On an issue tangentially related to a case coming before the Supreme Court in December, a district judge in New Orleans wrote an opinion pointing out how the Fifth Circuit interprets Section 363(m) more broadly than the Seventh and Ninth Circuits by mooting not only the sale of property but also the distribution of proceeds from the sale.
In chapter 11, the owner of three real properties sued the lender to challenge the validity, extent and priority of the lender’s lien. The bankruptcy court granted the lender’s summary judgment motion. Later, the court appointed a chapter 11 trustee.
The chapter 11 trustee and the lender entered into a settlement calling for the trustee to sell the three properties free and clear of tenants’ leases and pay the proceeds to the lender, except for enough to cover the trustee’s expenses.
The tenants opposed the sale motion but lost when the bankruptcy court approved the settlement and sale procedures. After the auction, the bankruptcy court approved the sale where the lender purchased one property and third parties bought the other two.
The three tenants had also filed a motion for adequate protection in the form of an assurance that they could remain in possession until 2038, when their leases would terminate. The bankruptcy court denied the tenants’ motion.
The tenants appealed the sale order, but the trustee filed a motion to dismiss the appeal as moot under Section 363(m). The section provides that the “reversal or modification on appeal of an authorization . . . of a sale or lease of property does not affect the validity of a sale or lease . . . to an entity that purchased or leased such property in good faith, . . . unless such authorization and such sale or lease were stayed pending appeal.”
The tenants argued that the appeal was not moot because they were only challenging the distribution of proceeds to the trustee, not the sale of the properties.
In her September 23 opinion, District Judge Sarah S. Vance outlined the different approaches among the circuits in terms of the breadth of Section 363(m). She cited a Seventh Circuit opinion by Circuit Judge Frank Easterbrook, Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019), and a similar decision from the Ninth Circuit Bankruptcy Appellate Panel.
As we reported in this column, Judge Easterbrook said that Section 363(m) is a limit on remedy and not jurisdictional. He said that the section does not “prevent a bankruptcy court from deciding what shall be done with the proceeds of a sale or lease.” Id. at 603. To read ABI’s report, click here
On the other side of the fence, Judge Vance cited In re Sneed Shipbuilding Inc., 916 F.3d 405, 410 (5th Cir. 2019), where the Fifth Circuit held that the appeal was moot because there was “no way to sever the settlement from the sale; they are mutually dependent.” To read ABI’s report, click here.
Similarly, Judge Vance cited In re Walker County Hospital Corp., 3 F.4th 229, 234 (5th Cir. 2021), where the Fifth Circuit held that the appeal was moot because an order amending a sale order was “integrally linked to, and indeed, inseparable from,” the sale order. To read ABI’s report, click here.
Judge Vance said that the converse is also true, that “the bar of section 363(m) does not apply to the appeal of a provision that is not integrally linked to the underlying sale.”
Ruling that the appeal was moot, including the distribution of proceeds to the trustee, Judge Vance said that the “settlement agreement between [the lender] and the Trustee was entered into for the purpose of fixing the amount of [the lender’s] claim and selling the properties to satisfy that claim.”
Judge Vance went on to say that the “terms regarding distribution of sale proceeds were part and parcel of the sale — they ensured that the sale would accomplish its purpose, the satisfaction of [the lender’s] claim, while allocating to the Trustee sufficient funds to effectuate the sale and to administer the estate.”
Finding that the distribution of proceeds was “integrally linked to the underlying sale,” Judge Vance dismissed the appeal as moot.
Observations
The Supreme Court will hear argument on December 5 in MOAC Holdings LLC v. Transform Holdco LLC, 21-1270 (Sup. Ct.), to decide whether the failure to obtain the stay of a sale approval order erects a jurisdictional bar to appeal under Section 363(m). In other words, is Section 363(m) jurisdictional, or is it only a limitation on remedy?
This distinction is important, because a jurisdictional bar would preclude an appellate court from reviewing any aspect of a sale order.
The “jurisdictional or not” question was not before Judge Vance. Still, she interpreted Section 363(m) as broadly mooting issues related to approval from a sale order.
When the Supreme Court issues its opinion on MOAC, and if the Court decides that Section 363(m) is not jurisdictional, we should read the opinion carefully, looking for a hint as to whether the justices see the section as broadly or narrowly mooting issues related to the sale itself.
To read ABI’s latest report on the MOAC grant of certiorari, click here.
On an issue tangentially related to a case coming before the Supreme Court in December, a district judge in New Orleans wrote an opinion pointing out how the Fifth Circuit interprets Section 363(m) more broadly than the Seventh and Ninth Circuits by mooting not only the sale of property but also the distribution of proceeds from the sale.
In chapter 11, the owner of three real properties sued the lender to challenge the validity, extent and priority of the lender’s lien. The bankruptcy court granted the lender’s summary judgment motion. Later, the court appointed a chapter 11 trustee.
The chapter 11 trustee and the lender entered into a settlement calling for the trustee to sell the three properties free and clear of tenants’ leases and pay the proceeds to the lender, except for enough to cover the trustee’s expenses.
The tenants opposed the sale motion but lost when the bankruptcy court approved the settlement and sale procedures. After the auction, the bankruptcy court approved the sale where the lender purchased one property and third parties bought the other two.
The three tenants had also filed a motion for adequate protection in the form of an assurance that they could remain in possession until 2038, when their leases would terminate. The bankruptcy court denied the tenants’ motion.