Recently, the United States Court of Appeals for the Second Circuit issued an opinion with respect to the remaining controversy arising from the sale of substantially all of the property of WestPoint Stevens under §363 of the Bankruptcy Code.1 Section 363(m) provides that the reversal or modification on appeal of an authorization to sell property under §363 does not affect the validity of the sale to a good-faith purchaser absent a stay pending appeal. In the court’s view, unless a provision of the sale order is so divorced from the overall transaction that the challenged provision would not have affected any of the considerations on which a purchaser relied, the entire sale order is protected by statutory mootness. In WestPoint, there were multiple appeals regarding provisions of the sale order, but there was no stay pending appeal. There was, however, a stipulation under which the parties agreed that the sale could close, but the portion of the sale consideration distributable on account of the junior liens was escrowed pending appeal. While the court exercised appellate jurisdiction with respect to distribution of the escrowed securities, the remainder of the appeal was moot. Even then, when the court fashioned an equitable remedy for the escrow, its ruling totally respected the core aspects of the sale order as moot and beyond its jurisdiction. Accordingly, the court held that a sale order cannot be appealed—even in part—absent a stay pending appeal.
In WestPoint, the court ruled that after a sale is consummated, the protection of §363(m) extends to protect the justifiable reliance of a good-faith buyer upon the provisions of the sale order, not just the transfer of the assets. Adopting a holistic view of the sale and the authorizing sale order, the Court of Appeals reasoned that the terms, including lien releases, claims satisfaction provisions, and pro rata distribution provisions, are within the intended shield of statutory mootness. Rather than parsing through potential ways to narrow the doctrine and assert jurisdiction, as the district court did, the Court of Appeals looked to its prior decisions and deferred to the practical need to facilitate the integrity and finality of bankruptcy sales in order to maximize value for the debtors assets.
Background
