In Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019), the U.S. Court of Appeals for the Seventh Circuit held that section 363(m) of the Bankruptcy Code does not moot an appeal involving a dispute over the proceeds of a sale of assets in bankruptcy. In concluding that section 363(m) does not moot such an appeal, but merely provides the purchaser with a defense in litigation challenging the sale, the Seventh Circuit overruled its prior decision on the scope of section 363(m) in In re River West Plaza-Chicago, LLC, 664 F.3d 668 (7th Cir. 2011). According to the Seventh Circuit in Trinity 83, "We now hold that § 363(m) does not make any dispute moot or prevent a bankruptcy court from deciding what shall be done with the proceeds of a sale or lease." The court ultimately held that the bankruptcy court did not err in finding that a secured lender that mistakenly released its mortgage, but then unilaterally canceled the release before the borrower filed for bankruptcy or another party’s rights intervened, did not forfeit its rights in the collateral and its proceeds.
Mootness and Section 363(m)
"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.
By contrast, the judge-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 if the plan has been substantially consummated.
An appeal can also be rendered moot (or otherwise foreclosed) by statute. For example, section 363(m) of the Bankruptcy Code provides that "[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 … to an entity that purchased or leased such property in good faith." Although courts disagree on the point, section 363(m) has been interpreted "to render statutorily moot any appellate challenge to a sale that is both to a good faith purchaser, and not stayed." Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d 376, 383 (1st Cir. 2018). 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).
Section 363(m) serves important public-policy considerations. Maximization of value is a fundamental goal of the Bankruptcy Code. Toibb v. Radloff, 501 U.S. 157 (1991). By protecting the finality of bankruptcy sales, section 363(m) helps to maximize the value of a debtor’s estate by encouraging the participation of buyers who are assured that a deal consummated with a debtor or bankruptcy trustee will not be modified by an appellate court after a sale transaction closes. Weingarten Nostat, Inc. v. Serv. Merch. Co., 396 F.3d 737 (6th Cir. 2005).
The courts of appeals are split regarding whether section 363(m) automatically moots an appeal of an order approving a 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. Old Cold, 879 F.3d at 383; U.S. v. Salerno, 932 F.2d 117 (2d Cir. 1991); In re Sneed Shipbuilding, Inc., 916 F.3d 405 (5th Cir. 2019); In re Steffen, 552 F. App’x 946 (11th Cir. 2014); In re Magwood, 785 F.2d 1077 (D.C. Cir. 1986); see also In re Ern, LLC,124 F. App’x 151, 152 (4th Cir. 2005) (unpublished ruling) (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 Trism, Inc., 328 F.3d 1003, 1007 (8th Cir. 2003) (mooting under section 363(m) "a challenge to a related provision of an order authorizing the sale of the debtor’s assets" because the related provision was integral to the sale of the assets and reversing the provision would adversely alter the parties’ bargained-for exchange); In re Rimoldi, 172 F.3d 876, 1999 WL 132260, *1 (9th Cir. 1999) (unpublished ruling) ("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."). Before Trinity 83, the Seventh Circuit had strictly interpreted section 363(m). See River West, 664 F.3d at 671–72.
Other circuits, including the Third, Sixth, and Tenth Circuits, have rejected the view that section 363(m) automatically moots an appeal. Instead, these courts have held that an appeal is not moot so 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)...
