The finality of sales of assets in bankruptcy is an indispensable feature of U.S. bankruptcy law, designed to maximize the value of a bankruptcy estate as expeditiously as possible for the benefit of all stakeholders. Promoting the finality of bankruptcy asset sales is the Bankruptcy Code's prohibition of reversal or modification on appeal of an order approving a sale to a good-faith purchaser unless the party challenging the sale obtains a stay pending appeal. This bar of appellate review is commonly referred to as "statutory mootness."
The U.S. Court of Appeals for the Eleventh Circuit recently addressed the statutory mootness concept in Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116 (11th Cir. 2021). Two of the three judges on the Eleventh Circuit panel ruled that an unstayed order approving a sale to a good-faith purchaser is moot on appeal, even if the sale was not properly authorized under the Bankruptcy Code. The third judge reached the same result, but for a different reason, because he determined that the debtors were precluded from challenging a sale that they had requested.
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. The doctrine of equitable mootness is sometimes criticized as an abrogation of federal courts' "virtually unflagging obligation" to hear appeals within their jurisdiction. See In re One2One Commc'ns, LLC, 805 F.3d 428, 433 (3d Cir. 2015); In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012). The U.S. Supreme Court in 2021 declined invitations to address this doctrine (see GLM DFW, Inc. v. Windstream Holdings, Inc., No. 21-78 (U.S. Oct. 4, 2021) (denying petition for certiorari).
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." 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); 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. Old Cold, 879 F.3d at 383; U.S. v. Salerno, 932 F.2d 117 (2d Cir. 1991); In re Walker County Hospital Corp., 3 F.4th 229 (5th Cir. 2021); 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) (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.").
Statutory mootness under section 363(m) can preclude appellate review not only of an unstayed sale order, but also orders approving transactions that are an integral part of the sale. See, e.g., In re Sears Holdings Corp., 2021 WL 5986997 (2d Cir. Dec. 17, 2021) (in a nonprecedential summary order, affirming a district court order dismissing an appeal of an order approving an assignment of a lease that was "integral" to a sale transaction and noting that, "We have held in no ambiguous terms that section 363(m) is a limit on our jurisdiction and that, absent an entry of a stay of the Sale Order, we only retain authority to review challenges to the 'good faith' aspect of the sale" (internal quotation marks and citations omitted)); In re Pursuit Holdings (NY), LLC, 845 Fed. App'x 60 (2d Cir. 2021) (the statutory mootness rule indisputably applies to challenges to any integral provision of an order approving a sale, such as a settlement); 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 alter the parties' bargained-for exchange).
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 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 court could order redistribution of the sale proceeds without disturbing the sale); Brown v. Ellmann (In re Brown), 851 F.3d 619 (6th Cir. 2017) (holding that parties alleging statutory mootness under section 363(m) must prove that the reviewing court is unable to grant effective relief); Osborn v. Duran Bank & Trust Co. (In re Osborn), 24 F.3d 1199 (10th Cir. 1994) (holding that an appeal of a sale order was not mooted by section 363(m) when under Texas state law a constructive trust could be imposed on the sale proceeds), abrogated in part on other grounds by Eastman v. Union Pac. R.R., 493 F.3d 1151 (10th Cir. 2007); In re C.W. Min. Co., 740 F.3d 548, 555 (10th Cir. 2014) (section 363(m) will moot appeals in cases where the only remedies available are those that affect the validity of the sale).
In Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019), the Seventh Circuit held that section 363(m) did not moot an appeal involving a dispute over the proceeds of a sale of assets in bankruptcy. In concluding that section 363(m) merely provided the purchaser with a defense in litigation challenging the sale, the Seventh Circuit overruled its prior decision strictly construing the scope of section 363(m) in In re River West Plaza-Chicago, LLC, 664 F.3d 668, 671-72 (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." Trinity 83, 917 F.3d at 602.
The Eleventh Circuit revisited statutory mootness under section 363(m) in Stanford.
Robert and Frances Stanford were the owners of American Printing Company ("APC"). The Stanfords and APC filed separate chapter 11 cases in May 2019 in the Northern District of Alabama. At that time, the Stanfords owed ServisFirst Bank ("SFB") approximately $5 million. The loan was secured by a lien on a parcel of commercial real estate ("Property") and certain other property owned by the couple. APC guaranteed the loan. APC was also indebted to SFB for approximately $7.2 million on a secured basis under a separate loan guaranteed by the Stanfords.
APC sought bankruptcy court approval to incur up to $13.2 million in debtor-in-possession ("DIP") financing from SFB that would "roll up" the $12.2 million in prepetition debt that it owed or guaranteed and provide the company with an additional $1 million in working capital. The court authorized the loan.
Shortly afterward, the Stanfords sought court approval in their chapter 11 case to sell the Property to SFB for $3.5 million via a "credit bid" of SFB's secured claim. Section 363(k) of the Bankruptcy Code provides that a creditor with a lien on assets to be sold outside the ordinary course of business under section 363(b) may credit bid its "allowed claim" at the sale, "unless the court for cause orders otherwise."
The bankruptcy court approved the sale. In its order, the court found that SFB was a good-faith purchaser under section 363(m) of the Bankruptcy Code, that the credit-bid consideration was the highest and/or best offer for the Property, and that the consideration to be paid to the Stanfords exceeded the liquidation value of the Property.
After the court approved the sale, however, the Stanfords claimed that SFB did not have the right to credit bid. They argued that: (i) the SFB roll-up loan to APC satisfied their debt to SFB and extinguished SFB's lien on the Property; (ii) the roll-up loan converted SFB's prepetition claims against them and APC into postpetition administrative claims solely against APC; and (iii) because SFB never required them to guarantee the roll-up loan, they had no remaining prepetition obligations to SFB. The Stanfords accordingly filed a motion to amend the sale order and to stay the sale.
The bankruptcy court denied the motion. It ruled that, except for making APC a co-obligor on the Stanfords' $7.2 million debt to SFB, the roll-up loan to APC had no impact on that debt or the lien securing it. The court also held that the Stanfords were foreclosed from arguing, after final approval of their motion to sell the Property, that SFB lacked "a biddable interest" in the Property.
The Stanfords appealed the sale order and the order denying their motion to amend it to the district court. They also asked the bankruptcy court to stay the sale order pending appeal, which relief the court granted conditioned on the posting of a $1.5 million bond. The Stanfords failed to post the bond, after which the sale of the Property was duly recorded.
SFB moved for dismissal of the appeal to the district court as moot under section 363(m). The district court granted the motion, explaining that it lacked authority to grant any effective relief because the Stanfords neither obtained a stay nor prevented the sale from being completed.
The Stanfords appealed to the Eleventh Circuit.
The Eleventh Circuit's Ruling
Writing for two judges on a three-judge panel, Circuit Judge Andrew L. Brasher explained that, 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.
Judge Brasher rejected the Stanfords' argument that section 363(m) does not protect from review all transactions authorized by bankruptcy courts but only transactions specifically authorized by the Bankruptcy Code, which they claimed was not the case here because SFB's credit bid was invalid. He explained that the plain language of section 363(m)—"an authorization under subsection (b) or (c) of this section"—makes it clear "that all 'authorizations' are covered, not just those that may be proper under the Code." Stanford, 17 F.4th at 123.
Moreover, Judge Brasher noted, the applicability of the rule is "further clarified by the conditional phrase 'unless such authorization … were stayed[,]' … which further establishes that Section 363(m) moots appeals from any authorization by a court, because a court order—unlike a Code provision—can be stayed." Id. According to Judge Brasher, this interpretation is consistent with its previous ruling on the scope of section 363(m) in In re The Charter Co., 829 F.2d 1054 (11th Cir. 1987).
Judge Brasher further noted that the Stanfords were not challenging the credit bidding "mechanism" under section 363(k) but merely a specific transaction involving a credit bid that they claimed was invalid.
The Stanfords asserted that SFB was not entitled to section 363(m)'s protections because they did not purchase the Property in good faith. In particular, they argued that, as a result of the roll-up loan's alleged extinguishment of the lien on the Property, SFB lacked any interest in the Property, and its credit bid failed to "give value" for the transaction, which is typically required for a purchase to be in good faith. Once again, Judge Brasher rejected the Stanfords' argument. In doing so, Judge Brasher found no fault with the bankruptcy court's findings that the sale was noncollusive, fair, and reasonable, conducted at arm's length, and resulted in the estate's realization of the highest and best value for the Property. He also emphasized that the Stanfords themselves previously asserted in their motion to approve the sale that SFB was a good-faith purchaser within the meaning of section 363(m).
Judge Brasher explained that, even if SFB's lien were disputed, courts have permitted credit bidding of disputed secured claims. In addition, he observed, SFB's credit bid was of sufficient value and SFB's lien "had value enough" to support the bankruptcy court's finding that SFB was a good-faith purchaser. Id. at 125.
Finally, the Eleventh Circuit ruled that the relief sought by the Stanfords—ordering SFB to pay $3.5 million in cash rather than unwinding the sale—was foreclosed by section 363(m). As the court had previously explained in Charter Company, Judge Brasher wrote, "by ordering [SFB] to pay something other than what it bid and the bankruptcy court approved, we would be undoing the sale itself, which we are powerless to do under [section] 363(m)." Id.
Concurring in the ruling, Circuit Judge Adalberto Jordan found "tension" between two Eleventh Circuit decisions on whether section 363(m) moots appeals when the appellant is challenging the underlying authorization. However, he skirted the issue because the Stanfords had not challenged "the credit bid mechanism." Id. at 127 (concurring opinion).
Instead, Judge Jordan concurred by invoking the "invited error doctrine," under which litigants (including debtors) cannot "appeal an order, action, or ruling that they invited or requested." Id.
Judge Jordan also questioned the validity of roll-up DIP loans, noting that the Eleventh Circuit previously banned the cross-collateralization of prepetition debt with pre- and postpetition assets. Id. (citing In re Saybrook Manufacturing Co., Inc., 963 F.2d 1490 (11th Cir. 1992)).
In Stanford, the Eleventh Circuit doubled down on its view that section 363(m) acts as a formidable roadblock to appellate review of unstayed bankruptcy sale orders, particularly where a challenge to an authorized sale does not involve the purchaser's good faith. Notably, it appeared that both the majority and concurring judges were critical of the debtors' efforts to challenge a sale that they had requested.