Section 363 Sales — Is Section 363(m) of the Bankruptcy Code Jurisdictional?
Many bankruptcy practitioners are familiar with the ubiquitous section 363(m) finding present in almost every bankruptcy court order involving the section 363 sale or lease of property of a debtor in bankruptcy. Section 363(m) provides that reversal or modification “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.” The importance of this finding most often presents itself in the dismissal of an appeal of a sale order by the debtor or unsuccessful bidder under the concept of equitable mootness. The concept of equitable mootness bars the prosecution of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for the reviewing court to address the merits of the appeal. In bankruptcy cases, appellees use the concept of equitable mootness to seek dismissal appeals involving orders approving the sale or lease of property under Section 363 or confirmation of a Chapter 11 plan. However, another avenue of defense involving the appeal of an order approving a sale or lease under Section 363 looms on the horizon.
For the second time in several months, the Second Circuit has ruled that the failure to obtain the stay of an order approving a sale is a jurisdictional bar to appeal under Section 363(m).
The issue was raised by the district court in MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 616 B.R. 615 (S.D.N.Y. 2020). In the underlying bankruptcy case, a landlord objected to the assignment of a lease, but the landlord’s objection was overruled by the bankruptcy court. On appeal, the district court initially reversed the bankruptcy court, holding that a provision in a lease cannot supplant the requirement in Section 365(b)(3)(A) mandating that the financial condition of an assignee of a lease must be “similar to the financial condition . . . of the debtor . . . as of the time the debtor became the lessee under the lease . . . .” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 613 B.R. 51 (S.D.N.Y. 2020).
Several days later, the purchaser of the lease filed a motion for rehearing. In its motion for rehearing, the purchaser contended for the first time that the appeal should be dismissed under Section 363(m) because the landlord did not obtain a stay pending appeal. Prior to this assertion, the purchaser had rather inconsistently asserted that the transaction was not a sale and that Section 363 did not apply.
Addressing the motion for rehearing, the district court recognized that the purchaser was now seeking to benefit from a complete reversal of its earlier position. 616 B.R. at 626. The district court asserted that the Second Circuit had twice held that Section 363(m) is “a jurisdiction-depriving statute.” Id. at 624 (citing In re WestPoint Stevens Inc., 600 F.3d 231, 248 (2d Cir. 2010) and In re Gucci, 105 F.3d 837, 838–840 (2d Cir. 1997)). The district court found that it lacked appellate jurisdiction, vacated its earlier opinion, and dismissed the appeal. The Second Circuit affirmed in a summary order. MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 2021 WL 5986997 (2nd Cir. Dec. 17, 2021).
The Second Circuit first found that Section 363(m) applied. The Second Circuit followed with the finding that Section 363(m) “also limits appellate review of any transaction that is integral to a sale authorized under § 363(b).”
Finding that Section 363(m) raises an issue of subject matter jurisdiction which arguably cannot be waived and raised for the first time on appeal, the Second Circuit found that the landlord’s argument “is foreclosed by our binding precedent in In re WestPoint Stevens Inc., under which § 363(m) deprived the District Court of appellate jurisdiction.” 2012 WL 5986997 (p.3). Several months earlier, the Second Circuit also asserted that Section 363(m) is jurisdictional because it “creates a rule of statutory mootness.” Pursuit Holdings (NY) LLC v. Piazza (In re Pursuit Holdings (NY) LLC, 845 Fed. Appx. 60, 62 (2d Cir. 2021).
This assertion that Section 363(m) is jurisdictional does not seem to have spread to other circuits. Asserting subject matter jurisdiction as a basis for dismissal raises a myriad of issues as there is no statutory exception for Section 363(m) found in 28 U.S.C. § 158, which specifies the appellate jurisdiction of district courts in bankruptcy matters. It certainly seems that the policy behind Section 363(m) can be furthered under the concept of equitable mootness rather than potentially opening flood gates to other jurisdictional exceptions under the Bankruptcy Code.
Only time will tell whether the “jurisdictional” limits of Section 363(m) will expand to other circuits. In the meantime, it is likely prudent for the appellee in such circumstances to raise jurisdiction as well as equitable mootness in its motion to dismiss the appeal of an order approving a Section 363 transaction.