Written by Thomas R. Phinney and Paul J. Pascuzzi*
Welcome to the ninth annual edition of our article covering recent developments in bankruptcy law. We provide a summary of the facts, issues, and holdings from a mix of ten recent important and interesting bankruptcy decisions. In some cases, for simplicity and brevity, the facts are simplified. Unless otherwise noted, all references are to the Bankruptcy Code or Federal Rules of Bankruptcy Procedure.
Bankruptcy Code section 106(a) expressly abrogates the sovereign immunity of a "governmental unit" for specified purposes. That section says, "[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section." Section 106(a) enumerates a list of Bankruptcy Code provisions to which the abrogation applies, including section 362 (governing the automatic stay). The question for the Supreme Court in this case was whether that express abrogation extends to federally recognized Indian tribes.
Lac du Flambeau Band of Lake Superior Chippewa Indians (the "Band") is a federally recognized Indian tribe that operates a business known as Lendgreen. Lendgreen loaned $1,100 to Coughlin (the "debtor"), who later filed a chapter 13 bankruptcy case. The filing triggered the automatic stay of section 362, enjoining creditor collection efforts. Lendgreen, however, continued collection efforts notwithstanding the bankruptcy filing. The debtor filed a motion in the bankruptcy court to enforce the automatic stay and recover damages based on the emotional distress caused by the collection efforts. The bankruptcy court dismissed the suit on tribal sovereign immunity grounds. The First Circuit reversed, concluding that the Bankruptcy Code unequivocally abrogates tribal sovereign immunity.
The Supreme Court focused on two provisions of the Bankruptcy Code: (1) section 106(a), which, as mentioned, abrogates sovereign immunity of governmental units as to a number of Bankruptcy Code provisions, including the automatic stay, and (2) section 101(27), which defines a governmental unit to include the catchall phrase "other foreign or domestic governments." Clearly, section 106(a) abrogated sovereign immunity as to the automatic stay. The question then was whether the Band, as an Indian tribe, is considered a "governmental unit" under section 101(27).
The Court first noted that, to "abrogate sovereign immunity," Congress must make its intent "unmistakably clear in the language of the statute." The Court also noted that it has held that tribes possess
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the "common-law immunity from suit traditionally enjoyed by sovereign powers" and that its cases have repeatedly emphasized that tribal sovereign immunity, absent a clear statement of congressional intent to the contrary, is the "baseline position."
In examining section 101(27), the Court noted that "governmental unit" exudes comprehensiveness from beginning to end and that Congress included a long list of governments that vary in geographic location, size, and nature in that section. The Court found it significant that the abrogation of sovereign immunity in section 106(a) plainly applies to all governmental units. Congress did not cherry-pick certain governments from the list in section 101(27) and abrogate immunity only with respect to certain types of governmental units. Nor did Congress suggest that some types of governments should be treated differently than others in section 106(a). Instead, the Court found, Congress categorically abrogated the sovereign immunity of any governmental unit that may attempt to assert it.
The Court went on to find that federally recognized tribes certainly qualify as governments. Federally recognized tribes exercise uniquely governmental functions. For example, they have power to make their own substantive law in internal matters and to enforce that law in their own forums.
The Court concluded that the Bankruptcy Code unequivocally abrogates the sovereign immunity of all governments categorically. Tribes are indisputably governments. Therefore, section 106(a) unmistakably abrogates their sovereign immunity, and the automatic stay applied to enjoin Lendgreen's collection efforts.
Section 363(m) protects good faith buyers in bankruptcy sales. This statute provides that the reversal or modification "of an authorization under subsection (b) or (c) of [section 363] of a sale or lease of property does not affect the validity of a sale or lease [to a purchaser in good faith] . . . unless such authorization and such sale or lease were stayed pending appeal." When an appeal is pending relating to a sale to a good faith buyer, the question arises whether the appeal is moot or must be dismissed based upon section 363(m).
The Supreme Court, in a unanimous decision, held that section 363(m) is not jurisdictional, and that the appeal was not moot. Rather, section 363(m) is only a limitation on remedies against a good faith buyer on appeal.
In its chapter 11 case, the debtor (Sears) sold most of its assets to a buyer (Transform Holdco, LLC). The sale included (by later designation, and under a separate assignment order) the assignment of the debtor's lease of commercial space at the "Mall of America" from landlord (MOAC Mall Holdings, LLC). The landlord appealed the assignment order on the grounds that, among other things, the buyer did not provide "adequate assurance of future performance" as required by section 365(b)(3).
The district court dismissed the landlord's appeal based upon section 363(m). The Second Circuit also dismissed a further appeal, but quite reluctantly. The Second Circuit followed its own established precedent, which held that section 363(m) was jurisdictional, but pointed out that the buyer had represented in the bankruptcy court that it would not invoke the protections of section 363(m) against an appeal by landlord. Partly on that basis, the bankruptcy court had declined the landlord's request for a stay pending appeal. However, the buyer later reversed courses, and on appeal contended the dismissal of the appeal was required by section 363(m). The appeal court described the buyer's change of positions as "egregious misconduct," but held that such consideration did not affect jurisdictional issues.
The landlord appealed to the Supreme Court, which reversed and remanded. The Supreme Court resolved a Circuit Split over whether section 363(m) was "jurisdictional," such that if the appeal court found the statute to be applicable, dismissal of the appeal was mandatory. Most other circuits, including the Ninth Circuit, had held that it is not jurisdictional.
The Court's decision notes that in the past the Court was sometimes "loose" in its use of the word "jurisdiction": "[W]e only treat a provision as jurisdictional if Congress 'clearly states' as much."1 To the contrary, the Court said that "§ 363(m) takes as a given the exercise of judicial power over any authorization under § 363(b) or § 363(c)." The Court further noted that section 363(m) is not located in the jurisdictional statutes codified at 28 U.S.C. § 1334(a)-(b), (e) and § 157.
The buyer also argued that the appeal was moot even without regard to section 363(m), on the grounds that at the time of the appeal the lease had already been transferred out of the estate. According to the buyer, relief was impossible, because avoidance under section 549 (governing avoidance of unauthorized post-petition transfers) was the only basis on which to avoid the transfer of the lease and the debtor's right to utilize section 549 had
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been waived in the sale order, and also because the time to use section 549 had expired.
The Court rejected the argument, using phrasing that arguably weakens the scope of the doctrine of "equitable mootness," a doctrine relied upon by courts to dismiss bankruptcy appeals, including appeals from confirmation orders where the plans have been consummated. The Court said that a "case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party."2 The Court declined to "[plumb] the Code's complex depths in 'the first instance' to assure ourselves that [the buyer] is correct about its contention that no relief remains legally available."
The Court remanded the case to the Second Circuit, which in turn remanded the case to the district court. Following remand, the parties will still be contending with the express limitations of section 363(m) and its directive that an appeal of a sale to a good faith buyer does not affect the validity of the sale.
This case involves the requirements for a valid involuntary bankruptcy petition under section 303(b) and Bankruptcy Rule 1003. Section 303(b) provides that an involuntary bankruptcy petition (i.e., forcing someone into a bankruptcy case involuntarily) can be filed by a creditor or creditors of the potential debtor. If the potential debtor has more than twelve creditors holding unsecured, noncontingent, and undisputed claims that aggregate at least $16,750, then three or more such creditors must join in the involuntary petition. If there are fewer than twelve such creditors, then only one of them is needed to file an involuntary petition. Once an involuntary petition is filed (and if contested by the potential debtor), the...
