On February 20, 2024, the United States Court of Appeals for the Fifth Circuit issued an Opinion, which held that challenges to “integral” aspects of a bankruptcy sale are statutorily moot under Bankruptcy Code § 363(m).1 In doing so, the Fifth Circuit affirmed the decision of the District Court for the Southern District of Texas,2 which had affirmed the confirmation order of the Bankruptcy Court for the Southern District of Texas3 in the chapter 11 cases (the “Chapter 11 Cases”) of Fieldwood Energy Inc. and certain of its affiliates (“Fieldwood”).
Asset sales under Bankruptcy Code § 363 are an important tool in complex chapter 11 cases, and finality of § 363 sale orders is critical to buyers. Bankruptcy Code § 363(m) provides for “statutory mootness” of appeals of § 363 sale orders,4 and the Opinion clarifies the application of § 363(m), following the recent decision in MOAC Mall Holdings LLC v. Transform Holdco LLC,5 in which the United States Supreme Court unanimously held that Bankruptcy Code § 363(m)’s statutory limitations are not jurisdictional, though they are “important” directives.
Background and Procedural History
Fieldwood, a Houston-based oil and gas exploration and production company with assets in both the deep and shallow waters of the Gulf of Mexico, filed the Chapter 11 Cases in the Bankruptcy Court in August 2020.6 Fieldwood’s plan of reorganization (the “Plan”) included, among other things, the sale of certain of Fieldwood’s assets to an entity controlled by a credit bid purchaser. The consideration for the purchase of the assets included a credit bid of approximately $1.03 billion and up to $105 million in cash.
During the Chapter 11 Cases, several surety companies that had issued prepetition surety bonds to Fieldwood (the “Sureties”) objected to confirmation of the Plan, which included a divisive merger through which Fieldwood would allocate the surety bonds to one entity, FWE I, but related indemnity agreements to a different entity, FWE III. The Sureties argued this structure would allow FWE I to use the surety bonds to pay for plugging and abandonment liabilities while depriving the relevant Sureties of their indemnity rights and premiums related to the bonds. The Sureties also objected that the Debtors’ transfer and abandonment of assets covered by bonds would violate the United States Supreme Court’s Midlantic decision, which limits a debtor’s ability to abandon property where the public’s health and safety is not adequately protected.7
Following a five-day contested hearing, the Bankruptcy Court overruled the Sureties’ objections and ordered that the § 363 sale and allocation of assets to the new entities would be “free and clear” of liens, claims, encumbrances, and other such interests pursuant to Bankruptcy Code § 363(f) supported by a finding that the sale was “unlikely to close” if it were modified as proposed by the Sureties.8 The Bankruptcy Court further found that the sale’s success was key to the government’s decision to withhold a potential Midlantic objection. On June 30, 2021, certain Sureties filed a notice of appeal in the Bankruptcy Court9 and, on July 2, 2021, filed an emergency motion in the Bankruptcy Court seeking a stay of the Confirmation Order.10 On July 6, 2021, the Bankruptcy Court denied the Sureties’ motion for a stay, holding that the Sureties had not satisfied any of the factors courts in the Fifth Circuit consider when determining whether a stay is warranted.
On March 7, 2023, the District Court affirmed the Confirmation Order, concluding that the appeal was statutorily moot under § 363(m), which “patently protects, from later modification on appeal, an authorized sale where the purchaser acted in good faith and the sale was not stayed pending appeal,” and also equitably moot.11 Given that the Sureties sought but failed to obtain a stay, the District Court proceeded to assess whether the aspects of the sale that the Sureties challenged were integral thereto. Relying on the Bankruptcy Court’s findings and testimony by the CEO of QuarterNorth Energy LLC, the purchaser, that purchasing debtor’s assets free and clear of the Sureties’ subrogation rights was paramount to the credit bid purchaser’s decision to consummate the sale and provide additional capital, the District Court deemed the elimination of the Sureties’ subrogation rights to be integral to the sale, and held that the Sureties’ appeal was statutorily moot under § 363(m).
On March 16, 2023, the Sureties appealed the District Court’s ruling to the Fifth Circuit.
The Opinion
The Opinion affirmed the District Court’s ruling that the Sureties’ appeal was statutorily moot under § 363(m).12 Specifically, the Fifth Circuit rejected the Sureties’ interpretation of MOAC Mall, in which the Supreme Court held that § 363(m) is not jurisdictional (and, thus, can be waived). The Sureties argued that MOAC “fundamentally narrowed the provision’s ability to bar relief on appeal,” but the Fifth Circuit “perceive[d] no narrowing of the effect of [§] 363(m) other than to clarify that a party can lose the benefit of its terms,” stating that “[§] 363(m) is alive and well and waivable” but “was not waived here.”13 The Fifth Circuit reiterated that “compliance with [§] 363(m) was ‘important and mandatory.’”14 The Opinion also rejected the Sureties’ argument that § 363(m) does not apply because the Sureties sought a stay in the Bankruptcy Court, holding instead that § 363(m) applies unless the sale is stayed pending appeal.15 Finally, the Fifth Circuit determined, supported by the testimony of QuarterNorth’s CEO,16 that the Bankruptcy Court’s findings that the sale was unlikely to close if the Sureties’ proposed modifications were made were plausible in light of the record read as a whole and not clearly erroneous.17
Key Takeaways
Sale transactions are an important aspect of modern chapter 11 practice as they allow parties to close a value-maximizing transaction with the protection of a bankruptcy court sale order. Permitting dissatisfied parties to appeal sale orders and retroactively alter the rights of good faith buyers and other parties in interest without obtaining a stay pending appeal could hamper the willingness of buyers to participate in and close such sale transactions. The Opinion should bolster the confidence of prospective buyers in § 363 sales in the Fifth Circuit that integral provisions in an approved sale order will not later be modified unless a stay has been granted by the bankruptcy court. As was done in Fieldwood, parties should make a fulsome record to support findings regarding good faith of the purchaser and that sale terms are integral aspects of the sale.
1 Swiss Re Corporate Solutions Am. Ins. Co. v. Fieldwood Energy III, L.L.C. (Matter of Fieldwood Energy LLC), No. 23-20104, __ F.4th __, 2024 WL 686207 (5th Cir. Feb. 20, 2024) (the “Opinion” of the “Fifth Circuit”).
2 In re Fieldwood Energy III LLC, No. 4:21-CV-2201, 2023 WL 2402871 (S.D. Tex. Mar. 07, 2023) (“District Court Decision” of the “District Court”).
3 Findings of Fact, Conclusions of Law, and Order (I) Confirming Eighth Amended Joint Chapter 11 Plan of Fieldwood Energy LLC and Its Affiliated Debtors and (II) Granting Related Relief, In re Fieldwood Energy LLC, No. 20-33948 MI, 2021 W L 2853151 (Bankr. S.D. Tex. June 25, 2021) [D.I. 1751] (the “Confirmation Order” of the “Bankruptcy Court”).
4 Bankruptcy Code § 363(m) provides:
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section 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.
11 U.S.C. § 363(m) (2020).
5 MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 301 (2023).
6 This was Fieldwood’s second bankruptcy filing following chapter 11 cases commenced in February 2018.
7 See Midlantic Nat. Bank v. N.J. Dept. of Envtl. Prot., 474 U.S. 494, 502 (1986).
8 See Opinion at *1 See also Confirmation Order, at *1.2.
9 Notice of Appeal, In re Fieldwood Energy LLC, No. 20-33948 MI (Bankr. S.D. Tex. June 30, 2021) [D.I. 1782].
10 Emergency Motion of Aspen American Insurance Company, Berkley Insurance Company and Sirius America Insurance Company for a Stay, pursuant to Bankruptcy Rule 8007, of the Order Confirming Eighth Amended Joint Chapter 11 Plan of Fieldwood Energy LLC and its Affiliated Debtors, or in the Alternative, for an Order Amending the Confirmation Order, pursuant to Bankruptcy Rule 9023, at *9-10, In re Fieldwood Energy LLC, No. 20-33948 MI (Bankr. S.D. Tex. July 2, 2021) [D.I. 1796].
11 District Court Decision, at *3.
12 The Fifth Circuit declined to reach the District Court’s alternative holding that the Sureties’ appeal was also equitably moot.
13 Opinion, at *3-4.
14 Id. at *3.
15 Id. at *4 (emphasis added).
16 Id.
17 Id. at *6.
