Official Comm. v. Walker Cty. Hosp. Dist. (In re Walker County Hospital Corp.), No. 20-20575, 2021 U.S. App. LEXIS 20610 (5th Cir. July 12, 2021)
The Fifth Circuit Court of Appeals recently reaffirmed the general rule that if an objecting party to a bankruptcy sale fails to seek a “stay” pending appeal, it runs the risk of the appeal being ruled as moot.
In Walker County Hospital, Walker County Hospital (the “Debtor”) had negotiated a deal for a third party to acquire the hospital. The Committee of Unsecured Creditors (the “Committee”) believed the bid was undervalued and after further negotiations, agreed to waive its objections based on newly-negotiated terms of the sale. The deal was subject to the buyer obtaining financing. After the Sale Order was entered, the buyer had difficulty obtaining financing and thus, the Debtor filed an emergency motion to amend the Sale Order to reduce the purchase price and grant the Buyer an administrative claim. The timing of the sale was critical and thus the Debtor sought to obtain shortened notice and further requested the court to waive the standard fourteen-day stay usually required in an order authorizing the use, sale, or lease of property as set forth in Bankruptcy Rule 6004(h). This time the Committee objected.
The record reflected that the Buyer had stated that it would not be able to close the transaction without the amended relief requested by the Debtor. A day after the motion for shortened notice was filed, the bankruptcy court entered an order amending the Sale Order (the “Amended Order”) and granted the relief requested. The Amended Order further stated:
The Amendment Order was “effective immediately upon its entry,” and it authorized the Debtor and the Buyers to “close the sale of the Purchased Assets immediately.” It also was explicit that “[a]ny party objecting to this order must exercise due diligence in filing an appeal and pursuing a stay within the time prescribed by law and prior to the Closing Date, [sic] or risk its appeal will be foreclosed as moot.”
2021 U.S. App. LEXIS 20610, *7
Significantly, the Committee did not seek a stay and appealed about two weeks later. The district court ruled that the appeal was “statutorily moot” under Section 363(m) of the Bankruptcy Code, which states in pertinent part that the “reversal or modification on appeal … of a sale . . . of property … [authorized under § 363(b)] does not affect the validity of such a sale…to an entity that purchased . . . such property in good faith . . . unless” that sale was “stayed pending appeal.” 11 U.S.C. § 363(m). The purpose of Section 363(m) is to allow for finality of a sale without worrying about an appeal that could set the sale aside.
The Committee appealed. In its opinion, the Fifth Circuit cited several cases for the proposition that absent the objecting party seeking a stay pending appeal, the appeal will be dismissed as moot. The Committee argued that it was not appealing the Sale Order but instead was appealing the Amended Sale Order. It further argued that Section 363(m) did not apply in the Amended Sale Order. The Fifth Circuit disagreed and found that the Sale Order and the Amended Sale Order could not be separated from one another and thus affirmed the district court ruling in finding the appeal statutorily moot. In affirming the Fifth Circuit stated:
In this opinion, we have held that § 363(m) forecloses the creditor’s appeal because it failed to seek the required stay of the Sale Order. Established precedent leads us to this conclusion, and the Committee’s argument that it appealed an order not subject to § 363(m) is unpersuasive.
In short: no stay, no pay.
2021 U.S. App. LEXIS 20610 *13-14 .
The takeaway from the Fifth Circuit is that under no uncertain circumstances, if the use, sale, or lease of property is by bankruptcy and reference is made to Section 363(m), an objecting party should immediately seek a stay pending appeal or risk the appeal being found to be statutorily moot.