Sixth Circuit Reaffirms the Vitality of 363(m)

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Contributed by Sara Coelho

A recent decision by the United States Court of Appeals for the Sixth Circuit makes sales of estate property free and clear of third-party interests easier by protecting purchasers of such assets from challenges to the terms of the sale on appeal.  In Official Comm. of Unsecured Creditors v. Anderson Senior Living Property (In re Nashville Senior Living, LLC), the Sixth Circuit applied statutory mootness under section 363(m) of the Bankruptcy Code to affirm the dismissal of an appeal from an order approving a sale of property free and clear of the interests of co-owners.  While the issue of a sale free and clear of co-ownership interests is not frequently encountered, this decision is significant because it is the first circuit court decision we have found since Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC) to uphold statutory mootness under section 363(m) where a 363 sale eliminated the rights of third parties in assets sold by a debtor.  The United States Court of Appeals for the Eighth Circuit has already applied Nashville (citing to the Bankruptcy Appellate Panel opinion), and rejected Clear Channel, to uphold the sale of assets under section 363(f) free and clear of liens in an opinion here.

In Nashville, the court determined that, even though section 363(m) only refers to sales under 363(b) or (c), all sales under section 363 of the Bankruptcy Code necessarily fall under one of those two subsections.  Thus, the appellants could not challenge the sale free and clear of co-owner’s interests in the estate property because such sale was protected under 363(m).  This reasoning may be applied with equal force to the more common scenario of a sale free and clear of junior liens under section 363(f), as was the case in Clear Channel.  The bankruptcy court approved the sale of seven assisted-living facilities free and clear of the property interests of co-owners in the facilities under 363(b), which allows the sale of a debtor’s property outside the ordinary course of business after notice and a hearing, and under section 363(h), which allows the sale of property interests held by co-owners of a debtor’s property when certain requirements are met.  The co-owners filed an appeal from the bankruptcy court’s authorization of the sale and sought a stay pending appeal.  The stay was denied and the debtors closed the sale.

The Debtors sought to dismiss the appeal under section 363(m), the Bankruptcy Code’s “statutory mootness” provision, which provides, in the words of the Nashville court, “that absent a stay, a sale to a good faith purchaser under § 363(b) or (c), once consummated, cannot be reversed or modified on appeal.”  The co-owners challenged the applicability of 363(m) to a sale of their ownership interest however, arguing that by its terms 363(m) does not apply to sales authorized under section 363(h).  The United States Bankruptcy Appellate Panel of the Sixth Circuit rejected this argument in an opinion here, holding that “although § 363(m) does not explicitly refer to a sale authorized under subsection (h), it nevertheless applies because the authority for such a sale is derived from subsection (b).”  It further found that the sale of the ownership interests of the co-owners was a central part of the sale and could not “be challenged without challenging the validity of the sale.”  The Sixth Circuit agreed and affirmed holding that, although the bankruptcy court must make the findings required under subsection 363(h) to approve the sale of a co-owner’s interest in property, the sale itself proceeds under section 363(b) or (c) and therefore falls directly within the ambit of section 363(m).

The court went on to hold that because the bankruptcy court found that the requirements of subsections 363(b) and (h) were satisfied, the sale was closed, and the good faith of the purchaser was not in dispute, the co-owners also could not challenge on appeal the bankruptcy court’s findings under 363(h).  The Sixth Circuit noted in a footnote that one court has required that to establish statutory mootness under 363(m), the reviewing court must be unable to grant effective relief that does not affect the validity of the sale.  The Sixth Circuit declined to consider whether such a rule should apply because it found that any relief granted to the co-owners in this case would materially modify the assets purchased by the purchaser and would thereby affect the validity of the sale.

This reasoning is directly counter to the reasoning of the United States Bankruptcy Appellate Panel of the Ninth Circuit in Clear Channel.  In Clear Channel, the bankruptcy court approved a sale of the debtor’s properties to a senior secured creditor free and clear of a lien on the property held by a junior creditor.  The “lien-stripping” aspect of the sale was approved pursuant to section 363(f).  The Ninth Circuit B.A.P. found that section 363(m)’s mootness requirement “by its terms applies only to ‘an authorization under subsection (b) or (c) of this section….’” and that section 363(m) distinguishes between the authorizations to sell estate property and the authorization sell free and clear of a lien.  Therefore, it held that while an appeal of the authorization to transfer title was moot, an appeal regarding the terms of the sale was not.

Although the Sixth Circuit’s decision in Nashville did not refer to the Clear Channel decision, it appears to be a well-reasoned rejection of the portion of Clear Channel addressing statutory mootness under section 363(m).  Both 363(h) and 363(f) authorize sales of estate property under section 363(b) or (c) free of interests of non-debtor parties, provided that the bankruptcy court finds that the debtor has satisfied additional requirements, but both refer back to 363(b) and (c) for the ultimate authorization for the sale.  Moreover, the decision is important in that it treated the terms of the sale, and not just the transfer of title as final, when it applied section 363(m) and stated that relief could not be fashioned without affecting the validity of the sale.  In so doing, the opinion also implicitly rejects Clear Channel’s distinction between transfer of title and the terms of the sale.

By protecting the estate’s ability to transfer title unclouded by the interests of third parties the Nashville decision makes estate property more attractive for potential purchasers, and increases the value of bankruptcy estate assets.  This result is to the benefit of all parties, including those third parties whose rights may be eliminated in a 363 sale.