The US Bankruptcy Code (USBC) provides finality and predictability for entities that purchase or lease property from a Chapter 11 Bankruptcy estate. Federal law upholds the validity of the sale or lease even if the bankruptcy court’s approval of the transaction is challenged on appeal. Federal courts were split on whether they had jurisdiction to adjudicate matters concerning sales or leases approved by a bankruptcy court. The Supreme Court resolved the issue and ruled that the USBC’s limitations on a reviewing court’s actions were non-jurisdictional.
Recently, a Fifth Circuit appellate court considered what the Supreme Court’s ruling meant for the USBC provisions upholding the validity of bankruptcy court-authorized sales or leases. The court concluded the Supreme Court’s ruling made no substantive changes to the USBC, which is good news for purchasers of assets in bankruptcy.
Section 363(m) of the Federal Bankruptcy Code
Section 363 of the USBC allows debtors to sell assets that are not part of normal business operations free and clear of security and lien interests. This process benefits debtors, creditors, and buyers. However, all sales must be authorized by a bankruptcy court.
USBC Section 363(m) provides that if the approval for the sale or lease of property is reversed or modified on appeal, the action taken will not affect the validity of the authorized transaction as long as the following two conditions are met.
- The entity purchasing or leasing the property acted in good faith.
- The authorization and sale or lease were not stayed pending the appeal.
The protections in the federal statute are not absolute. The validity of authorized transactions can still be an issue on appeal if a buyer acted in bad faith or because a stay was in place before the appeal.
The Supreme Court’s Decision in MOAC Mall Holdings vs. Transform Holdco
Federal courts had developed two distinct lines of thought regarding their authority to review sales and lease transactions under Section 363(m). The Second and Fifth Circuits treated 363(m) as barring the appellate courts’ ability to review a sale or lease transaction unless there was bad faith or the sale was stayed pending appeal. Courts in the remaining circuits interpreted the laws as merely limiting the options available for relief on appeal but not removing the authority of the courts to consider the merits.
In MOAC Mall Holdings vs. Transform Holdco (MOAC), the US Supreme Court settled the jurisdictional issue, deciding that Section 363(m) did not remove a reviewing court’s authority to consider the merits of an appeal but limited the reviewing court’s ability to grant the desired relief. MOAC involved a Section 363 sale by debtor Sears to Transform Holdco. The sale included rights to acquire certain leases. Transform Holdco requested the bankruptcy court assign the Sears lease with MOAC Mall Holdings to Transform Holdco. The bankruptcy court agreed, and MOAC Mall Holdings appealed.
After initially ruling in favor of MOAC Mall Holdings, the district court reversed its earlier decision after a rehearing wherein Transform Holdco argued that Section 363(m) prevented the district court from having jurisdiction to hear the appeal. Based on precedent, the district court agreed 363(m) was jurisdictional and not subject to waiver and dismissed the appeal. The Second Circuit confirmed.
Supreme Court’s Final Decision
Regarding a reviewing court’s authority under Section 363(m), the Supreme Court said there must be evidence of a clear intent on the part of Congress that provisions in a statute be jurisdictional before they will be treated as limiting court authority.
The Court found no such clear intent within the language of 363(m). The Court also pointed out that Section 363(m) is separate from the USBC’s provisions addressing the jurisdiction federal courts have over bankruptcy matters.
The Fifth Circuit Looks at Section 363(m) After MOAC
The Fifth Circuit was one of only two federal judicial circuits that interpreted Section 363(m) as a jurisdictional limitation and thus a bar on the ability of appellate courts to review the merits of a Section 363 sale. In a recent decision, the Fifth Circuit addressed the issue of how Section 363(m) should be interpreted after the Supreme Court’s decision in MOAC.
In early 2024, the Fifth Circuit heard Swiss Re Corporate Sols. American Ins. Co. vs. Fieldwood Energy III (Swiss Re). Swiss Re involved the appeal of a bankruptcy court’s confirmation order approving the sale of the debtor’s assets free and clear and eliminating the subrogation rights of some surety companies. The surety companies appealed the bankruptcy court’s approval of the sale.
The district court dismissed the surety companies’ claims after determining that the elimination of subrogation rights was integral to the 363 sale and, therefore, made the claims statutorily moot under Section 363(m). The surety companies argued that Section 363(m) limitations should not apply based on the Supreme Court’s decision in MOAC, asserting that the case narrowed the provision’s ability to deny relief on appeal.
Upon reviewing MOAC, the Fifth Circuit ruled that the Supreme Court’s decision did not narrow the application of Section 363(m) but merely clarified the authority of courts to grant relief under the provision. However, because the provision was determined to be non-jurisdictional, the benefit of its terms could now be waived – though the issue of waiver was not before the court.
What the Fifth Circuit’s Decision in Swiss Re Means for Buyers in Section 363 Sales
The Fifth Circuit’s decision should give 363 sale buyers confidence that the protections of Section 363(m) are still fully in place and the integral provisions of an approved transaction cannot later be modified unless a stay was granted by the bankruptcy court or the purchaser acted in bad faith.
At MehaffyWeber, our experienced bankruptcy attorneys understand the need for good faith purchasers to be able to rely on the validity of the transactions approved by a bankruptcy court. Our bankruptcy practice includes financial assessments, reorganization planning and negotiation, and litigation of contested issues. If you are looking for help with business bankruptcy matters, contact the nationally recognized Texas law firm MehaffyWeber.