Opinion ID: 659
Heading Depth: 3
Heading Rank: 1

Heading: Review of the Sale Order

Text: We have held in no ambiguous terms that section 363(m) is a limit on our jurisdiction and that, absent an entry of a stay of the Sale Order, we only retain authority to review challenges to the good faith aspect of the sale. See Gucci I, 105 F.3d at 838, 840. Specifically, we held in Gucci I that we lack jurisdiction to review the unstayed sale order,  id. at 838 (emphasis added), of a sale subject to the protections of section 363(m) and concluded that we may neither reverse nor modify the judicially-authorized sale, id. at 839-40 (emphasis added). We noted that it was unclear why an appellate court ... could not order some form of relief other than invalidation of the sale,  but accepted our place in the statutory scheme and observed that whatever other relief might be available could presumably be pursued in the bankruptcy court by those entitled to such relief. Id. at 840 n. 1 (emphasis added). We adhere to our holding in Gucci I that, under section 363(m), we lack jurisdiction to review the entire Sale Order  not just the actual sale transaction. See id. at 838; United States v. Salerno, 932 F.2d 117, 122-23 (2d Cir.1991); see also In re Parker, 499 F.3d at 621 (observing that the First, Second, Fifth, Seventh, Eleventh, and the D.C. Circuits have adopted a  per se rule automatically mooting appeals for failure to obtain a stay of the sale at issue (citations omitted)); cf. In re Parker, 499 F.3d 616, 620 (6th Cir.2007) ([W]e begin by dispelling any notion that we sit in review of the bankruptcy court's Order of Sale. Defendant's attempts to assail the validity of the bankruptcy court's Order of Sale, however indirectly, are statutorily moot.). This holding is consistent with the uniquely important interest in assuring the finality of a sale that is completed pursuant to 11 U.S.C. § 363(b) or (c) in bankruptcy proceedings. [8] See Gucci II, 126 F.3d at 387 (stating that without this assurance of finality [under section 363(m)], purchasers could demand a large discount for investing in a property that is laden with the risk of endless litigation as to who has rights to estate property); see also In re Rare Earth Minerals, 445 F.3d 359, 363 (4th Cir.2006) (Section 363(m) codifies Congress's strong preference for finality and efficiency in the bankruptcy context, particularly where third parties are involved.). Similar to the logic that the sale price of the debtor's assets will be driven down if the purchaser is not guaranteed ownership of those assets upon closing of the sale, see Gucci II, 126 F.3d at 387, a purchaser will demand a discount for the purchase of assets in which the terms and conditions of the sale cannot be protected from challenge even after closing the sale, cf. In re Trism, Inc., 328 F.3d 1003, 1007 (8th Cir.2003) ([A] challenge to a related provision of an order authorizing the sale of the debtor's assets affects the validity of the sale [and therefore falls under section 363(m)] when the related provision is integral to the sale of the estate's assets.). A narrow exception may lie for challenges to the Sale Order that are so divorced from the overall transaction that the challenged provision would have affected none of the considerations on which the purchaser relied. Cf. Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490, 499 (3d Cir.1998) (stating that an appeal is not moot under § 363(m) unless the party failed to obtain a stay and reviewing courts can fashion a remedy that will not affect the validity of the sale). But see George W. Kuney, Slipping Into Mootness, 2007 Ann. Surv. of Bankr.L. Part I § 9, subpart III(A)(i) ([I]t does not appear that [the Third Circuit's] `exception' to mootness is found in many fact patterns and one is left to wonder what remedy an objecting party to a section 363 sale would be seeking that `did not distort' the validity of the section 363 sale. ... Given the narrowness of this exception, for most practical purposes the Third Circuit should be viewed as having adopted a de facto per se rule.). We need not here address the potential for such an exception in this case, however, because the Contrarians clearly challenge an integral provision of the Sale Order. The lien release and claim-satisfaction provisions, in conjunction with the pro rata distribution provision and Aretex's purchase of a 17.5% interest, were essential to Aretex's acquiring control of the Debtor's business because: (1) the distribution provision guaranteed that the Securities would be distributed pro rata to the First and Second Lien Lenders; (2) the lien release and claim-satisfaction provisions guaranteed that the Securities received by the individual First and Second Lien Lenders would be unencumbered by other liens; and (3) Aretex's holding of approximately 40% of the First Liens and 51% of the Second Liens guaranteed it a substantial distribution of the unencumbered Securities. In accordance with its bid, Aretex was required to purchase an additional 17.5% interest in WestPoint International, which then guaranteed it a holding of 55.5% ownership in that corporation. Even under the terms of the subsequent Stay Stipulation, which permitted the closing of the sale, the scenario least favorable to Aretex, i.e., distribution of the entirety of the Second Securities to the First Lien Lenders, would still leave Aretex owning a controlling 50.5% of WestPoint International. Indeed, both the Sale Order and the Asset Purchase Agreement emphasize the importance of the lien release, claim satisfaction, and distribution provisions of the Sale Order to occur as a condition to the closing of the sale. For example, the Sale Order provides that the purchasers would not have entered into the Agreement and would not consummate the transactions contemplated thereby, ... if the ... Securities were not free and clear of all Interests, Interests being defined as Liens, claims, encumbrances, and other interests. Further, under the Sale Order, effective as of the Closing the transfer of assets vest[ed] ... Aretex, the other First Lien Lenders, and to the extent applicable, the other Second Lien Lenders, with their proportionate share of [the Securities]... in satisfaction of their replacement lien. [9] Likewise, the Asset Purchase Agreement required that the Sale Order find and provide, among other things ... that the Parent Common Stock and Subscription Rights purchased, retained by and/or distributed to ... the First Lien Lenders and Second Lien Lenders shall be received and retained by each of them free and clear of all Liens, claims and encumbrances of any nature. Thus, without the lien release, claim satisfaction, and distribution provisions as integral parts, there simply could not be a sale. Cf. In re Stadium Mgmt. Corp., 895 F.2d 845, 849 (1st Cir.1990) (concluding that a certain condition of the sale was integral to the sale and removing it from the sale would have adversely affected the terms of the sale). The Contrarians' argument that control was not an essential element of Aretex's bid is belied not only by the Sale Order and Asset Purchase Agreement, but also by the record. The Debtor made it clear that it pursued a section 363(b) asset sale as a last resort because both the Contrarians and Aretex could not agree on any plan that would permit the other to control the restructured Debtor. Further, both Aretex and the Contrarians were explicit about their understanding that the winner of the auction would obtain control of the Debtor's business, noting throughout the auction the importance of control and referencing minority shareholder protections which would apply to the losing bidder. Indeed, that the bids were assessed by incorporating a control premium shows that all parties involved in the auction understood that the winning bidder would acquire control of the Debtor's business. Although Aretex's final bid did not explicitly condition the sale on obtaining control of WestPoint International, the combination of the lien release, claim satisfaction, and distribution provisions, along with the purchase of 17.5% interest, mathematically guaranteed Aretex control of WestPoint International. The Contrarians further argue that Aretex cannot claim any protections under section 363(m) because it was not the actual entity receiving the purchased assets. This argument fails, however, because it conflates the issue of standing for the appealing party with the application of section 363(m) by a reviewing court. We repeat that we lack jurisdiction to review the Sale Order unless a stay has been entered or there is a challenge to the good faith aspect of the sale; our jurisdiction does not depend on which entity challenges the Sale Order. [10] See Gucci I, 105 F.3d at 839-40 (stating that section 363(m) moots the appeal); see also In re The Charter Co., 829 F.2d 1054, 1056 (11th Cir.1987) ([A]ppellant argues that the stay requirement does not apply to a purchaser who challenges the authorization. ... There is nothing in the language of section 363(m) to suggest that such an exception exists.). [11] In sum, this case presents an unmistakable record of a sale for control of the Debtor's business. Throughout its litigation history  before, during, and after the auction  the main concern in this case with any plan of reorganization or section 363(b) sale was control. The Sale Order and Asset Purchase Agreement confirm this obvious truth. The lien release, claim satisfaction, and distribution provisions of the Sale Order, in conjunction with Aretex's purchase of a 17.5% interest, are necessary for control to transfer from the Debtor to Aretex. Accordingly, we do not hesitate to conclude that any challenges to these integral and integrated provisions of the Sale Order do not serve to undermine the statutory mootness of this appeal as provided by section 363(m).