U.S. Supreme Court Rules That Bankruptcy Code's Protection Of Unstayed Asset Sale Orders To Good-Faith Purchasers Is Not Jurisdictional

• Published date: 13 June 2023
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Jones Day
• Author: Mr Oliver Zeltner and Mark Douglas

Section 363(m) of the Bankruptcy Code provides that the reversal or modification of an order approving a sale or lease of assets in bankruptcy does not affect the validity of the sale or lease to a good-faith purchaser or lessee unless the party challenging the sale or lease obtains a stay pending its appeal of the order. Bankruptcy and appellate courts, however, have long disagreed as to whether this provision is jurisdictional'meaning that it can never be waived and an appellate court lacks jurisdiction to hear any appeal of an unstayed sale or lease authorization order'or instead a defense that can be invoked by the proponents of the sale (e.g., the debtor, the bankruptcy trustee, or the purchaser) on appeal subject to waiver, forfeiture, and similar doctrines.

The U.S. Supreme Court settled this question on April 19, 2023. A unanimous Court ruled in MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927, 2023 WL 2992693 (2023) ("Transform Holdco"), that section 363(m) is not jurisdictional, and that an appeal of a 2019 bankruptcy court order approving the assignment of a lease between Sears, Roebuck & Co. ("Sears") and MOAC Mall Holdings LLC ("MOAC") as part of Sears's sale of substantially all of its assets was not moot.

Section 363(m) of the Bankruptcy Code and Statutory Mootness

In general, "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 that has been "substantially consummated."

As relevant here, an appeal can also be rendered moot (or otherwise foreclosed) by statute. Section 363(m) of the Bankruptcy Code provides as follows:

The reversal or modification on appeal of an authorization [of a sale or lease of property in bankruptcy] 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, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

11 U.S.C. ' 363(m). Section 363(m) is a powerful protection for good-faith purchasers and lessees because it...