Two of the three judges on an Eleventh Circuit panel held that an order approving a sale to a good faith purchaser is moot on appeal under Section 363(m), even if the sale was not properly authorized under the Bankruptcy Code.
The third judge reached the same result by saying that the debtors could not appeal a sale they asked for in the first place.
A couple owned a corporation. The couple and the corporation were in separate chapter 11 cases. Before bankruptcy, both the individuals and the corporation owed secured debts to the same lender totaling $12.2 million. Each guaranteed the other’s obligations. In addition, the couple pledged separate property to the lender.
To finance its reorganization, the corporate debtor sought and obtained financing that rolled up its prepetition obligations of $12.2 million and provided an additional $1 million in credit. The rollup was secured.
In chapter 11, the individuals sought and obtained an order selling the separate property to the lender for a $3.5 million credit bid.
After sale approval, the individual debtors developed a theory that the rollup paid off the prepetition debt they owed to the lender, thereby making the lender ineligible to credit bid. The bankruptcy court disagreed and ruled that the rollup did not eliminate the individuals’ obligations to the lender. The bankruptcy court also denied a stay of the sale order pending appeal. The district court dismissed the appeal as statutorily moot under Section 363(m).
The individuals appealed to the circuit, raising questions under Section 363(m). It provides:
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization 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.
The Majority’s Broad Reading of 363(m)
The individual debtors argued in the circuit that Section 363(m) only moots transactions authorized by the Bankruptcy Code, not all transactions authorized by the bankruptcy court. To the individual’s way of thinking, the sale was not authorized by the Code because the credit bid was invalid.
For himself and Circuit Judge Julie Carney, Circuit Judge Andrew L. Brasher rejected the argument, holding that the language of Section 363(m) “moots an appeal from ‘an authorization under subsection (b) or (c) of this section.’ This language makes it clear that all ‘authorizations’ are covered, not just those that may be proper under the Code.” [Emphasis in original.]
Judge Brasher went on to rule that the bankruptcy court’s findings of fact about the lender’s good faith were not clearly erroneous, making Section 363(m) applicable. He noted how some courts have held that a disputed lien can form the basis for a credit bid.
Even if Section 363(m) applies, the individual debtors contended that the court could still grant the relief they requested — namely, requiring the lender to pay with cash, not by credit bid.
Judge Brasher said that Eleventh Circuit precedent “firmly forecloses the argument.” By ordering the lender “to pay something other than what it bid and the bankruptcy court approved, we would be undoing the sale itself, which we are powerless to do under 363(m).”
The two judges affirmed the district court and held that the appeal was statutorily moot under Section 363(m).
The Concurrence
Concurring in the judgment, Circuit Judge Adalberto Jordan wrote an opinion that merits reading by every bankruptcy lawyer and bankruptcy judge in the Eleventh Circuit.
Judge Jordan found “tension” between two Eleventh Circuit precedents on the issue of whether Section 363(m) moots appeals when the appellant is challenging the underlying authorization. He did not reach the question because the individual debtors had not challenged “the credit bid mechanism.”
Instead, Judge Jordan would have invoked the principle that the individuals could not “appeal an order, action, or ruling that they invited or requested.” The “invited error doctrine,” he said, “applies to debtors just as it does to other litigants.” For that reason, Judge Jordan concurred in the judgment.
Judge Jordan ended his opinion by questioning the validity of rollups. First, he noted that the Eleventh Circuit had banned the cross-collateralization of pre-petition debt with pre- and post-petition assets. See In re Saybrook Manufacturing Co., Inc., 963 F.2d 1490 (11th Cir. 1992).
Subsequently, Judge Jordan said, “bankruptcy attorneys have become creative” by using rollups, which he called “formally distinct but functionally similar.”
“[T]he type of debtor-in-possession financing loan approved in this case is due for serious substantive review,” Judge Jordan said in closing.
Two of the three judges on an Eleventh Circuit panel held that an order approving a sale to a good faith purchaser is moot on appeal under Section 363(m), even if the sale was not properly authorized under the Bankruptcy Code.
The third judge reached the same result by saying that the debtors could not appeal a sale they asked for in the first place.
A couple owned a corporation. The couple and the corporation were in separate chapter 11 cases. Before bankruptcy, both the individuals and the corporation owed secured debts to the same lender totaling $12.2 million. Each guaranteed the other’s obligations. In addition, the couple pledged separate property to the lender.
To finance its reorganization, the corporate debtor sought and obtained financing that rolled up its prepetition obligations of $12.2 million and provided an additional $1 million in credit. The rollup was secured.