Section 363 of the Bankruptcy Code authorizes a trustee to use, sell, or lease property of the bankruptcy estate outside of the ordinary course of business upon bankruptcy court approval. The key benefit of a sale under Section 363 is that the sale is “free and clear” and divests the property of all liens, claims, and encumbrances. Issues that commonly arise in a Section 363 sale include: 1) whether the property to be sold is part of the bankruptcy estate; 2) whether the parties with interests in the property are adequately protected; 3) whether the property to be sold is subject to a bona fide dispute; and 4) whether the buyer is acting in good faith. If these issues are resolved and the bankruptcy court approves the sale, Section 363 may provide a good faith purchaser with invaluable security by limiting the effect of a successful appeal of the order approving the Section 363 sale.
Section 363(m) provides, “The reversal or modification on appeal of an authorization under [Section 363(b) or (c)] of the 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.” The practical implication is, if the court concludes that the buyer acted in good faith, and if a reviewing court does not stay the sale of property prior to closing, then a reversal or modification of the order authorizing the sale does not unwind the transaction. Once a good faith purchaser closes the sale, absent a stay of the closing, the sale will stand.
The United States Court of Appeals for the Third Circuit laid out the test for a good faith purchaser in In re Abbotts Dairies of Pennsylvania, 788 F.2d 143 (3d Cir. 1986). “The requirement that a purchaser act in good faith. . . speaks to the integrity of his conduct in the course of the sale proceedings. Typically, misconduct that would destroy a purchaser’s good faith status at a judicial sale involves fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders.” In re Abbots Dairies, 788 F.2d at 147. By acting in good faith, a buyer can secure the protections of Section 363(m), provided a reviewing court does not stay the sale.
Obtaining a stay of a bankruptcy court order is no easy task. The party must first seek relief from the bankruptcy court. The party can move the district court or bankruptcy appellate panel to stay the order only if the he can show why he did not obtain the stay from the bankruptcy court. In either scenario, in the Third Circuit, the party must establish four elements to obtain a stay: 1) a strong likelihood of success on the merits of the appeal; 2) the movant will suffer substantial irreparable injury if the stay is denied; 3) substantial harm will not be suffered by the other parties if the stay is granted; and 4) issuance of the stay would not harm the public interest. In re Bankr. Appeal of Allegheny Health, Educ. & Research Found., 252 B.R. 309, 321 (W.D. Pa. 1999).
Each elements turns wholly on the facts of the case, but generally, the party seeking a stay carries a heavy burden. For instance, if the bankruptcy court ruled against the party that objected to the sale, what would it find the party has a strong likelihood of success on appeal? If the court does stay the sale, what risks are involved? Can the buyer walk away from the sale? Would staying the sale harm the public interest by losing the proceeds if the buyer walks? Courts often consider these questions, and many others, before ruling on a motion to stay a Section 363 sale. But in the end, if the buyer acted in good faith, and the sale is not stayed, Section 363(m) allows the buyer to close on a Section 363 sale without the risk of a successful appeal unwinding the sale.