On Oct. 24, 2017, the U.S. Court of Appeals for the Third Circuit in In re Pursuit Capital Management LLC[1] struck down an appeal as moot pursuant to a strict interpretation of Bankruptcy Code § 363(m) in large part due to the appellant’s failure to seek a stay of a sale order in the lower court.
Pursuit Capital Management LLC (the debtor), a general partner in a securities and investment funds group, filed for chapter 7 in response to an adverse judgment in the amount of $5 million. As the debtor had listed essentially no assets on its schedules, the chapter 7 trustee proposed to sell the debtor’s potential causes of action, to include avoidance actions against the debtor’s principals (collectively, the “transferred claims”), in order to administer the debtor’s chapter 7 case.
A group of the debtor’s creditors (the “creditor group”) agreed to purchase the transferred claims for $125,000 in exchange for a concession that the creditor group would be deemed to have standing to pursue the claims. After the trustee sought court approval of the sale of the transferred claims to the creditor group, the parties against whom the transferred claims were to be asserted (the “pursuit parties”) objected, arguing collusion between the trustee and creditor group and that the proposed sale would not maximize the value of the debtor’s estate. The U.S. Bankruptcy Court for the District of Delaware directed the trustee to entertain offers for the transferred claims from the pursuit parties, who then offered $147,500. In light of the multiple offers, the trustee opted to conduct a public auction for the transferred claims.
At auction, the pursuit parties raised their offer to $170,000 before abruptly ending their participation due to a scheduling conflict. The trustee proposed several alternative dates to reconvene the auction but noted that the pursuit parties’ $170,000 offer was the preferred bid up to that point. As none of the dates proposed by the trustee were acceptable to the parties, the trustee requested that final sealed bids be delivered to him and that the winner would be selected therefrom. The trustee received a sealed bid from the creditor group in the amount of $180,000, but the pursuit parties failed to provide such a bid and affirmatively withdrew their previous offers from consideration.
After the trustee sought approval for the sale to the creditor group, the pursuit parties offered $200,000 by e-mail and requested that the sale approval hearing be adjourned. The bankruptcy court denied the adjournment request, and the pursuit parties made a new offer in the amount of $220,000, which the trustee rejected. At the hearing, the pursuit parties requested that the auction be reopened, making yet another offer of $205,750, which was again rejected by the trustee. While cross-examining the trustee, the pursuit parties made a final offer of $250,000, but the bankruptcy court rejected this bid due to its timing. Before the conclusion of the hearing, the pursuit parties objected to the approval, asserting that (1) the creditor group’s $180,000 offer was not the highest bid, (2) the trustee circumvented the auction procedures and (3) only the trustee could prosecute the transferred claims. The bankruptcy court approved the sale to the creditor group (the “sale order”), and the pursuit parties appealed to the U.S. District Court for the District of Delaware but failed to seek a stay of the sale order. The district court denied the pursuit parties’ appeal, stating that the failure to seek a stay of the sale order rendered the appeal moot. An appeal to the Third Circuit followed.
The Third Circuit noted that Bankruptcy Code § 363(m) promotes finality of sales of a debtor’s property in bankruptcy, as it allows third parties to rely on the orders and judgments of the courts, attracts investors, and promotes a debtor’s rehabilitation. The court stated that three conditions must be met in order to find that a challenge to a sale order is moot under § 363(m): (1) the purchaser must have purchased the property in good faith; (2) the underlying sale was not stayed pending appeal; and (3) reversal or modification of the sale would affect the validity of the sale.
As to the good-faith purchase of the transferred claims, the Third Circuit noted that the bankruptcy court found no collusion between the trustee and the creditor group, the creditor group abided by the auction procedures, and the creditor group gave value for the transferred claims, as evidenced by the fact they were purchased at a public auction. The court noted that the pursuit parties were unable to offer evidence to the contrary beyond vague assertions that the trustee discriminated against them during the sale process. Rather, the pursuit parties’ own conduct during the sale denied them the opportunity to purchase the transferred claims.
As to the second prong, it was undeniable that the pursuit parties failed to seek a stay of the sale order before filing their appeals. Although the pursuit parties argued that a stay was unnecessary, as their legal rights and defenses were preserved in the sale order because the transferred claims were sold “as is, where is,” the court noted that the pursuit parties “provide[d] no legal authority to support that extraordinary assertion of an exemption from § 363(m).” The court further noted that the plain language of § 363(m) required the pursuit parties to seek a stay of the sale order, which they failed to do.
On the final question as to a reversal of the sale order affecting the validity of the sale, the pursuit parties argued that although they now owned the transferred claims, the creditor group did not have the authority to prosecute those claims, as only the trustee had such power. Therefore, reversal of the sale order would not affect the validity of the sale. The court countered that the power to prosecute the claims was the very essence of the sale to the creditor group, and that a reversal of the sale order would frustrate the central feature of the transaction by no fault of the creditor group. Such a clawback, the court stated, would directly affect the validity of the sale of the transferred claims to the creditor group.
As the court demonstrated that all three requirements of § 363(m) were met, it upheld the decision of the lower courts, thereby dismissing the appeal.
The Pursuit Capital Management decision is a stark reminder that courts will strictly apply the plain language of the Bankruptcy Code. When representing a party who asserts that they have been prejudiced by entry of an order approving the sale of a debtor’s assets, counsel would be wise to adhere to the strictures set forth by § 363(m) and seek a stay of the order in bankruptcy court prior to appeal, lest they further prejudice their client in the form of an order rendering the appeal moot for failure to follow this procedural requirement.