In Short
The Situation:
The Result: The
Looking Ahead: The Court's decision resolves a circuit split on an important issue and provides clear guidance to good-faith purchasers of assets from a bankrupt debtor: Invoke § 363(m)'s protections on appeal or risk forfeiting them. The ruling may have further implications on challenges to hearing some bankruptcy appeals.
The Statute
Section 363(m) of the Bankruptcy Code (11 U.S.C.) limits a party's ability to undo an authorized transfer of property from a bankruptcy estate made to a good-faith purchaser or lessee. It provides that "[t]he reversal or modification of an authorization under [11 U.S.C. § 363(b) or (c)] 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."
In 2018, department store chain
MOAC sought a stay pending appeal. The bankruptcy court denied this request, reasoning that an appeal of the Assignment Order did not qualify as an appeal of an "authorization" described in § 363(m). The court emphasized that Transform had explicitly represented that it would not invoke § 363(m) on appeal. The Assignment Order became effective, and Sears assigned the lease to Transform's subsidiary.
MOAC appealed to the District Court, which agreed with MOAC that the assignment did not satisfy § 365's adequate-assurance requirements and vacated the Assignment Order. Transform sought rehearing—reversing its assertions to the bankruptcy court, it now argued that § 363(m) deprived the district court of jurisdiction to grant MOAC's requested relief. The district court was "appalled" by Transform's sandbagging in waiting until after it lost the appeal to invoke § 363(m), and stated that "if ever there was an appropriate situation for the application of judicial estoppel, this would be it." Nevertheless, the District Court held that, under Second Circuit precedent, § 363(m) was jurisdictional and therefore not subject to waiver or judicial estoppel. The Second Circuit affirmed for the same reason.
The
The Court first rejected Transform's argument that the appeal should be dismissed as moot because the Assignment Order had been consummated and the lease had been transferred out of the bankruptcy estate such that, Transform claimed, "no legal vehicle remains available for undoing the lease transfer." Describing "these kinds of mootness arguments"—from the claimed lack of "legal availability of a certain kind of relief"—as "disfavor[ed]," the Court explained that "[a] case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party" and "remains live as long as the parties have a concrete interest, however small, in the outcome of the litigation." MOAC argued that it did have remedies available, and its arguments were "not so implausible that [they are] insufficient to preserve jurisdiction." The Court declined to act, under the guise of jurisdictional mootness, as a first-level reviewer of the merits of intricate questions under the Bankruptcy Code.
On the merits, the Court held that § 363(m) is not jurisdictional. Jurisdictional rules, the Court explained, "pertain to the power of the court rather than the rights or obligations of the parties." Provisions are jurisdictional only "if
Two Key Takeaways
- MOAC resolves a circuit split concerning whether courts have jurisdiction to hear appeals challenging unstayed orders authorizing the sale or lease of property from a bankrupt debtor's estate to a good-faith purchaser or lessee. In such case, litigants defending the transfer must invoke § 363(m) at the first opportunity or risk losing the statute's protections.
- The Court described jurisdictional mootness arguments based on the claimed lack of available relief as "disfavor[ed]," going instead to the merits unless the only plausible view is that it is "impossible" to grant "any" effectual relief. It remains to be seen how lower courts will apply this aspect of the Court's opinion to bankruptcy appeals involving mootness arguments beyond the scope of § 363 sales.
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