Gimme Shelter: “Transactions Integral to a Sale” Are Given Section 363(m) Protection

Contributed by Jordan Bryk
Oh, a [third party] is threat’ning
My very [deal] today
If I don’t get some shelter
Oh yeah, [my deal will] fade away.

– Rolling Stones, Gimme Shelter

The United States District Court for the District of Delaware recently expanded the scope of transaction protection under section 363(m) of the Bankruptcy Code.  In Boeing Co. v. Kaiser Aircraft Indus. (In re Ala. Aircraft Indus.), No. 11-01003-JEI, 2012 U.S. Dist. LEXIS 5279 (D. Del. Jan. 17, 2012), the court struck down an appeal by The Boeing Company to prevent Kaiser Aircraft Industries, Inc. from purchasing assets from debtor Alabama Aircraft Industries, Inc.  Kaiser sought shelter in section 363(m) and successfully argued that Boeing’s attempt to block the deal should be dismissed as moot.
In 2007, aerospace and defense company Alabama Aircraft hit heavy turbulence.  The company lost out to Boeing on a $1.1 billion Air Force contract to refurbish KC-135 aerial refueling tankers, work that accounted for 90% of Alabama Aircraft’s sales.  After failing to amend its collective bargaining agreement or refinance its working capital, Alabama Aircraft landed in bankruptcy on February 15, 2011.  The debtor later agreed to sell, pursuant to section 363 of the Bankruptcy Code, substantially all of its operating assets to Kaiser for $500,000 in cash.
Under the terms of the asset purchase agreement, Kaiser also agreed to fund a litigation trust, which would give Kaiser 90% of any amount collected from pursuing causes of action Alabama Aircraft had against Boeing and others.  The litigation against Boeing stems from unfair tactics that Boeing allegedly used to win the $1.1 billion Air Force contract.  On September 1, 2011, at an expedited bankruptcy proceeding, the court orally granted Alabama Aircraft’s sale motion.  Although Boeing did not object to the sale of Alabama Aircraft’s assets to Kaiser, it challenged the establishment of the litigation trust as part of the asset sale on the ground that it constitutes a sale or assignment of pre-judgment tort causes of action in violation of state law.  The bankruptcy court, however, overruled Boeing’s objection and also denied Boeing’s oral motion to stay the sale pending appeal.  After Alabama Aircraft and Kaiser executed the asset purchase agreement, Boeing appealed from the sale order.
The district court held, among other things, that section 363(m) bars Boeing’s appeal from the sale order.  Under section 363(m), parties such as Boeing who wish to appeal from a sale of bankruptcy estate property must first obtain a stay pending appeal; otherwise, their appeal will be dismissed as moot following consummation of the sale.  Boeing argued that the creation of the litigation trust was not a sale of property – it was merely a use of property, and, therefore, section 363(m) protection should not apply.
The district court rejected Boeing’s argument.  First, the court held that the creation of the litigation trust was, in fact, a sale of property and not a use of property.  In order to support this finding, the court noted that (1) the litigation trust agreement refers to the establishment of the trust as a “Purchased Asset,” and (2) the establishment of the litigation trust was part of an underlying sale of Alabama Aircraft’s major assets.  Second, and perhaps most importantly, the court ruled that, even if the establishment of the litigation trust is deemed to be a use and not a sale of property, “transactions integral to a sale” deserve section 363(m) protection.
To support the position that “transactions integral to a sale” deserve section 363(m) protection, the court cited to another Third Circuit case, which used section 363(m) to protect the assignment of employment contracts because they were “inextricably intertwined” with the debtor’s sale of assets.  The court drew a parallel between the assignment of employment contracts and the establishment of a litigation trust – in both cases, the underlying sale depended upon the successful execution of these auxiliary transactions.  The court therefore concluded that section 363(m) protection was appropriate in this case as well.
The district court’s ruling is a small victory for bankruptcy investors.  Although courts increasingly seem to find ways to limit equitable mootness in the context of consummation of a plan, Alabama Aircraft arguably expands the scope of section 363(m) and protects buyers of distressed assets even from those who challenge narrow aspects of their bankruptcy acquisitions.  If a buyer is able to consummate a section 363 sale, Alabama Aircraft shows that all aspects of the sale should be protected by the statutory mootness provided under section 363(m) so long as the buyer can demonstrate that they relate to “transactions integral to the sale.”