The U.S. Court of Appeals for the Sixth Circuit recently reviewed the scope of and standard for applying §363(m) of the Bankruptcy Code, which is the statutory mootness rule protecting §363 sales. The Sixth Circuit’s analysis began with the following principles: (1) the “mootness rule” applies “regardless of the merits of legal arguments raised against” the bankruptcy court’s order and (2) functions to “encourage participation in bankruptcy asset sales and increase the value of the property of the estate by protecting good faith purchasers from modification by an appeals court of the bargain struck with the [bankrupt].” Brown v. Ellmann (In re Brown), 851 F. 3d 619 (6th Cir. 2017) (quoting In re Nashville Senior Living, 620 F. 3d 548, 591(6th Cir. 2010)).
Asset sales pursuant to §363 of the Bankruptcy Code are prevalent in bankruptcy proceedings whether to fund the reorganization by disposing of undesired assets or to sell substantially all of the assets on a going concern basis outside of a plan, often on a notably faster schedule. In addition to speed, §363 sales are attractive because they are insulated from appeal by the statutory mootness rule, which essentially establishes finality for such sale orders. In contrast, bankruptcy court orders confirming a plan may be protected from appeal only by equitable mootness, which can be more complicated. In the absence of a stay pending appeal, §363(m) prohibits reversal or modification of a sale so long as the purchaser acted in good faith. Indeed, most circuits construe §363(m) as creating a “per se” rule automatically mooting appeals. In contrast, in Brown the Sixth Circuit joins the Third and Tenth Circuits in requiring, as an additional element for statutory mootness, a determination that the reviewing court is unable to “grant effective relief without impacting the validity of the sale.” The inquiry then focuses on whether it is possible to fashion relief in a manner that would not disturb the bargain struck with the good faith purchaser.
