Expansive View of 363(m) Mootness Adopted

By: John P. Esposito

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, in a case of first impression, the Sixth Circuit was presented with the opportunity to address the interaction of the “mootness” provision of section 363(m)[1] and the power of a trustee under section 363(h) to sell “both the estate’s interest . . . and the interest of any co-owner in [estate] property.”[2] In In re Nashville Senior Living, LLC,[3] the Sixth Circuit held that a non-debtor co-owners’ failure to obtain a stay of the bankruptcy court’s order approving the sale of both the debtors’ interest and the interests of the co-owners in jointly-owned property rendered an appeal to undo the sale as moot.[4] The court rejected, as “an aberration in well-settled bankruptcy jurisprudence,”[5] the contrary reasoning of the Ninth Circuit in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC)[6], which held that mootness could not apply to the “free and clear” aspect of a sale authorized under section 363(f). In essence, the Sixth Circuit interpreted section 363’s mootness provision expansively to cover sales under subsection (h),[7] despite the fact that 363(m) explicitly applies only to sales under sections 363(b)[8] or (c).[9]

 

In In re Nashville Senior Living, chapter 11 debtors, Nashville Senior Living, LLC moved in the Bankruptcy Court for the Middle District of Tennessee to permit the sale of certain properties pursuant to section 363, the Code’s “use, sale, or lease” provision. The properties in question were jointly owned by certain non-debtors, who were represented by the Official Committee of Unsecured Creditors (“the Committee”), which opposed the sale of their interests. In order to sell the co-owners’ interests, and thereby receive maximum value for its property, a debtor must satisfy the stringent requirements of subsection (h). If it can be established that physical partition of the property is impracticable, that sale of the property will realize a higher value free of the interests of co-owners, that the benefit to the estate of the sale of the property free of the interests of co-owners outweighs any detriment to such co-owners, and that the property is not used in the sale of energy, the court may approve the sale of a co-owner’s interest in property.[10] The bankruptcy court permitted the debtors to sell the co-owners’ interests finding that the debtors satisfied the four requirements of subsection (h).[11] The Committee appealed to the Bankruptcy Appellate Panel of the Sixth Circuit.

 

Shortly thereafter, the sale of the properties closed and the debtors moved to dismiss the appeal, arguing that the appeal was moot under section 363(m)[12] because the bankruptcy court had denied the Committee’s request for a stay of the sale and the sale had already been consummated.[13] The Committee argued that 363(m), which “moots” an appeal of a sale of property once it has closed with a good faith purchaser, explicitly applies only to those sales authorized by subsections (b) or (c) and therefore cannot apply to the sales of the co-owners’ interests authorized under subsection (h).[14] The Bankruptcy Appellate Panel for the Sixth Circuit agreed with the debtors, expanding the coverage of the “mootness” provision to include sales authorized by subsection (h), despite the fact that subsection (m) does not explicitly do so.[15]

 

The court based its holding on a variety of policies implicated by the Code, noting that section 363 furthered the bankruptcy process’s important function of liquidating debtor assets in order to pay creditors[16] by granting a trustee broad powers over the sale of those assets. The panel recognized that because of a co-owner’s “unconditional and absolute”[17] common law property rights, subsection (h) sets out strict requirements for the sale of a co-owner’s property. Despite the importance of these property rights however, the panel noted that the ability of a co-owner debtor to force the sale of jointly held property is simply “one of the risks of ownership by tenancy in common.”[18] Moreover, the panel recognized the importance of finality in bankruptcy sales involving good faith purchasers, as reflected by 363(m).[19] Such a “mootness” provision maximizes the value of estate assets by encouraging third parties to transact with the debtor and assuring them that consummated sales cannot be nullified on appeal.[20]

 

The panel rejected the Committee’s reliance on Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC),[21] a recent decision which confined 363(m) to its plain meaning. In that case, a secured creditor attempted to credit-bid its debt and purchase estate property “free and clear” of the interest of a non-consenting junior lien-holder, Clear Channel Outdoor, Inc. (“Clear Channel”).[22] The bankruptcy court approved the sale pursuant to section 363(f), which allows a trustee to sell property under subsections (b) or (c) “free and clear of any interest…of an entity other than the estate.”[23] No stay of the sale was obtained and Clear Channel appealed to the Bankruptcy Appellate Panel of the Ninth Circuit. The panel specifically found that 363(m) did not moot appeals of sales authorized under subsection (f) and that mootness could only apply to sales under subsections (b) or (c) by virtue of the statute’s explicit language.[24] It reasoned that Congress intended the mootness provision to only affect changes in title and not the “free and clear” term of a sale.[25] The Nashville panel however was not persuaded, observing that the Ninth Circuit cited no case law for its holding.[26] Moreover, Clear Channel could be distinguished because a “free and clear” sale was merely a term of a sale, whereas a sale under subsection (h) was an integral element of one.[27]

 

Given the Code’s interests of efficient liquidation, finality in sales, and the protection of good faith purchasers, the In re Nashville Senior Living panel reasoned that 363(m) should be interpreted to cover a sale made pursuant to 363(h) when it is an essential element of a sale authorized under 363(b).[28] If good faith purchasers are not assured that they will be protected when properly consummated sales are later appealed, there is an obvious risk that third parties will not seek to transact with debtors, resulting in bankruptcy estates not realizing their maximum value to the detriment of creditors and debtors alike.[29] Finally, the property-rights interests implicated by a forced sale of a co-owner’s interest in a tenancy-in-common[30] can still be safeguarded by the rigorous burdens imposed on a trustee by the requirements of 363(h). This holding in In re Nashville Senior Living is consistent with the treatment of 363(m) in other circuits[31] and serves to further effectuate primary goals of bankruptcy law while protecting the equally important property rights of co-owners.

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