11th Cir. Rejects the debtors’ challenge to the sale of real estate collateral approved by the bankruptcy court
The United States Court of Appeals for the Eleventh Circuit recently ruled that a debtor’s appeal from a sell order is legally invoked by subsection 363 (m) of the Bankruptcy Code.
In that decision, the Eleventh Circuit held that: … and (2) Section 363 (m) applies to appeals of any sale authorized by the bankruptcy court, and not just those duly authorized by the Bankruptcy Code.
A copy of the notice in Reynolds v. ServisFirst Bank is available at: Link to Opinion.
The underlying proceeding arose out of two separate Chapter 11 bankruptcy proceedings. The first proceeding involved two debtors who were natural persons and the second proceeding concerned the company owned by the debtors in the first proceeding (“debtor company”). Before declaring bankruptcy, the company’s debtors and debtors borrowed money from the lender, each vouching for the other’s debt. The loans were secured by real estate.
After declaring bankruptcy, the company’s debtor was authorized by the bankruptcy court to acquire a debtor-in-use loan from the lender who would “roll over” the debt and provide an additional amount of working capital. Neither party believed that this loan would affect the lender’s lien on the real estate guarantee.
About a month later, the debtors filed a petition seeking approval of the sale of the property to the lender, pursuant to 11 USC § 363 (b), which provides for the sale of the assets of an outside bankruptcy estate. in the ordinary course of business. The sale was approved “via a $ 3.5 million credit offer” under 11 USC § 363 (k). In approving the sale, the bankruptcy court expressly concluded that the lender was “a buyer in good faith under section 363 (m) of the Bankruptcy Code”.
After the final approval of the sale, the debtors claimed that the lender’s cumulative loan to the debtor company had paid off their own debts to the lender and eliminated the lender’s lien on their real estate. The debtors filed a petition to vary the order to sell and to suspend the sale.
The petition was dismissed by the bankruptcy court because: (1) the only effect of the roll-up loan on the debtors’ loans was to make the debtor company a co-debtor rather than a guarantor; and (2) the debtors were not allowed to argue that the lender did not have an auctionable interest in the property after the final approval of the sale.
The bankruptcy court further ruled that fair estoppel, judicial estoppel and the law of the case prohibited debtors from modifying the sale on the grounds that the lender did not have a potentially auctionable interest in the property. The bankruptcy court also ruled that the roll-up loan consolidated the debtor’s obligations to the business, making a debtor or co-debtor of all debts to the lender without eliminating the debtors’ obligations to the lender.
The debtors appealed the order to sell and the order dismissing their variation petition, and asked the bankruptcy court to stay the sale pending the appeal. The bankruptcy court agreed to grant the stay on condition that the debtors post a replacement bond, which they did not.
The debtors eventually gave the signed property deed to the lender and the deed was duly registered. After the sale was concluded, the lender decided to dismiss the appeal as moot under 11 USC 363 (m) and the petition was granted by the district court, which held that because the debtors did not had not obtained a stay or had not prevented the sale from being concluded. , the trial court did not have the power to grant effective relief under the Bankruptcy Code, which rendered the appeal moot.
The debtors then appealed against the decision of the district court. The appeal was based on the fact that the lender was not a bona fide buyer under the provision of the Bankruptcy Code which governs the sale of the debtor’s assets.
Under subsection 363 (m) of the Bankruptcy Code, district and appellate courts are prohibited from rescinding or varying the authorization of a bankruptcy court to sell the property of a mass of bankruptcy to someone who “purchased… such property in good faith” under subsection 363 (b) or c) unless the sale has been suspended pending appeal. 11 USC 363 (m).
Although the Bankruptcy Code prohibits the remedy of an appeal under section 363 (m), it does not nullify jurisdiction. However, as any opinion on the merits of the transaction would only be advisory, the Court of Appeal considers that these statutory appeals are devoid of purpose. See Chafin vs. Chafin, 568 US 165, 172 (2013).
The Eleventh Circuit found here that Section 363 (m) applied to the debtor’s appeal, holding that Section 363 (m) applied to appeals of any sale authorized by the bankruptcy court, and not just to those duly authorized by the Bankruptcy Code.
The Court held that subsection 363 (m) is a flat rule, but recognized that the applicability of subsection 363 (m) is always conditioned on the presence (1) of the appellant’s failure to obtain a stay of the order to sell, and (2) a sale made with “an entity that has bought or leased [the] good faith property.
Thus, the Eleventh Circuit held that appellate courts could assess whether a buyer had acted in good faith in determining whether paragraph 363 (m) was moot for an appeal. Here, the Court of Appeal found no evidence that the lender had engaged in fraudulent behavior. The court further found that the lender’s lien was of sufficient value to support the bankruptcy court’s conclusion that the lender was a bona fide buyer.
After establishing that the debtors’ appeal was covered by subsection 363 (m), the Eleventh Circuit upheld the district court’s decision that the relief sought by the debtors was excluded, thereby rendering their appeal moot.
The debtors ultimately argued that instead of unwinding the sale, the court could force the lender to pay cash for the property. However, the Eleventh Circuit ruled that because this adjustment would change the sale price after the fact, it would affect the validity of the appeal sale. So the court explained that if he ordered the lender to pay an amount other than what he offered and the bankruptcy court approved, the court would cancel the sale itself, which it did not. has no authority to do under section 363 (m).
Therefore, as the law prohibits the court of appeal from providing a remedy, the Eleventh Circuit ruled that the appeal was moot.