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11th Cir. Rejects Debtors’ Challenge to Real Estate Collateral Sale Approved by Bankruptcy Court

The U.S. Court of Appeals for the Eleventh Circuit recently ruled that a debtor’s appeal of a sale order was statutorily mooted by Subsection 363(m) of the Bankruptcy Code.

In so ruling, the Eleventh Circuit held that: (1) while the Bankruptcy Code bars relief for an appeal pursuant to 11 U.S.C. § 363(m), it does not defeat jurisdiction; and (2) Subsection 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

A copy of the opinion in Reynolds v. ServisFirst Bank is available at:  Link to Opinion.

The underlying proceedings arose out of two separate Chapter 11 bankruptcy proceedings. The first proceeding involved two natural person debtors and the second proceeding involved the company owned by the debtors in the first proceedings (“company debtor”). Prior to declaring bankruptcy, the debtors and the company debtors borrowed money from the lender, each serving as guarantor for the other’s debt. The loans were secured by real property.

After declaring bankruptcy, the company debtor was granted permission by the bankruptcy court to acquire a debtor-in-possession loan from the lender which would “roll-up” the debt and provide an additional amount of working capital. None of the parties thought this loan would affect the lender’s lien on real property collateral.

Approximately a month later, the debtors filed a motion seeking approval of the sale of the real property to the lender, pursuant to 11 U.S.C. § 363(b), which provides for the sale of a bankruptcy estate’s assets outside the normal course of business. The sale was approved “via a credit bid of $3.5 million” under 11 U.S.C. § 363(k). In approving the sale, the bankruptcy court expressly found that the lender was “a good faith purchaser under Section 363(m) of the Bankruptcy Code.”

After final approval of the sale, the debtors asserted that the lender’s roll-up loan to the company debtor had paid off their own debts to the lender and eliminated the lender’s lien on their real property. The debtors filed a motion to amend the sale order and stay the sale.

The motion was rejected by the bankruptcy court as: (1) the only effect the roll-up loan had on the debtors’ loans was making the company debtor a co-obligor rather than a guarantor; and (2) the debtors were foreclosed from arguing that the lender lacked a biddable interest in the property after final approval of the sale.

The bankruptcy court further ruled that equitable estoppel, judicial estoppel, and the law of the case barred the debtors from amending the sale on the ground that the lender lacked a biddable interest in the property. The bankruptcy court also held that the roll-up loan consolidated the company debtor’s obligations, making it an obligor or co-obligor in all debt owed to the lender without eliminating the debtors’ obligations to the lender.

The debtors appealed the sale order and the order denying their motion to amend, and petitioned the bankruptcy court to stay the sale pending appeal. The bankruptcy court agreed to grant the stay on condition that the debtors post a supersedeas bond which they failed to do.

The debtors ultimately gave the executed deed to the property to the lender and the deed was duly recorded. After the sale was consummated, the lender moved to dismiss the appeal as moot under 11 U.S.C. 363(m) and the motion was granted by the district court, which held that because the debtors did not obtain a stay or prevent the sale from being completed, the trial court lacked authority to grant effective relief under the Bankruptcy Code, which rendered the appeal moot.

The debtors then appealed the district court’s decision.  The basis for the appeal was that the lender was not a good faith purchaser under the Bankruptcy Code provision which governs sales of debtor assets.

Under Subsection 363(m) of the Bankruptcy Code, district and appellate courts are precluded from reversing or modifying a bankruptcy court’s authorization of a sale of a bankruptcy estate’s property to someone who “purchased … such property in good faith” under subsection 363(b) or (c) unless the sale was stayed pending appeal. 11 U.S.C. 363(m).

Although the Bankruptcy Code bars relief for an appeal pursuant to subsection 363(m) it does not defeat jurisdiction. However, as any opinion on the propriety of the transaction would be advisory-only, the appellate court considers such statutory appeals moot. See Chafin v. Chafin, 568 U.S. 165, 172 (2013).

The Eleventh Circuit here found that subsection 363(m) applied to the debtor’s appeal, holding that section 363(m) applies to appeals from any sale authorized by the bankruptcy court, not just those properly authorized by the Bankruptcy Code.

The Court held that Subsection 363(m) is a flat rule, but acknowledged the applicability of Subsection 363(m) is still conditioned on the presence of (1) the failure of the appellant to obtain a stay of the sale order, and (2) a sale transacted with “an entity that purchased or leased [the] property in good faith.”

Thus, the Eleventh Circuit held that appellate courts could assess whether a buyer acted in good faith in determining whether Subsection 363(m) moots an appeal.  Here, the Appellate Court found no evidence that the lender engaged in fraudulent behavior. The Court further found that the lender’s lien had value enough to support the bankruptcy court’s fact-finding that the lender was a good faith purchaser.

Having established that the debtors’ appeal was covered by Subsection 363(m), the Eleventh Circuit went on to affirm the district court’s ruling that the relief sought by the debtors was precluded, thereby mooting their appeal.

The debtors finally argued, that rather than unwinding the sale, the Court could make the lender pay cash for the property. However, the Eleventh Circuit held that because this relief would change the sale price after the fact, it would affect the validity of the sale on appeal. Thus, the Court reasoned, if it ordered the lender to pay an amount other than that which it bid and which the bankruptcy court approved, the Court would be undoing the sale itself, which they do not have the power to do under 363(m).

Therefore, as the statute forbids the appellate court from providing a remedy, the Eleventh Circuit held that the appeal was moot.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in New York, and her Illinois admission on motion is pending.

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