Fifth Circuit: Recent U.S. Supreme Court Ruling Did Not Alter Mootness Requirements for Unstayed Bankruptcy Sale Orders
Section 363(m) of the Bankruptcy Code offers powerful protection for good-faith purchasers in bankruptcy sales because it limits appellate review of an approved sale, irrespective of the legal merits of the appeal. Specifically, it provides that the reversal or modification of an order approving the sale of assets in bankruptcy does not affect the validity of the sale to a good-faith purchaser unless the party challenging the sale obtains a stay pending its appeal of the order. That is, section 363(m) renders an appeal "statutorily moot" absent a stay of the sale order. Until 2023, bankruptcy and appellate courts disagreed as to whether this provision is jurisdictional—meaning that it cannot 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 in 2023 when a unanimous Court ruled in MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288 (2023) ("Transform Holdco"), that section 363(m) is not jurisdictional. But good-faith purchasers in bankruptcy need not despair; the U.S. Circuit Court for the Fifth Circuit has declared that "Section 363(m) is alive and well" following Transform Holdco.
In Matter of Fieldwood Energy LLC, 93 F.4th 817 (5th Cir. 2024), the Fifth Circuit addressed the impact of the Supreme Court's decision on statutory mootness under section 363(m). There, the Fifth Circuit affirmed the lower court's dismissal of an appeal under section 363(m) because the challengers failed to obtain a stay pending appeal. The challenge was brought by certain sureties whose subrogation rights were canceled as part of a "free and clear" bankruptcy asset sale. According to the Fifth Circuit, because the cancellation of the subrogation right was "an integral" part of the sale transaction, absent a stay, the appeal was statutorily moot under section 363(m). Nothing in the Supreme Court's ruling in Transform Holdco, the Fifith Circuit reasoned, changed that application of section 363(m).
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. In the interest of judicial economy, it limits the jurisdiction of federal courts to actual cases or controversies and 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, 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."
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) provides powerful protections for good-faith purchases in bankruptcy sales by limiting appellate review of the decision. 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, 581 (6th Cir. 2005) ("'Section 363(m) protects the reasonable expectations of good faith third-party purchasers by preventing the overturning of a completed sale, absent a stay, and it safeguards the finality of the bankruptcy sale.'") (quoting Official Comm. of Unsecured Creditors v. Trism, Inc. (In re Trism, Inc.), 328 F.3d 1003, 1006 (8th Cir. 2003)). The provision serves the interests of finality and certainty in bankruptcy sale transactions and encourages bidding for estate property. See In re Sneed Shipbuilding, Inc., 916 F.3d 405, 409 (5th Cir. 2019) ("If deference were not paid to the policy of speedy and final bankruptcy sales, potential buyers would not even consider purchasing any bankrupt's property.") (internal citations omitted); In re Palmer Equip., LLC, 623 B.R. 804, 808 (Bankr. D. Utah 2020) (section 363(m)'s protection is vital to encouraging buyers to purchase the debtor's property and thus ensuring that adequate sources of financing are available).
The federal circuit courts of appeals have disagreed over whether section 363(m) is jurisdictional, such that the failure to obtain a stay pending appeal of a sale order deprives an appellate court of jurisdiction to hear the appeal outside of the limited issue of whether the sale was made to a good-faith purchaser. Compare Su v. C Whale Corp. (In re C Whale Corp.), 2022 WL 135125, *4 (5th Cir. Jan. 13, 2022) (section 363(m) is jurisdictional and precludes an appeal of an unstayed order approving a bankruptcy sale); and Sears v. U.S. Trustee (In re AFY), 734 F.3d 810, 816 (8th Cir. 2013) (mootness under section 363(m) deprives an appellate court from hearing an appeal of an unstayed sale order) with Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116, 122 (11th Cir. 2021) ("Statutory mootness under 363(m) … is not jurisdictional. Though it provides a defense against appeals from bankruptcy court orders, 'even an ironclad defense, does not defeat jurisdiction.'"). As noted previously, the Supreme Court resolved this circuit split in Transform Holdco.
Fieldwood Energy
Fieldwood Energy LLC and its affiliates (collectively, the "debtors") were once one of the largest oil and gas exploration and production companies operating in the Gulf of Mexico. Faced with declining oil prices, the COVID-19 pandemic, and billions of dollars of decommissioning and environmental remediation obligations, the debtors filed for chapter 11 protection in August 2020 in the Southern District of Texas.
The debtors proposed a chapter 11 plan providing for: (i) a credit bid sale of some of their oil and gas assets and equity interests for approximately $1.03 billion; (ii) "divisive mergers" of the debtors after the completion of the credit bid sale, with the allocation of some oil and gas assets among the resulting entities; and (iii) the abandonment of other oil and gas assets in accordance with agreements reached with various U.S. government agencies. The government agencies agreed not to object to the plan on environmental grounds because it provided for an increased allocation of responsibility for the remediation and decommissioning liabilities.
Certain sureties objected to the plan because the credit bid sale and the allocation of assets to the newly formed entities were to be "free and clear" of all liens, claims, encumbrances, and other interests, including the sureties' subrogation rights against the debtors, pursuant to section 363(f) of the Bankruptcy Code. The bankruptcy court confirmed the plan over their objections.
The bankruptcy court denied the sureties' request for a stay pending appeal of the confirmation order. The chapter 11 plan became effective on August 27, 2021, and was substantially consummated shortly afterward.
On appeal to the district court, the sureties sought reversal only of the plan provisions dealing with the sale of the debtors' assets free and clear of their subrogation rights. They argued that the relevant provisions in the confirmation order were ambiguous, incongruous, and contradictory. They also claimed that the bankruptcy court exceeded its authority in stripping them of their subrogation rights.
Instead of ruling on the merits, the district court ruled that the appeal was statutorily moot under section 363(m) because the sureties had not obtained a stay pending appeal, and equitably moot because, among other things, the relief requested by the sureties would be a "grave threat" to the success of the plan given the governmental agencies' right to "veto" the plan on environmental grounds. See In re Fieldwood Energy III LLC, 2023 WL 2402871, at *5 (S.D. Tex. Mar. 7, 2023), aff'd, 93 F.4th 817 (5th Cir. 2024). The sureties appealed to the Fifth Circuit.
The Fifth Circuit's Ruling
A three-judge panel of the Fifth Circuit affirmed the district court's decision.
In so ruling, the Fifth Circuit addressed only the district court's statutory mootness analysis. It declined to reach the district court's alternative holding that the appeal was equitably moot.
Writing for the Fifth Circuit panel, U.S. Circuit Court Judge Leslie H. Southwick rejected the sureties' arguments that: (i) the Supreme Court's decision in Transform Holdco "has changed how we should understand Section 363(m)"; (ii) the district court erred in treating section 363(m) as jurisdictional; (iii) Section 363(m) does not apply because the sureties sought (albeit did not obtain) a stay pending appeal; and (iv) Section 363(m) is inapplicable because the plan confirmation order provisions they challenged were not integral to the sale of the debtors' assets.
According to Judge Southwick, Transform Holdco did not "narrow[] the effect of Section 363(m) other than to clarify that a party can lose the benefit of its terms" by waiver or forfeiture, neither of which occurred in this case. Therefore, Judge Southwick wrote, "compliance with Section 363(m) was "important and mandatory." Fieldwood Energy, 293 F.4th at 823 (internal quotations omitted).
The Fifth Circuit panel acknowledged that Transform Holdco discussed mootness outside the context of statutory or equitable mootness. However, Judge Southwick explained, the Supreme Court did so in rejecting the assignee/purchaser's argument that the appeal of the bankruptcy court's order approving the sale and lease assignment was constitutionally moot because the lease was no longer part of the bankruptcy estate. He further noted that the Court did not resolve that issue because the lower courts did not consider it. "The only mootness issue for us," Judge Southwick wrote, "is that which arises under Section 363(m)," a determination unaffected by the Supreme Court's discussion of constitutional mootness in Transform Holdco. Id.
The Fifth Circuit panel concluded that the district court "appropriately treated Section 363(m) as a nonjurisdictional precondition to relief that prevented the Sureties from succeeding on appeal." Judge Southwick noted that the district court proceeded to discuss equitable mootness after finding that the appeal was statutorily moot under section 363(m). The fact that it did so, he explained, is evidence that the district court did not view section 363(m) as jurisdictional because, had that been the case, the court would have immediately dismissed the case for lack of jurisdiction without considering equitable mootness. Id.
According to the Fifth Circuit, the fact that the sureties sought a stay pending appeal was not relevant. The express language of section 363(m), Judge Southwick explained, requires that a stay have been granted. "There is no exception within the text," he wrote, "for a party who seeks a stay and fails." Id. at 824.
Finally, the Fifth Circuit concluded that the lower courts correctly found that the "free and clear" provisions in the chapter 11 plan challenged by the sureties were "integral to the sale." The panel found no clear error in the bankruptcy court's finding that "the deal is unlikely to close if we change it, modify our order, and that the cost would be approximately $350 million to the estate." Id. at 825 (internal quotations omitted). The Fifth Circuit also cited testimony from a representative of the purchaser of the debtors' assets that buying the assets free and clear was of "paramount importance," including any claims based on subrogation rights. Id.
Outlook
As noted by the Fifth Circuit panel in Fieldwood Energy, section 363(m) of the Bankruptcy Code is "alive and well," and the Supreme Court's decision in Transform Holdco did nothing to change how the provision is to be applied. The Fifth Circuit's ruling reinforces the importance of section 363(m) in promoting the finality of bankruptcy assets sales and fulfilling the reasonable expectations of debtors, creditors, purchasers, and other stakeholders. It also indicates that, at least in the Fifth Circuit, section 363(m) bars an appeal of an unstayed order approving a bankruptcy sale if the challenge relates to "an integral part" of the sale transaction.
