Restructuring

“We’re riding down the boulevard,
We’re riding through the dark night,
With half the tank and empty heart,
Pretending we’re in love, when it’s never enough, nah.”
Duke Dumont’s “Ocean Drive” in the background.  Bayshore Boulevard.  Spring of 2013.  The Zuercher Trust.  Three objectors.  Two trustees.  Allegations of bad faith and collusion.  And, In re Zuercher Trust of 1999, a recent appeal of a sale order and a section 363(m) good faith finding.  In Zuercher Trust, the Ninth Circuit B.A.P. declined to remand the case for a supplemental finding of good faith under section 363(m) notwithstanding  allegations of new facts relevant to the good faith issue, and instead disposed of the appeal on the merits.  Although the B.A.P. affirmed the bankruptcy court’s sale order in this case, Zuercher Trust serves as a reminder that good faith findings under section 363(m) of the Bankruptcy Code, which are required to preserve a purchaser’s equitable mootness arguments, can be reversed under a clearly erroneous standard and may be subject to a remand if new facts emerge.  
Background
Monica Hujazi formed the Zuercher Trust (the “Trust”) to develop and manage California real estate.  She commenced a chapter 11 case on behalf of the Trust in anticipation of a foreclosure sale on some of the Trust’s property.  A chapter 11 trustee was appointed.  The trustee filed a motion to sell one of the Trust’s properties located on Bayshore Boulevard in San Francisco, subject to overbid and auction procedures.  Before the property was sold, the case was converted to a chapter 7 case and a chapter 7 trustee was appointed.
Thereafter, the bankruptcy court entered an order approving the sale over the objections of certain parties and rendered a section 363(m) good faith finding.  The objectors appealed, and the appellant (the chapter 7 trustee) argued, among other things, that the appeal was moot in light of section 363(m).  The objectors countered that the good faith finding should be reversed, in particular due to the emergence of new facts.  Specifically, after the sale order was entered, the closing date was extended several times to allow the purchaser to obtain financing.  According to the appellants, these extensions undermined the bankruptcy court’s earlier findings regarding the purchaser’s good faith because they called into question, among other things, the market value of the property.
Ninth Circuit B.A.P.
Section 363(m) limits the remedies available on appeal to objectors in a section 363 sale when it is established that the purchaser has acted in good faith.  Section 363(m) provides 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.

11 U.S.C. § 363(m).  A good faith finding requires the following determination:

(1) compliance with approved sale procedures; (2) arms-length negotiations, leading to a sale reflecting a purchase price at or near the market value of the property; (3) opportunity for competitive bidding; (4) knowledge in advance of the sale of who the proposed purchaser is; and (5) the absence of any evidence of fraud, collusion or grossly unfair advantage over other bidders.

Zuercher Trust, at p. 20.
As the court noted, a bankruptcy court’s finding that a purchaser qualifies as a good faith purchaser for purposes of section 363(m) can be reversed on appeal if it is found to be clearly erroneous (a pretty high standard—it must be “illogical, implausible, or without support in the record”).  Id. at 15.  Moreover, the B.A.P. held that when new facts come to light plausibly calling into question whether section 363(m) applies and such determination is critical to the disposition of the appeal, the appropriate procedure is a limited remand to permit the bankruptcy court to hear and consider the new facts.
However, notwithstanding this general rule, the court determined that, in light of the facts, the “better, more-efficient practice” in Zuercher Trust was to decide the merits of the appeal, rather than to remand for a supplemental good faith determination to answer the question of whether § 363(m) applied such that the appeal was moot.  In choosing this path, the court was persuaded by the fact that the merits of the appeal had been fully briefed, oral argument had been held, the resolution of the appeal on the merits was straightforward, and, most importantly, the issue of section 363(m)/equitable mootness was not critical to the disposition of the appeal (given that the merits supported the appellees).  Accordingly, the B.A.P. pressed forward on the merits.
In reliance on the record, the Ninth Circuit B.A.P. rejected all of the appellants’ arguments, including that the property was not sufficiently marketed, and held that, among other things, the sales price was reflective of the property’s market value.  Accordingly, the B.A.P. affirmed the bankruptcy court’s sale order.
Conclusion
Although the sale in Zuercher Trust was upheld by the B.A.P., this case serves as a reminder for practitioners that section 363(m) orders are not sacrosanct.  Indeed, they can be reversed on a clearly erroneous finding or on remand where new facts are presented and the issue of whether section 363(m) applies is critical to the disposition of the appeal.
Andriana Georgallas is an Associate at Weil Gotshal & Manges, LLP in New York.