Why Every Buyer Should Always Seek 363(m) Protection in an Asset Pur...

Posted by Yosina M. Lissebeck, Esq. on April 8, 2015

Yosina M. Lissebeck, Esq.
Lissebeck Law

Bankruptcy Code § 363 authorizes a debtor-in-possession or Trustee, to sell property of the estate other than in the ordinary course of business. A proposed sale of estate property will be approved if it is in the best interests of the estate, based on the facts and history of the case.[1] Before the bankruptcy court can approve such a proposed sale, the court must find that there is a valid business justification for the sale.[2] In addition to a sufficient business reason for the sale, the court must find (1) the sale is in the best interest of the estate; (2) is fair and reasonable; (3) the assets to be sold were adequately marketed; and (4) was negotiated in good faith; and (5) that the buyer is proceeding in good faith; and (6) the sale is an “arms-length” transaction.[3] Lastly, the court must find that the debtor-in-possession gave adequate and reasonable notice of the sale.[4]

But there is another subsection of 363 that a buyer should request be part of any bankruptcy sale transaction: 363(m) – the good faith finding. A finding under this section will often protect the buyer from any reversal of the sale on appeal, because it will render the appeal moot and allow it to be dismissed. If a party appeals the order approving the sale, there is a good faith 363(m) finding in the order, and the party fails to get a stay to stop the sale from closing: then once the sale closes, the buyer is protected and the appellate court cannot unwind the sale. Section 363(m) states:

(m) 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.

So how does it work? When the parties seek approval of the sale by the bankruptcy court, a buyer should request that the motion also ask the court to make a 363(m) good faith finding. The finding must be made by the court at the same time the sale is approved, and the parties must provide evidentiary support for the finding. A good faith buyer is “one who buys ‘in good faith’ and ‘for value.”[5] “[L]ack of good faith is [typically] shown by ‘fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders,”'[6] Typically a declaration of the buyer is submitted with the sale motion that states the buyer at all times acted in good faith, that buyer agreed to pay fair market value for property that was marketed and/or subject to overbid, that the sale was negotiated at arm’s length, that buyer did not collude or take unfair advantage of the process, and that the buyer is not an affiliate or insider of the Debtor. With the proper evidentiary support, the bankruptcy court can make the good faith finding, and the buyer will be protected if a party tries to appeal and unwind the sale.

Now of course, every sale has different facts and circumstances and 363(m) is not always going to provide the buyer protection or render an appeal moot. The Ninth Circuit Bankruptcy Appellate Panel in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC) 391 B.R. 25 (9th Cir. BAP 2008) held that 363(m) will not apply where a 363 sale attempts to strip liens and eliminate the rights of third parties in assets sold by a debtor. Thus, it is always best to contact a bankruptcy practitioner to answer any questions or assist you with the sale process. But, in most cases a 363(m) finding is going to provide the buyer with some extra piece of mind.


[1] In re American West Airlines, 166 B.R. 908, 912 (Bankr. D. Ariz. 1994), citing In re Lionel Corp., 722 F.2d 1063, 1071 (2nd Cir. 1983).
[2] See, e.g., In re 240 North Brand Partners, Ltd., 200 B.R. 653, 659 (9th Cir. BAP 1996).
[3] In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 842 (Bankr. C.D. Cal. 1991).
[4] Ibid.
[5] In re Ewell, 958 B.2d 276, 281 (9th Cir. 1992), citing In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3rd Cir. 1986).
[6] Id.


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