United States: Fifth Circuit Doubles Down On Statutory Mootness Approach To Bankruptcy Sales

In Tanguy v. West (In re Davis), 2018 WL 4232063 (5th Cir. Sept. 5, 2018), the U.S. Court of Appeals for the Fifth Circuit revisited the circumstances under which section 363(m) of the Bankruptcy Code moots an appeal of a bankruptcy court's order approving a sale of assets. The Fifth Circuit reaffirmed its adherence to the majority rule on the issue, ruling that, absent evidence that the purchaser did not acquire the property in good faith, the challengers' failure to obtain a stay pending appeal moots any appeal of a sale order. The court also held that the challengers abandoned any argument that the appeal was not moot by failing to raise it before the bankruptcy court.

Mootness Under 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.

An appeal can be rendered moot by statute as well. For example, section 363(m) of the Bankruptcy Code provides that the reversal or modification on appeal of an order authorizing a sale of assets does not affect the validity of the sale if the purchaser acted in "good faith" and the party challenging the sale failed to obtain a stay pending appeal:

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) (citing Licensing by Paolo v. Sinatra (In re Gucci), 126 F.3d 380 (2d Cir. 1997)).

The statutory mootness provided by 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). Because it protects the finality of bankruptcy sales, section 363(m) maximizes 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 usually 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) (citing Anheuser-Busch, Inc. v. Miller (In re Stadium Mgmt. Corp.), 895 F.2d 845 (1st Cir. 1990)).

The courts of appeals are split regarding whether section 363(m) automatically moots an appeal under all circumstances.

A majority of the circuits, including the First, Second, Fifth, Seventh, Eleventh, and D.C. Circuits, have generally adopted a per se rule that an appeal of a sale order is automatically mooted if the closing of the sale is not stayed pending appeal. See Ginther v. Ginther Trusts (In re Ginther Trusts), 238 F.3d 686 (5th Cir. 2001); U.S. v. Salerno, 932 F.2d 117 (2d Cir. 1991); In re Stadium Mgmt. Corp., 895 F.2d 845 (1st Cir. 1990); In re Charter Co., 829 F.2d 1054 (11th Cir. 1987); In re Sax, 796 F.2d 994 (7th Cir. 1986); In re Magwood, 785 F.2d 1077 (D.C. Cir. 1986). These courts have based the per se rule on the language of section 363(m) and the associated public policy considerations—in particular, maximizing value by protecting the finality of bankruptcy sales. See Salerno, 932 F.2d at 123 (discussing the public policy behind the finality of bankruptcy sales); Stadium Mgmt., 895 F.2d at 847 (same); Sax, 796 F.2d at 998 (same).

The minority approach, adopted by the Third, Sixth, and Tenth Circuits, rejects 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 Brown v. Ellmann (In re Brown), 851 F.3d 619 (6th Cir. 2017) (finding that parties alleging statutory mootness under section 363(m) must prove that the reviewing court is unable to grant effective relief); Krebs Chrysler-Plymouth, Inc. v. Valley Motors, 141 F.3d 490 (3d Cir. 1997) (holding that an appeal was moot under section 363(m) only after examining each remedy requested by the appellant and determining that each affected the validity of the sale); 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).

The Fifth Circuit revisited this issue in Davis.

Davis

In 2007, Richard Davis commenced a chapter 7 case in the Southern District of Texas. In an adversary proceeding, the chapter 7 trustee obtained a judgment against Philippe Tanguy and two businesses owned and operated by him (collectively, the "Appellants") on a promissory note. To collect on the judgment, the trustee commenced a receivership proceeding against the Appellants in Texas state court, where he recovered a parcel of real property (the "Property") owned by the Appellants on behalf of the chapter 7 estate.

The Appellants, however, disputed that the bankruptcy estate held good title to the Property, claiming that the state court receivership was a "sham." The trustee subsequently filed a motion to sell the Property free and clear of competing interests under section 363(f) of the Bankruptcy Code. The bankruptcy court initially denied the motion, deciding to abstain until the state courts resolved the Property ownership/receivership dispute.

The trustee renewed his motion to sell the Property after a state appellate court upheld the legitimacy of the receivership and the trustee's acquisition of the Property. After an auction, the bankruptcy court overruled the Appellants' objections and approved the sale of the Property to Croix Custom Homes ("Croix")—the only bidder. The Appellants appealed the sale order but did not seek a stay pending appeal.

In the district court, the trustee moved to dismiss the appeal, arguing that, because the Appellants neither sought nor obtained a stay pending appeal, the appeal was moot under section 363(m).

The Appellants countered that, because the Property was subject to a state court receivership and the bankruptcy court had previously abstained from resolving the ownership dispute, the bankruptcy court lacked jurisdiction to approve the sale of the Property. However, nowhere in their objection to the motion to dismiss did the Appellants address the trustee's contention that section 363(m) mooted the appeal. The district court dismissed the appeal as moot, and the Appellants appealed to the Fifth Circuit.

The Fifth Circuit's Ruling

The sole issue on appeal to the Fifth Circuit was the district court's decision that the appeal was moot under section 363(m). According to the trustee, the Appellants abandoned any argument contesting this issue because they failed to address it in their submissions below or in their initial briefs filed with the Fifth Circuit. The Appellants countered that their submissions "implicitly" challenged Croix's good faith in purchasing the property, thereby preserving their argument under section 363(m).

Initially, the Fifth Circuit noted that "[a]n assertion that a ruling is being appealed, in the absence of any argument in the body of the brief supporting the appeal, does not preserve the issue on appeal" (citations and internal quotation marks omitted).

The Fifth Circuit rejected the Appellants' "implicit challenge" argument. First, it explained that "[w]e have previously suggested that good faith is a separate argument from § 363(m), such that arguing good faith alone would not preserve an argument that a case was not moot under § 363(m)" (citing Black v. Shor (In re BNP Petroleum Corp.), 642 F. App'x 429, 434 (5th Cir. 2016) (determining that a mootness argument under section 363(m) was abandoned, despite the fact that good faith was briefed)).

Next, the Fifth Circuit concluded that, even if a good-faith argument could preserve a section 363(m) mootness argument for appeal, the Appellants did not contest Croix's (the purchaser's) good faith in their opening briefs, but instead contended that the trustee acted without good faith in failing to adequately disclose the facts surrounding the state court litigation. According to the Fifth Circuit, the trustee's good faith is irrelevant to section 363(m), which focuses on the good faith of the purchaser.

Finally, the Fifth Circuit emphasized that a litigant may not challenge a purchaser's good-faith status under section 363(m) for the first time on appeal. The issue must first be raised in the bankruptcy court. Therefore, the court held that the Appellants had abandoned their argument regarding Croix's status as a good-faith purchaser and that the Appellants had also abandoned their argument that the appeal of the sale order was not moot.

Even if they had not done so, the Fifth Circuit explained, it would still affirm the district court's ruling that the appeal was moot under section 363(m) under the per se mootness rule. "[A]bsent a lack of good faith," the court wrote, "any appeal brought . . . is moot following sale of the property when there was no stay pending appeal," even if the party challenging the sale argues that the bankruptcy court did not have jurisdiction to authorize it (citing Ginther v. Ginther Trs. (In re Ginther Trs.), 238 F.3d 686, 689 (5th Cir. 2001); Gilchrist v. Westcott (In re Gilchrist), 891 F.2d 559, 560–61 (5th Cir. 1990)).

The court rejected the Appellants' argument that they never had an opportunity to contest Croix's good faith in the bankruptcy court because the court estopped them from making that argument on the basis of their lawyers' statements at a status conference that the Appellants did not oppose the sale. According to the Fifth Circuit, the Appellants were never barred from making a bad-faith argument, yet they failed to do so in any of their submissions to the bankruptcy court in connection with the sale of the Property or in contesting the court's order approving it.

Outlook

In Davis, the Fifth Circuit reaffirmed that it remains in the majority camp on the issue of statutory mootness under section 363(m) of the Bankruptcy Code. According to this approach, in the absence of a showing that a purchaser or lessor did not acquire or lease property in good faith, the failure to obtain a stay pending appeal of an order approving a sale or lease of property moots the appeal. The other takeaway from the Fifth Circuit's ruling in Davis is that a party challenging a sale must expressly raise the issue of the purchaser's good faith in the bankruptcy court to preserve the issue for appeal.

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