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5th Circuit Court’s Interpretation Continues to Moot 363 Appeals
Recent decisions from the United States Court of Appeals for the Fifth Circuit and the corresponding lower bankruptcy courts have highlighted the Circuit’s expansive interpretation of the Bankruptcy Code’s Section 363(m), which guards bankruptcy sales. Hence, the sales are not subsequently overturned on appeal.
In a September opinion in the case of In re Royal, the District Judge offered a comprehensive summary of Fifth Circuit case law while mooting a debtor’s efforts to appeal a sale following Section 363.
How the Case Arose
The case arose when a party who owned three properties on Royal Street in New Orleans filed for bankruptcy protection in Bankruptcy Court. The properties were tenant-occupied and subject to leases with a secured lender holding a lien on each property. While this case was being heard, the court-appointed trustee of the case and a lender later reached a settlement concerning the sale of the property. In response to these details, the tenant pursued protection for their property interests and requested that the court require the debtor to either directly assume or reject the leases.
The bankruptcy court permitted the sale of the property by the trustee but denied a motion by the tenant for adequate protection and a motion requiring the debtor to either assume or reject leases of the property in question. The tenants later appealed this decision and pursued a stay pending appeal of the bankruptcy court’s order. This request was then rejected.
The bankruptcy court entered a final order approving the settlement and sale of the properties, the bidding procedures, and setting the sale through an auction of the property. The tenants appealed these orders to the district court, and the appeals were subsequently consolidated.
The Judge’s Decision in This Case
The judge held that the appeal in question was moot. The Fifth Circuit’s precedent, the judge held, was apparent and failure to obtain a stay has been found fatal to a challenge of authorization that a bankruptcy court holds over the sale of a property. The judge additionally pointed out that in the 5th Circuit’s interpretation, “fatal means fatal” and that challenges to sales through bankruptcy are dismissed when the party that challenges a sale does not obtain a stay.
Furthermore, the judge noted that other courts, including the Seventh Circuit and Ninth Circuit, have applied a more giving approach to Section 363(m). For example, in the Trinity case, the Seventh Circuit found that 363(m) does not render a dispute moot or prevent bankruptcy courts from determining what should be done with proceeds from a sale or lease.
Lastly, the judge cited a district court opinion from the Seventh Circuit. In this case, In re X-Treme Bullets, the judge noted that the Sixth Circuit and Ninth Circuit Courts recognized a more restrictive view of mootness under section 363(m), which has the potential to preserve some types of challenges on appeal following a sale of a property.
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