Article 363 Sales – Is Article 363 (m) of the Bankruptcy Code jurisdictional? | Nelson Mullins Riley & Scarborough LLP

Many bankruptcy practitioners are familiar with the ubiquitous section 363 (m) conclusion found in almost all bankruptcy court orders involving the sale or lease of property of a bankrupt debtor under section 363. Article 363 (m) provides that the cancellation or modification of an authorization under paragraph (b) or (c) of this article of a sale or lease of property does not affect not the validity of a sale or lease under such authorization to an entity that bought or leased that good in good faith, whether or not that entity was aware of the pending appeal, to unless this authorization and this sale or rental have been suspended pending the appeal. The significance of this conclusion most often arises in the dismissal of an appeal of a sale order by the debtor or the unsuccessful bidder under the concept of equitable non-compliance. The concept of theoretical fairness precludes the prosecution of an appeal where an overall change of circumstances has occurred such that it would be unfair for the reviewing court to consider the merits of the appeal. In bankruptcy cases, respondents use the concept of fair non-compliance to seek dismissal appeals involving orders approving the sale or lease of property under section 363 or the confirmation of a Chapter 11 plan. However, another line of defense involving appealing an order approving a sale or lease under Section 363 is looming.

For the second time in several months, the Second Circuit has ruled that failure to obtain a stay of an order approving a sale is a ban on appeal under section 363 (m).

The question was raised by the district court of MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 616 BR 615 (SDNY 2020). In the underlying bankruptcy case, a landlord objected to the assignment of a lease, but the landlord’s objection was dismissed by the bankruptcy court. On appeal, the district court initially overturned the bankruptcy court, ruling that a provision in a lease cannot override the requirement of section 365 (b) (3) (A) requiring that the financial position d ‘an assignee of a lease must be’ similar in financial standing. . . of the debtor. . . from the moment the debtor becomes a tenant under the lease. . . . ” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 613 BR 51 (SDNY 2020).

A few days later, the purchaser of the lease files a request for review. In its request for a rehearing, the purchaser argued for the first time that the appeal should be dismissed under section 363 (m) because the owner had not been granted a stay pending appeal. Prior to this assertion, the purchaser had asserted rather inconsistently that the transaction was not a sale and that Section 363 did not apply.

Addressing the petition for review, the district court acknowledged that the buyer was now seeking a complete reversal of its previous position. 616 BR to 626. The District Court asserted that the Second Circuit had twice ruled that Section 363 (m) was “a law depriving it of jurisdiction”. Identifier. to 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 ruled that it lacked appeal jurisdiction, quashed its earlier opinion and dismissed the appeal. The Second Circuit confirmed in a summary order. MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 2021 WL 5986997 (2nd Cir. 17 Dec. 2021).

The second circuit first found that section 363 (m) applied. The Second Circuit found that Section 363 (m) “also limits appellate review of any transaction forming part of a sale authorized under Section 363 (b)”.

Finding that Section 363 (m) raises a question of substantive jurisdiction which arguably cannot be waived and raised for the first time on appeal, the Second Circuit concluded that the owner’s argument “is excluded by our binding precedent. in In the case of WestPoint Stevens Inc., under which section 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 legal non-compliance”. Pursuit Holdings (NY) LLC v Piazza (In re Pursuit Holdings (NY) LLC, 845 Fed. Approx. 60, 62 (2nd Cir. 2021).

This assertion that Article 363 (m) is jurisdictional does not appear to have spread to other circuits. Asserting jurisdiction over the matter as the basis for termination raises a myriad of issues as there is no statutory exception for section 363 (m) found in 28 USC § 158, which specifies the appellate jurisdiction of the courts of district in bankruptcy. It certainly seems that the policy behind Section 363 (m) could be reinforced under the concept of fair non-compliance rather than potentially opening the floodgates to other jurisdictional exceptions under the Bankruptcy Code.

Only time will tell if the “jurisdictional” limits of Section 363 (m) will extend to other circuits. In the meantime, it is probably prudent for the respondent in such circumstances to invoke jurisdiction as well as the mootness of equity in its motion to dismiss an appeal from an order approving a settlement under the Act. section 363.

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