The Eleventh Circuit Revisits The Doctrine Of Statutory Mootness In Bankruptcy Sales

• Published date: 31 January 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Daniel Merrett and Mark Douglas

The finality of sales of assets in bankruptcy is an indispensable feature of U.S. bankruptcy law, designed to maximize the value of a bankruptcy estate as expeditiously as possible for the benefit of all stakeholders. Promoting the finality of bankruptcy asset sales is the Bankruptcy Code's prohibition of reversal or modification on appeal of an order approving a sale to a good-faith purchaser unless the party challenging the sale obtains a stay pending appeal. This bar of appellate review is commonly referred to as "statutory mootness."

The U.S. Court of Appeals for the Eleventh Circuit recently addressed the statutory mootness concept in Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116 (11th Cir. 2021). Two of the three judges on the Eleventh Circuit panel ruled that an unstayed order approving a sale to a good-faith purchaser is moot on appeal, even if the sale was not properly authorized under the Bankruptcy Code. The third judge reached the same result, but for a different reason, because he determined that the debtors were precluded from challenging a sale that they had requested.

Dismissal of Appeals Under the Doctrine of Mootness

"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.

The court-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. The doctrine of equitable mootness is sometimes criticized as an abrogation of federal courts' "virtually unflagging obligation" to hear appeals within their jurisdiction. See In re One2One Commc'ns, LLC, 805 F.3d 428, 433 (3d Cir. 2015); In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012). The U.S. Supreme Court in 2021 declined invitations to address this doctrine (see GLM DFW, Inc. v. Windstream Holdings, Inc., No. 21-78 (U.S. Oct. 4, 2021) (denying petition for certiorari).

An appeal can also be rendered moot (or otherwise foreclosed) by statute. For example, section 363(m) of the Bankruptcy Code provides that, absent a stay pending appeal, "[t]he reversal or modification on appeal of an authorization . 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." Although courts disagree on the point, section 363(m) has been interpreted "to render statutorily moot any appellate challenge to a sale that is both to a good faith purchaser, and not stayed." Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d 376, 383 (1st Cir. 2018).

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); see also In re Palmer Equip., LLC, 623 B.R. 804, 808 (Bankr. D. Utah...