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Introduction

Bankruptcy sales are known for their speed and complexity.  Notwithstanding the implications for procedural due process rights or otherwise meritorious appellate arguments, bankruptcy courts routinely waive the fourteen-day stay provided in Bankruptcy Rule 6004(h) and authorize debtors to close sales immediately.  The occurrence of closing has broad ramifications for parties desiring to challenge the bankruptcy court’s sale order on appeal.  The Fifth Circuit’s recent opinion in Walker County Hospital Corporation should serve as a reminder to parties and practitioners that seeking a stay prior to closing is critical to the viability of an appeal from a sale order.  Without such a stay, reviewing courts may, and often will, rely on the mootness doctrine to summarily dismiss an appeal regardless of the merits.  The case is Official Comm. v. Walker Cty. Hosp. Dist. (In re Walker Cty. Hosp. Corp.), 3 F.4th 230 (5th Cir. 2021).

Background

Walker County Hospital Corporation (the “Hospital” or “Debtor”) operated a not-for-profit community hospital in rural Huntsville, Texas.  It was the county’s largest healthcare provider. On the brink of closing its doors, the Hospital filed a chapter 11 bankruptcy case in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) on November 11, 2019.  On the petition date, it also filed a motion with the Bankruptcy Court to: (i) establish a marketing process and procedures for auctioning substantially all of its assets; and (ii) approve the designation of a “stalking horse” purchaser (the “Buyers”) for the Hospital.  At the conclusion of the marketing process, the Buyers’ stalking horse bid was the only offer.  Importantly, the Buyers’ bid contained a financing contingency which made the bid conditioned upon the Buyers obtaining acceptable financing from a third-party lender (the “Lender”).

Meanwhile, an official committee of unsecured creditors (the “Committee”) was appointed in the Debtor’s bankruptcy case.  The Committee believed the Buyers’ bid was too low and would leave little or no money behind for unsecured creditors.  However, just days before the sale hearing, the Debtor, Buyers, and Committee reached a complex settlement (the “Settlement”) which resolved the Committee’s objection to the sale and provided more favorable terms for the Debtor and Committee in the transaction.  Thereafter, the Bankruptcy Court entered its order (the “Sale Order”) pursuant to section 363(b) of the Bankruptcy Code and approved the sale, including the Settlement terms which were attached to the purchase agreement.

The key feature of the Settlement, which later formed the impetus for the appeal, centered around the Hospital’s accounts receivable and a large future payment related to a Medicaid program.  The Buyers’ bid was structured such that the payment would be received after the closing date and therefore included in the purchased assets.  However, in the event it was received before closing, the payment was to be included an “Accounts Receivable Sharing Waterfall,” which was a formula designed to divide the Hospital’s accounts receivable between the Buyers and Debtor’s estate.

After the Sale Order was entered, the Buyer’s financing application stalled, and the Lender’s due diligence process delayed the closing.  In order to keep the Hospital running during the interim period, the Buyers and Debtor negotiated side agreements to fund operations.  The side agreements included, as a condition to closing, that the Hospital had not received the Medicaid payment because this future A/R was critical to the Buyers’ ability to obtain financing.

While closing remained delayed, the Medicaid payment was received by the Hospital on February 25, 2020.  The next day, the Debtor filed an emergency motion to amend the Sale Order and asked the Bankruptcy Court to adjust the purchase price downward.  Without the relief requested, the Buyers would not close the sale, and the Hospital would shutter.  As is common practice in bankruptcy cases, the Debtor also asked for a waiver of the fourteen-day stay provided by Bankruptcy Rule 6004(h) because prompt consummation of the sale was critical.

Approximately twenty-four hours later, on February 27, 2020, the Bankruptcy Court entered the order amending the Sale Order (the “Amendment Order”) without a hearing, and without the Committee having filed a formal objection.  The Amendment Order expressly provided that it was effective immediately upon entry, and further stated 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, or its appeal will be foreclosed as moot.”  Hours later – at 12:01 a.m. on February 28, 2020 – the Debtor and Buyers closed the sale of the Hospital.

The Committee never sought a stay of the Sale Order or Amendment Order, but two weeks later, it appealed the Amendment Order to the District Court.  The Committee argued that the Debtor failed to comply with the Bankruptcy Rules in seeking the Amendment Order, and that the Committee’s procedural due process rights were violated.  The Buyers moved to dismiss the Committee’s appeal and argued it was mooted by the closing pursuant to section 363(m) of the Bankruptcy Code, and that the sale could not be modified because the Committee never sought a stay.  Without addressing the Committee’s due process arguments, the District Court ruled that the Committee’s appeal was statutorily moot.  The Committee then appealed to the United States Court of Appeals for the Fifth Circuit (the “Court”).

Analysis

1. Statutory Mootness

The Court affirmed the District Court’s decision and dismissed the Committee’s appeal.  The crux of the Court’s opinion is an analysis of statutory mootness under section 363(m) of the Bankruptcy Code.  Under that section, “modification on appeal” of a “sale … of property” authorized under Bankruptcy Code section 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 Court began by explaining that the policy underlying section 363 of the Bankruptcy Code is to promote finality of bankruptcy sales which, in turn, maximizes the purchase price for the debtor’s assets and ultimately benefits the debtor’s creditors.  The Court acknowledged that the cost of this policy is summarily disposing of full judicial review of potentially meritorious appeals under the statutory mootness doctrine, but reasoned that Congress believed the benefits of maximizing bidding and purchase prices outweighs this cost.  For this reason, the Court emphasized its “unmistakable” precedent that a failure to obtain a stay is fatal to a challenge of a bankruptcy court’s sale order if the sale has already closed because such appeals are statutorily moot under section 363(m) of the Bankruptcy Code.

1. Disposition of the Committee’s Arguments

The Court then addressed the Committee’s interrelated arguments that Bankruptcy Code section 363(m) did not act as a bar to the appeal of the Amendment Order.  Specifically, the Committee argued that it only appealed the Amendment Order, and not the Sale Order.  While the Sale Order was entered pursuant to Bankruptcy Code section 363(b), the Amendment Order did not mention either subsection 363(b) or 363(c), which are the only two subsections to which section 363(m)’s bar would apply.  Thus, because the Committee did not appeal the Sale Order, and the Amendment Order was not entered pursuant to section 363(b), the Committee argued that section 363(m) would not apply to render its appeal statutorily moot.

The Court found the Committee’s arguments unpersuasive because it is clear that the Amendment Order was “integrally linked” and “inseparable” from the Sale Order.  The Court compared the facts to its other controlling precedent where creditors argued that section 363(m) was inapplicable.  In American Grain, a creditor appealed a bankruptcy court order approving a lease of property, rather than a sale, and therefore argued that section 363(m) did not apply.  Am. Grain Ass’n v. Lee-Vac, Ltd., 630 F.2d 245, 247 (5th Cir. 1980).  In that case, the Court held that such a strict interpretation of section 363(m) would undermine the policy of affording finality to bankruptcy court judgments and proceedings. Id. at. 248.  Likewise, in Sneed Shipbuilding, a creditor who was only appealing a cash disbursement that was included as part of a sale and settlement argued that the appeal was not mooted by section 363(m).  New Indus. v. Byman (In re Sneed Shipbuilding, Inc.), 914 F.3d 1000, 1002 (5th Cir. 2019).  There, the Court explained that it does not conduct an isolated analysis of sales, and that the cash disbursement was an essential feature that could not be severed.  Id. at 1004.

The Court found these cases comparable and controlling.  That is, the Amendment Order did not authorize a different sale, and was not a discrete decree.  The Amendment Order merely amended the Sale Order that had already been entered pursuant to section 363(b) of the Bankruptcy Code and therefore could not be separated from it.  Accordingly, the Court held that section 363(m) of the Bankruptcy Code foreclosed the Committee’s appeal because it failed to seek the required stay of the Sale Order.

Conclusion

The Committee did not ultimately receive what it bargained for.  For that reason, the Committee’s arguments regarding due process and the manner in which the Bankruptcy Court ruled on the Debtor’s emergency motion deserve at least some level of sympathy.  With the Hospital’s assets insufficient to pay creditors in full, the Committee negotiated the best deal possible for its constituency as reflected in the Settlement and Sale Order.  When the Medicaid payment arrived before closing, the Debtor sought emergency approval of the Amendment Order which adjusted the sale price downward and granted the Buyers an administrative expense claim to be paid ahead of unsecured creditors.  Then, within a period of forty-eight (48) hours from the filing of the emergency motion, the Amendment Order was entered by the Bankruptcy Court without objection or a hearing, and the Debtor and Buyers had closed the sale without the Committee seeking a stay.

The Court’s opinion in this case cements the Fifth Circuit’s authority on statutory mootness under section 363(m) of the Bankruptcy Code.  As the Court stated, “fatal means fatal,” and any moot appeals will be summarily dismissed.  This case also serves as a friendly reminder that bankruptcy sales can evolve rapidly, and bankruptcy courts are often willing to approve such sales on a moment’s notice.  Practitioners representing creditors, equity holders, or other interested parties, should also be wary of a debtor’s and buyer’s intentions to rush a closing as a means of rendering potential appeals statutorily moot.  Thus, practitioners who foresee even the slightest chance of appealing a sale order would be well served to have a draft of a motion for stay pending appeal prepared as soon as a sale order gets entered.  As the Court concluded in its final sentence of the opinion, “no stay, no pay.”

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