Tenth Circuit Imports Section 363(m) to Nonbankruptcy Appeals

There is a longstanding debate in academic circles on the question of whether equitable mootness violates 28 U.S.C. §§ 158 and 1291, which grant rights of appeal from final orders of the bankruptcy and district courts. There is also a debate about whether equitable mootness applies outside of bankruptcy.

On January 3, the Tenth Circuit stopped short of ruling whether equitable mootness exists beyond bankruptcy.

In compensation for expenses incurred in cleaning up contamination, the U.S. government obtained a $2.5 million lien on real property under CERCLA, the Comprehensive Environmental Response, Compensation, and Liability Act. Two years later, an adjoining landowner paid $50,000 to purchase an easement on the property subject to the CERCLA lien.

The owner of the contaminated land signed a consent decree conveying the land to a trust and authorizing the trustee to sell the property.

Over objection from the holder of the easement, the district court authorized the sale of the land to a third party free and clear of all liens, claims and encumbrances, with proceeds to be distributed in accordance with interests in the property. Because the proceeds did not fully pay the $2.5 million owing to the U.S. government, the adjoining landowner got nothing, although the easement was extinguished by the sale “free and clear.”

The adjoining landowner appealed and lost in a nonprecedential opinion by the Tenth Circuit.

The government contended that the appeal was constitutionally or equitably moot.

Insofar as the landowner was seeking to set aside the transfer to the third party free and clear of the easement, the appeals court ruled that the appeal was constitutionally moot, based on cases finding no ability to alter a sale to a third party.

In a footnote, the circuit court acknowledged that most of the authority came from cases under Section 363(m) and its predecessor rule. That section renders appeals statutorily moot from orders authorizing sales or leases to good faith purchasers, so long as there was no stay pending appeal.

The Tenth Circuit said that the rule established in bankruptcy cases “has also been recognized and applied outside of bankruptcy.”

Insofar as the adjoining landowner wanted to recover some of the sale proceeds, the government argued that the appeal was also constitutionally moot. The Tenth Circuit disagreed.

Because the government was a party to the appeal, the appeals court said it could theoretically direct the government to disgorge some of the sale proceeds. Since some relief was possible, the circuit court said that aspect of the appeal was not constitutionally moot.

However, the government argued that the appeal over sale proceeds was equitably moot. Naturally, the adjoining landowner contended that equitable mootness is not available outside of bankruptcy.

The appeals court chose “not to decide these questions, because we can readily resolve on the merits the priority-of-interest issue over which we have jurisdiction.”

On the merits, the landowner argued that the government’s CERCLA lien was not valid because proper notices were not given under Utah lien law.

Finding “substantial compliance” with Utah law, the Tenth Circuit upheld the district court because the landowner was entitled to none of the sale proceeds.

Observation: The Tenth Circuit’s approach to equitable mootness should be imported to bankruptcy appeals. As it was with the Denver-based appeals court, reaching the merits of the appeal was easier than applying the murky doctrine of equitable mootness.

Because statutes grant rights of appeal from final orders, this writer believes that appellate courts should always reach the merits in bankruptcy cases. If there was error, the appellate court in most cases should remand to determine whether any relief is feasible.

As it is today, many important issues in bankruptcy cases routinely become moot. For example, chapter 11 confirmation issues are often rendered moot. There would be more clarity in bankruptcy law without the doctrine of equitable mootness.

Indeed, it appears the Third Circuit may be moving in that direction. In In re Tribune Media Co., 799 F.3d 272 (3d Cir. Aug. 19, 2015), the Third Circuit declined to dismiss an appeal for equitable mootness because it would not be unfair if one class were forced to pay back $30 million.