"Fatal Means Fatal": 5th Circuit's Broad Read Of 363(m) Continues To Moot Section 363 Appeals After The Sale

• Published date: 09 November 2022
• Subject Matter: Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Landlord & Tenant - Leases
• Law Firm: Bracewell
• Author: Mr Mark Dendinger and Robert Grattan

Recent rulings out of the United States Court of Appeals for the Fifth Circuit and its lower bankruptcy courts have emphasized the circuit's broad interpretation of section 363(m) of the Bankruptcy Code, which protects bankruptcy sales from being overturned on appeal.

In her September 23 opinion in In re Royal Street Bistro, LLC, et al., No. 21-2285, District Judge Sarah S. Vance provided a comprehensive summary of the Fifth Circuit case law while mooting a debtor's attempt to appeal a sale under section 363 of the Bankruptcy Code.

The Royal Street case arose when the owner of three properties on New Orleans' Royal Street filed for bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Louisiana. The properties were also subject to leases and occupied by tenants. A secured lender also held a lien on each property.

During the case, the court-appointed chapter 11 trustee and the secured lender reached a settlement that required the properties be sold. In response, the tenants sought adequate protection of their interests in the properties and asked the court to require the debtor to explicitly assume or reject the leases. The bankruptcy court granted the trustee's sale and settlement motion and its bidding procedures motion, and it denied the tenants' motion for adequate protection and motion to require the debtor to assume or reject leases. The tenants appealed. They then sought a stay pending appeal of the order from the bankruptcy court, the district court, and ultimately a writ of mandamus from the Fifth Circuit. Each court rejected the request.

The bankruptcy court subsequently entered final orders approving the settlement and proposed sale of the properties, approving the bidding procedures, and setting the auction sale of the property. The tenants appealed those orders to Judge Vance's district court, and the appeals were consolidated.

At the auction, one property was sold to the secured lender and the other two to third parties. The proceeds from the sales were then used to pay off the secured lender and to cover the Trustee's fees.

Judge Vance heard the consolidated appeal at the district court, where the chapter 11 trustee moved for summary judgment dismissing the appeal as moot under section 363(m). That section reads:

(m) The reversal or modification on appeal 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...