Appeals of “Sale” Orders: Sometimes They Are Moot and Sometimes They Are Not

Fenicle v. Energy Future Holdings Corp. (In re Energy Future Holding Corp.), 596 B.R. 473 (D. Del. 2019) –

Parties representing “Unmanifested Asbestos Claims” sought to appeal a bankruptcy court order confirming a plan of reorganization that included a sale of debtors free and clear of claims and interests by way of a merger. The primary issue was whether the appeal was statutorily moot under section 363(m) of the Bankruptcy Code.

Some of the debtors had been in the business of building, maintaining, and servicing power plants. Workers in the plants were exposed to asbestos. At the request of the debtors the bankruptcy court set a bar date for all prepetition claims, including claims of Unmanifested Asbestos Claimants – meaning people that suffered injuries caused by prepetition exposure to asbestos that became manifest only after the bar date.

A key part of the plan was a restructuring that contemplated a “free and clear” sale through a merger. The appellants appealed the confirmation order, contending among other things that the court erred in discharging claims of the holders of Unmanifested Asbestos Claims who did not file proofs of claim prior to the bar date.

The appellees (primarily the debtors) moved to dismiss on the grounds of statutory mootness, equitable mootness, untimeliness, and standing. The district court concluded that the statutory mootness argument was dispositive.

Under section 363(m) reversal or modification on appeal of an authorization of a sale under section 363(b) or (c) does not affect the validity of the sale to a good faith purchaser unless the sale was stayed pending appeal. The court emphasized that only a good faith purchaser is entitled to the protection of section 363(m), which moots a challenge to a sale if (1) the sale was not stayed pending appeal, and (2) reversing or modifying the sale authorization would affect the validity of the sale.

The first question was whether the confirmation order was a sale order for purposes of section 363(m). The appellants argued that a separate order approving the merger was the sale order, and section 363(m) protects only direct appeals, not collateral attacks on sales orders.

The court rejected this argument on the grounds that (1) the merger order approved the merger agreement in its entirety, and (2) the merger agreement conditioned the closing of the merger on an order confirming the plan and authorizing all of the transaction agreements contemplated by the merger agreement. Thus, both the merger order and the confirmation order were necessary for authorization. Accordingly, the court held that the confirmation order was “an order authorizing a sale (the merger agreement)” so that section 363(m) was applicable.

No one challenged the bankruptcy court finding that the purchaser was a good faith purchaser. So, the next issue was whether the conditions for invoking the protection of section 363(m) were met.

It was clear that the appellants did not obtain a stay pending appeal. The appellants argued that they could not pay the bond required to stay a $9.45 billion transaction. However, inability to pay does not excuse a party from seeking a stay. So, their appeal would be moot unless the relief requested would not affect the validity of the sale.

Under applicable precedent: “A challenge to a ‘central element’ of a sale inevitably challenges the validity of the sale.” There is “a narrow exception that may lie for challenges to the Sale Order that is so divorced from the overall transaction that the challenged revision would have affected none of the considerations on which the purchaser relied.”

The appellees argued that discharge of the Unmanifested Asbestos Claims was a collateral issue that would not affect the validity of the sale, while the appellees argued that the purchaser relied on the asbestos bar date, which was integral to the sale and part of the bargained-for exchange.

The court noted that the requested relief would require either reversal of the confirmation order or “blue-penciling” the order. A reversal would affect the validity of the sale because it would undo the merger agreement since the closing was conditioned on confirmation.

The court determined that “blue-penciling” would also affect the validity. Under the confirmation order only enumerated liabilities survived the plan, namely certain legacy general unsecured claims, intercompany claims, and certain property tax claims limited in amount.

Providing the requested relief would require adding the Unmanifested Asbestos Claims as a fourth category. The bargain with the purchaser ensured that the liabilities it would take on under the merger would be limited and certain. Granting the requested relief would saddle the purchaser with more liability than it bargained for.

The court found substantial evidence that the debtors’ plan had to provide certainty and a “cordoning off” of liability in order to attract any purchasers. Discharge of untimely claimants was a central and integral part of the sale. In other words, the challenge to the discharge of the Unmanifested Asbestos Claims inevitably challenged the validity of the sale.

Accordingly, the court determined that the appeal was moot under section 363(m).

The protection afforded to a good faith purchaser under section 363(m) is often a critical consideration for purchasers. It is worth keeping in mind that there are nuances to this section so that the protection may not be as unassailable as expected. For example, one can certainly imagine another court deciding that a confirmation order approving a plan that contemplates a merger is not authorization of a sale under section 363 as required to invoke section 363(m).

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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