Fifth Circuit: A Challenge to Bankruptcy Court’s Jurisdiction Must Be Asserted Before §363 Sale

The importance of a bankruptcy court order approving a sale and the statutory mootness protecting a good faith buyer from appeal was recently underscored, even in the face of an argument that a parallel litigation in state court deprived the bankruptcy court of jurisdiction.  Jurisdictional challenges to a bankruptcy court’s action have often been problematic. Whether a constitutional or jurisdictional challenge to a bankruptcy court sale order would prevail on appeal in the absence of a stay pending appeal was recently raised before the Court of Appeals for the Fifth Circuit. The Fifth Circuit held that a challenge to a bankruptcy court’s authorization to sell property under §363 of the Bankruptcy Code is moot under §363(m) unless such authorization was stayed pending appeal. Although such holding is required by the plain text of §363(m), the court’s decision is notable because it rejected as moot the argument that bankruptcy court lacked jurisdiction over the sale. Consequently, parties seeking to bring jurisdictional challenges to a §363 sale must raise the challenge at the bankruptcy court and, should the challenge fail, protect the appeal by seeking a stay of such sale. The challenger must seek the stay in the first instance at the bankruptcy court and, if unsuccessful, seek a stay at the district court. Otherwise, once such sale is effectuated, challenges to the bankruptcy court’s jurisdiction may no longer be asserted to invalidate the sale to a good faith buyer.

Background

The case, West v. Tanguy (In re Davis), 2018 WL 4232063, No. 17-20655 (5th Cir. 2018) (per curiam), has a lengthy factual and procedural background. In short summary, Davis filed a petition under Chapter 7 of the Bankruptcy Code in 2007, and appellee, West, was named the Chapter 7 trustee. West initiated an adversary proceeding against appellant, Tanguy, and two businesses owned and operated by him (collectively, Tanguy) based on a promissory note issued to Davis by Tanguy in conjunction with the purchase of an airplane, which had since become a part of Davis’ bankruptcy estate. The U.S. Bankruptcy Court for the Southern District of Texas (the “bankruptcy court”) entered a judgment in favor of West in the amount of approximately $1.2 million plus attorney fees. West took action to collect on the judgement.