It is common for buyers of assets in bankruptcy cases to proceed to closing even if the court’s approval of the sale is under appeal. Their willingness to do so comes in large measure thanks to Section 363(m) of the Bankruptcy Code, which protects most sales from being unwound even in the face of an otherwise meritorious appeal. Yet, on Sept. 24, 2018, the U.S. District Court for the Southern District of New York issued a decision1 in which the court considered the merits of an appeal of a bankruptcy court order approving the transfer for consideration of a lawsuit to the defendants in that lawsuit (thereby extinguishing it) by a Chapter 7 trustee, despite the bankruptcy court’s finding that the transferee was a “purchaser in good faith” of the action within the meaning of Section 363(m) of the Bankruptcy Code.2

According to the district court, the transferee was not entitled to Section 363(m) protection because it had “detailed, long-standing knowledge” of the allegation of an affiliate of the debtor that the action was not property of the estate. Although the district court ultimately affirmed the sale on its merits, the fact that the district court even considered the appeal could raise a red flag for buyers seeking to close on a bankruptcy court-approved transaction in reliance on a good faith finding under Section 363(m).

Relevant Facts

The proceedings involved two debtors, one an individual named Mel Cooper, and the other an entity in which Cooper had an interest. Both debtor estates were being managed by statutory trustees. Prior to the filing of the cases, Cooper had filed state court actions against various third parties (the state court defendants), first in his own name (the individual action) and then, later, after the Chapter 7 trustee assumed control of that first action, against the identical parties, this time in the name of a nondebtor entity, BB Holdings Group, that Cooper apparently controlled. Cooper alleged in filings with the bankruptcy court that he mistakenly filed the action in his own name and that BBHG, in fact, owned the cause of action.

The Chapter 7 trustee ultimately settled the individual action with the state court defendants by providing for the transfer of the individual action and all associated claims to the state court defendants (thereby extinguishing those claims), in exchange for consideration that included the waiver by the state court defendants of various claims they had against the estate. The Chapter 7 trustee then moved before the bankruptcy court for approval of the proposed resolution pursuant to, among others, Section 363(b) of the Bankruptcy Code, which mandates court approval of all estate transactions occurring outside the ordinary course of business. Cooper, through BBHG, objected, principally on the basis of his allegation that the claims associated with the individual action really belonged to BBHG rather than the estate, and that the trustee was therefore not authorized to enter into the settlement transaction with the state court defendants.

After an evidentiary hearing, the bankruptcy court approved the settlement transaction, finding, among other things, that the claims associated with the individual action belonged to Cooper’s estate rather than BBHG, that the settlement was reasonable, and that the state court defendants were acquiring the individual action in good faith within the meaning of Section 363(m) of the Bankruptcy Code.3 This last finding was particularly important, because Section 363(m) provides generally that a sale remains valid as to a purchaser in good faith regardless of any subsequent reversals or modifications on appeal — i.e., it renders a sale approval order (unless stayed prior to closing) effectively unappealable.

Cooper then sought a stay of the bankruptcy’s court’s approval order pending appeal, which was denied, and the settlement transaction was consummated. An appeal to the district court followed.

Issues on Appeal

On appeal to the district court, the Chapter 7 trustee argued that, as a threshold matter, the appeal should be dismissed as moot, since the settlement was effectively unreviewable due to the protection granted to good faith purchasers under Section 363(m) of the Bankruptcy Code. Section 363(m) generally provides that the validity of a sale to a good faith purchaser approved under Section 363(b) or (c) cannot be reversed on appeal, and “is designed to ensure finality and certainty to court approved bankruptcy sales.”4 The Chapter 7 trustee also defended the transaction on its merits.

The District Court’s Decision

After first concluding that the settlement transaction was a “sale” within the meaning of Section 363 of the Bankruptcy Code, the district court next sought to determine whether the state court defendants were, in fact, good faith purchasers within the meaning of Section 363(m). In so doing, the district court looked to the classic definition of a “buyer in good faith (sometimes known as a bona fide purchaser for value, or BFP)” that applies in various other areas of the law, which requires the purchaser to have bought the subject asset “for value, in good faith, and without notice of adverse claims.” The district court acknowledged the “tension” associated with requiring buyers not to have had notice of adverse claims in bankruptcy proceedings, “which frequently feature objectors.” It also conceded that “[i]f mere knowledge of an objection to a bankruptcy sale (or settlement, as the case may be) were to preclude application of section 363(m), the provision’s reach would be dramatically circumscribed,” and that it could limit the section’s ability “to secure the best price for the debtor’s assets.”5

However, rather than find the “adverse notice” BFP factor to be inapplicable to bankruptcy sales, the district court resolved the tension by positing a distinction, based on its analysis of the case law, that would look at “the extent of the purchaser’s knowledge regarding the adverse claims” as the “critical factor.”6 Here, because the state court defendants had “detailed, long-standing knowledge of BBHG’s adverse claims” (indeed, it could hardly be otherwise, given that they were the ones against whom the claims were asserted), the district court held they were not good faith purchasers entitled to protection under Section 363(m).

The district court then proceeded to evaluate the substance of the appeal, and affirmed the bankruptcy court’s order (and, consequently, the settlement transaction itself) on the merits of the transaction.


Although the district court ultimately upheld the bankruptcy court’s approval of the settlement transaction on its merits, its conclusion that the requirements of Section 363(m) had not been met should be a matter of concern to parties selling and buying assets through a Section 363 sales process. This is particularly so given that the decision emanates from the Southern District of New York, a prominent and influential jurisdiction in which the lion’s share of the largest and most significant bankruptcy asset sales traditionally have occurred. The district court’s interpretation of Section 363(m), if widely followed, could give buyers greater reason to insist upon a final, nonappealable order before closing on a sale transaction with a bankruptcy estate, thereby engendering otherwise avoidable delay and incentivizing objecting parties with poor arguments on the merits to extract settlement value with the very pendency of an appeal, without regard to whether that appeal is likely to ultimately succeed. Moreover, the promulgation of a test for Section 363(m) eligibility that would require a fact-intensive inquiry as to the depth and breadth of a particular buyer’s “knowledge” about a particular claim arguably would undermine the very “finality and certainty” that Section 363(m) was designed to create.

There is also room to question the district court’s interpretation of Section 363(m) not just on policy grounds, but as a matter of legal analysis and precedent as well. Because even if the district court was right to incorporate the traditional BFP standard into Section 363(m), the district court seems to have overlooked the fact that the “adverse claim” at issue here — BBHG’s argument that it, rather than the Cooper estate, was the true owner of the individual action — had already been decided in favor of the Cooper estate by the bankruptcy court, in the context of its approval of the settlement transaction. At most, the only right remaining for BBHG at that point was its right to appeal, which generally has been held insufficient to establish an “adverse claim” for the purpose of defeating a purchaser’s BFP status.7 This is because “while an appeal from a final judgment or order may leave an inchoate shadow on the rights defined therein, those rights are nonetheless fully enforceable in the absence of a judicially issued stay pending disposition of the appeal.”8 For the same reason, the two cases cited by the district court in favor of its conclusion that the state court defendants were not buyers in good faith may be inapposite — it appears that the “adverse claims” in both those cases remained the subject of pending litigation in other courts.9

In any event, it is still too early to gauge the extent of the importance of the Cooper decision, which may be borne out over time. That depends, among other things, on whether the analysis in Cooper is adopted by other courts, rejected by them, or perhaps be limited to its particular facts (which arose where the buyer purchased claims asserted against itself). But to the extent that other courts in the district and elsewhere follow its conclusions and pare back some of the protections to which buyers generally have been thought entitled under Section 363(m), the decision has the potential to substantially affect the timing and certainty of sales under Section 363 in the future.

  1. In re Cooper , 2018 U.S. Dist. LEXIS 163240 (S.D.N.Y. Sep. 24, 2018)
  2. The full text of Section 363(m) reads as follows: “The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.”
  3. In re Cooper, 2018 U.S. Dist. LEXIS 163240 at *13-14.
  4. Petroleum & Fran. Funding LLC v. Bulk Petroleum Corp. , 435 B.R. 589, 592 (E.D. Wis. 2010)
  5. See In re Cooper, 2018 U.S. Dist. LEXIS 163240 at *29-30.
  6. See id. at *30.
  7. See, e.g., Da Silva v. Musso , 76 N.Y.2d. 436, 442 (N.Y. 1990) (Under New York law, “the conclusion is inescapable that, under both the former and the present statutory provisions, the ‘good faith’ of a purchaser who has acquired the property for value during the pendency of a claimant’s appeal is not vitiated by the purchaser’s actual knowledge of the appeal.); Singh v. Ahamad , 62 N.Y.S.3d 140, 141 (App. Div. 2d. 2017) (same). See also In re Bedford Springs Hotel Inc. , 99 B.R. 302, 305 (Bankr. W.D. Pa. 1989) (“Those cases which do discuss a purchaser's knowledge of adverse claims, as said knowledge affects ‘good faith’ status, have said that knowledge of claims which have been asserted in an appeal presently pending, in no way deprives a purchaser of ‘good faith’ status.”) (citations omitted).
  8. Da Silva v. Musso, 76 N.Y.2d. at 439.
  9. See Jeremiah v. Richardson , 148 F.3d 17, 22 (1st Cir. 1998) (appellant’s “first argument is that the bankruptcy court lacked jurisdiction because it had not yet determined the status” of pending adversary proceeding); In re TMT Procurement Corp., 764 F.3d 512, 523-26 (5th Cir. 2014) (issues held to be not mooted by bankruptcy court’s order were the subject of pending state court litigation over which the bankruptcy court did not otherwise have jurisdiction).

This article was published by Law360 on October 11, 2018 and is republished with permission. 

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