To promote the finality of bankruptcy asset sales, section 363(m) of the Bankruptcy Code "moots" an appeal of an order approving a sale to a good-faith purchaser unless the party challenging the sale obtains a stay pending appeal. Courts, however, sometimes disagree over the scope of section 363(m) and whether it also bars appeals of orders approving transactions that are related to a sale, such as settlements.
The U.S. District Court for the Eastern District of Louisiana recently addressed this question in In re Royal Street Bistro LLC, 2022 WL 6308294 (E.D. La. Sept. 23, 2022) ("Royal Street II"), appeal filed, No. 22-30629 (5th Cir. Oct. 5, 2022). The district court affirmed bankruptcy court orders approving an auction sale of properties free and clear of a tenant's leasehold interest as well as a related settlement agreement because both appeals were mooted by section 363(m)'the sale, by the express terms of section 363(m), and the settlement, because it was an integral part of the sale.
The ruling reinforces the principle that property can be sold free and clear of a tenant's leasehold interest, despite protections of such interests elsewhere in the Bankruptcy Code. It is also emblematic of the broad interpretation in the Fifth Circuit of statutory mootness under section 363(m).
Dismissal of Appeals Under the Doctrine of Mootness
"Mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. An appeal can be either constitutionally, equitably, or statutorily moot. Constitutional mootness is derived from Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of cases that are hypothetical or merely advisory.
The court-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis for precluding appellate review of an order confirming a chapter 11 plan that has been "substantially consummated." See Collier ' 1129.09 (16th ed. 2022).
An appeal can also be rendered moot (or otherwise foreclosed) by statute. For example, section 363(m) of the Bankruptcy Code provides that, absent a stay pending appeal, "[t]he 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 under such authorization to an entity that purchased or leased such property in good faith."
Section 363(m) is a powerful protection for good-faith purchasers because it limits appellate review of a consummated sale irrespective of the legal merits of the appeal. See Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors of Made in Detroit, Inc. (In re Made in Detroit, Inc.), 414 F.3d 576 (6th Cir. 2005); see also In re Palmer Equip., LLC, 623 B.R. 804, 808 (Bankr. D. Utah 2020) (section 363(m)'s protection is vital to encouraging buyers to purchase the debtor's property and thus ensuring that adequate sources of financing are available).
The circuits are split regarding whether section 363(m) automatically moots an appeal of an order approving an unstayed sale under all circumstances. Some circuits, including the First, Second, Fifth, Eleventh, and D.C. Circuits, have held that, in the absence of a stay of the sale order, the court must dismiss a pending appeal as moot unless the purchaser did not act in good faith. See Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d 376, 383 (1st Cir. 2018); U.S. v. Salerno, 932 F.2d 117, 123 (2d Cir. 1991); In re Walker County Hospital Corp., 3 F.4th 229, 236 (5th Cir. 2021); In re Steffen, 552 F. App'x 946, 949-50 (11th Cir. 2014); In re Magwood, 785 F.2d 1077, 1081 (D.C. Cir. 1986); see also Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116, 122 (11th Cir. 2021) (although statutory mootness precludes review of an unstayed order approving a sale to a good-faith purchaser, mootness under section 363(m) is not jurisdictional, but acts as a defense); In re Ern, LLC, 124 F. App'x 151, 152 (4th Cir. 2005) (dismissing an appeal of a sale order as moot because the assets had been transferred and the party challenging the sale failed to obtain a stay pending appeal); In re Rimoldi, 172 F.3d 876, 1999 WL 132260, *1 (9th Cir. 1999) ("This court has recognized only two exceptions to section 363(m)'s rule of mootness. The first applies where real property is sold subject to a statutory right of redemption; the second applies where state law otherwise would permit the transaction to be set aside.").
Other circuits, including the Third, Sixth, and Tenth Circuits, have rejected the view that section 363(m) automatically moots an appeal. Instead, those courts have held that an appeal is not moot as long as it is possible to grant effective relief without impacting the validity of the sale. See In re ICL Holding Co., Inc., 802 F.3d 547, 554 (3d Cir. 2015) (section 363(m) did not moot the government's appeal of the terms for the ordered distribution of escrowed funds for administrative expenses and settlement proceeds from the sale of substantially all of the debtors' assets since the...
