Understanding Bankruptcy Code Section 363(m): Appellate Review and Buyer Protections

Bankruptcy Code Section 363(m) protects purchasers of assets in bankruptcy by limiting appellate review of the sale unless the challenging party obtains a stay pending the appeal. According to a Jones Day’s Business Restructuring Review article, Section 363(m) renders an appeal “statutorily moot,” absent a stay.

Before 2003, bankruptcy courts and appellate courts disagreed on whether this provision is “jurisdictional,” meaning an appellate court lacks jurisdiction to hear any appeal of an unstayed sale, or if a defense is available by the proponents of the sale.

In 2023 the Supreme Court ruled (MOAC Mall Holdings LLC v. Transform Holdco LLC) that it is not jurisdictional. However, the Fifth Circuit recently revived protection for the buyer. It affirmed a lower court’s dismissal of an appeal because the challengers didn’t obtain a stay.

The challenge was brought by sureties whose subrogation rights were canceled as part of a bankruptcy asset sale. According to the Fifth Circuit, because the cancellation was “an integral part” of the sale transaction, absent a stay the appeal was statutorily moot under section 363(m). The Court reasoned that the 2023 Supreme Court ruling didn’t nullify that application of Bankruptcy Code Section 363(m).

The case involved an oil and gas company that filed for Chapter 11 in 2020. The debtors proposed a plan for a credit-bid sale of oil and gas assets to newly formed entities. The sureties objected because the sale and the allocation of assets were to be “free and clear” of everything including their subrogation rights, but the bankruptcy court confirmed the plan.

The sureties appealed to district court, which ruled that the appeal was statutorily moot because the sureties had not obtained a stay pending appeal. A three-judge panel of the Fifth Circuit affirmed the district court’s decision.

Jones Day says that the ruling “reinforces the importance of section 363(m) in promoting the finality of bankruptcy assets,” and bars appeal of an unstayed order approving a bankruptcy sale if the challenge relates to “an integral part” of the sale transaction, at least in the Fifth Circuit.