In In re Polaroid Corp., — B.R. —, 2010
WL 2696748 (8th Cir. July 8, 2010) (Eighth
Circuit holds that all challenges to a §
363 sale, other than a challenge to good
faith, are statutorily moot unless the
sale order has been stayed.)
In prior issues of The Secured
Lender, we reported on a developing
circuit court split regarding the treatment of certain challenges to § 363
sales. In Clear Channel Outdoor, Inc. v.
Knupfer, 391 B.R. 25 (9th Cir. BAP 2008),
the Ninth Circuit Bankruptcy Appellate
Panel held that § 363(m) of the Bankruptcy Code does not preclude reversal,
on appeal, of the term in the sale order
that the assets were transferred in the
§ 363 sale free and clear of any junior
liens, even though the sale was not
stayed pending appeal and there were
no allegations of bad faith. Through a
narrow, literal and inexplicable reading
of § 363(m), the court in Clear Channel
determined that, although § 363(m)
blocks reversal of an order authorizing
a sale to a good faith purchaser on appeal, it does not prohibit the reversal of
the free and clear terms of such order.
As a result, the senior secured lender
in Clear Channel, who credit bid its
debt to purchase assets in a § 363 sale,
was held to have purchased the assets
subject to the existing liens.
The Ninth Circuit’s interpretation of
§ 363(m) is problematic and, if followed
by other courts, would obviously have
a chilling effect on bankruptcy sales.
However, in In re West Point Stevens,
Inc., 600 F.3d 231 (2d Cir. 2010), the Second Circuit came to the opposite conclusion and held that, under § 363(m),
all challenges to a § 363 sale other than
a challenge to good faith are statutorily
moot unless the sale order has been
stayed. Recently, in In re Polaroid Corp.,
the Eighth Circuit had the opportunity
to address the issue and agreed with
the approach of the Second Circuit.
In Polaroid, PLR Acquisition, LLC
purchased the assets of the debtor,
Polaroid Corporation, in a § 363 sale
for approximately $87 million. The
bankruptcy court approved the sale
free and clear of any liens, including
the liens of Acorn Capital Group. Acorn
moved to stay the sale pending appeal.
Acorn’s motion was denied by both the
bankruptcy court and the district court.
The sale then closed, the assets were
transferred to PLR and a successor in
interest to Acorn appealed.
Section 363(m) of the Bankruptcy
The reversal or modification on
appeal of [a judicial] authoriza-
tion under subsection (b) or (c) of
this section of a sale or lease of
property does not affect the valid-
ity 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 authoriza-
tion and such sale or lease were
stayed pending appeal.
Acorn argued, in reliance on Clear
Channel, that § 363(m) is inapplicable
because it only applies to sales autho-
rized “under subsections (b) or (c)” and,
therefore, not to sales free and clear of
liens under § 363(f). The Eighth Circuit,
however, determined that this inter-
pretation ignored a plain reading of §
363(f), which provides that ‘the trustee
may sell property under subsection (b)
or (c) of this section free and clear of
any interest in such property” only if
one of five specified conditions is met.
Thus, the free and clear sale must be
authorized under (b) or (c) in order for §
363(f) to be applicable in the first place.
Section 363(f) only deals with the terms
of the sale, not with its authorization.
In addition, the bankruptcy court’s own
order contained a specific reference to
the sale being pursuant to § 363(b). After
concluding that “Clear Channel appears
to be an aberration in well-settled bank-
ruptcy jurisprudence applying § 363(m)
to the ‘free and clear’ aspect of a sale un-
der § 363(f),” the Eighth Circuit dismissed
Acorn’s appeal as statutorily moot.
Jonathan N. Helfat, partner, Otterbourg
Steindler Houston & Rosen, PC, and
Richard M. Kohn, partner, Goldberg
Kohn, are CFA co-general counsel.