(d), the bankruptcy court approved the sale to the insider and allowed the closing to occur immediately.
The competing bidder appealed without a stay, contending that Section 363(m) did not apply because the insider-purchaser was not in good faith. That section provides that the reversal or modification of an order approving a sale “does not affect the validity of a sale” to a purchaser “that purchased . . . such property in good faith, whether or not such [purchaser] knew of the pendency of the appeal, unless such authorization and such sale . . . were stayed pending appeal.”
The First Circuit Bankruptcy Appellate Panel upheld the sale-approval order, holding that the appeal was moot under Section 363(m).
On a second appeal, First Circuit Judge William J. Kayatta, Jr. upheld the lower courts, likewise ruling in an opinion on Jan. 12 that the appeal was moot under Section 363(m).
The outcome of the appeal turned on the meaning of “good faith purchaser,” a term not defined in the Bankruptcy Code. In the context of Section 363(m), the First Circuit has held that the term means someone “who buys property in good faith and for value, without knowledge of adverse claims.”
In turn, Judge Kayatta said, “good faith” means someone who acts “without fraud, misconduct, or collusion, and must not take ‘grossly unfair’ advantage of other purchasers.”
The competing bidder’s appeal was based on a contention that the insider-purchaser was not in good faith because it knew the loser was challenging the sale. Judge Kayatta rejected the argument, saying that “a likely appellate challenge to the sale itself” is not an “adverse claim.” Citing the Fifth Circuit, he said there is a difference between knowing there are objections to the sale and having knowledge of an adverse claim.
Next, the disappointed bidder contended that Section 363(m) should not apply because the bankruptcy court waived the 14-day automatic stay under Bankruptcy Rule 7062 and allowed the sale to close immediately.
Since the debtor had repeatedly given notice that it would seek to waive the automatic stay, Judge Kayatta said there were no due process grounds to make Section 363(m) inapplicable.
Finally, and of perhaps the most significance, the appellant argued that the sale violated Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), because the insider-purchaser had agreed to assume some but not all claims against the debtor. The appellant contended that the sale thereby offended the priorities of distribution and gave better treatment to some creditors of the same rank.
Judge Kayatta refused to consider the Jevic allegations. Section 363(m) applies, he said, “even if the bankruptcy court’s approval of the sale was not proper, so long as the bankruptcy court was acting under Section 363(b).”
He went on to say, “the fact that a sale is improper cannot mean ipso facto that there is no good faith purchaser. Otherwise, Section 363(m) would not preclude any challenge to the propriety of consummated sales.”