Disappointed Bidder in Bankruptcy Asset Sales Waived Argument that Buyers Did Not Act in Good Faith by First Raising It on Appeal
The finality of asset sales in bankruptcy is an indispensable feature of U.S. bankruptcy law designed to maximize the value of a bankruptcy estate as expeditiously as possible for the benefit of all stakeholders. To promote such finality, section 363(m) of the Bankruptcy Code prohibits reversal or modification on appeal of an order authorizing a sale or lease to a "good-faith" purchaser unless the party challenging the sale obtains a stay pending appeal. A bankruptcy appellate panel ("BAP") for the Sixth Circuit examined the scope of section 363(m) in Clearview Eastern Fund LLC v. Woodward (In re Human Housing Henrietta Hyatt LLC), 666 B.R. 332 (B.A.P. 6th Cir. 2025). The BAP ruled that an appeal of asset sale orders by a disappointed bidder was moot under section 363(m) because the bidder did not obtain a stay pending appeal and waived any challenge to the good faith of the purchasers by failing to raise the issue before the bankruptcy court. The panel also held that merely having a competing bid does not constitute an "adverse interest" sufficient to defeat a buyer's good faith in connection with a sale.
Mootness of Appeals Under Section 363(m)
"Mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. An appeal can be either constitutionally, equitably, or statutorily moot. Constitutional mootness is derived from Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of cases that are hypothetical or merely advisory.
The court-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis for precluding appellate review of an order confirming a chapter 11 plan that has been "substantially consummated."
An appeal can also be rendered moot (or otherwise foreclosed) by statute. For example, section 363(m) of the Bankruptcy Code provides as follows:
The reversal or modification on appeal of an authorization [of a sale or lease of property in bankruptcy] 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). Section 363(m) of the Bankruptcy Code is a powerful protection for good-faith purchasers because it limits appellate review of a consummated sale irrespective of the legal merits of the appeal. See Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors of Made in Detroit, Inc. (In re Made in Detroit, Inc.), 414 F.3d 576, 581 (6th Cir. 2005); see also In re Palmer Equip., LLC, 623 B.R. 804, 808 (Bankr. D. Utah 2020) ("Section 363(m)'s protection is vital to encouraging buyers to purchase the debtor's property and thus insuring that adequate sources of financing are available.") (citations and internal quotation marks omitted).
Bankruptcy and appellate courts have long disagreed as to whether section 363(m) is jurisdictional—meaning that it can never be waived and an appellate court lacks jurisdiction to hear any appeal of an unstayed sale or lease authorization order other than on the ground that the purchaser or lessee did not act in good faith—or instead a defense that can be invoked by the proponents of the sale (e.g., the debtor, the bankruptcy trustee, or the purchaser) in connection with the appeal. The U.S. Supreme Court definitively settled this question in MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927 (2023). A unanimous Court held that section 363(m) is not jurisdictional and that an appeal of a bankruptcy court order approving the assignment of a lease was not moot. The Court was also skeptical about mootness in general as a bar to appellate review of bankruptcy court decisions, despite the importance of finality in bankruptcy sales.
Good Faith
The Bankruptcy Code does not define "good faith." Courts have adopted various definitions, many of which are substantially similar. See generally Collier on Bankruptcy ("Collier") ¶ 363.11 (16th ed. 2025). For example, the Fifth Circuit has defined a "good faith purchaser" for purposes of section 363(m) as "'one who purchases the assets for value, in good faith, and without notice of adverse claims.'" Hsin Chi Su v. C Whale Corp. (In re C Whale Corp.), 2022 WL 135125, at *3 (5th Cir. Jan. 13, 2022) (quoting In re TMT Procurement Corp., 764 F.3d 512, 521 (5th Cir. 2014)); accord Made in Detroit, 414 F.3d at 581; Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380, 390 (2d Cir. 1997); In re Mark Bell Furniture Warehouse, Inc., 992 F.2d 7, 8 (1st Cir. 1993).
Lack of good faith is commonly manifested by "fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of the other bidders." TMT Procurement, 764 F.3d at 521 (citations and internal quotation marks omitted); accord Ewell v. Diebert (In re Ewell), 958 F.2d 276, (9th Cir. 1992); In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147–148 (3d Cir. 1986); Hoese Corp. v. Vetter Corp. (In re Vetter Corp.), 724 F.2d 52, 56 (7th Cir. 1983); Badami v. Burgess (In re Burgess), 246 B.R. 352, 356 (B.A.P. 8th Cir. 2000); In re General Motors Corp., 407 B.R. 463, 494 (Bankr S.D.N.Y. 2009).
Some courts—principally in the Third Circuit—require a finding of good faith at the time the bankruptcy court approves a sale or lease of property under section 363. See Abbotts Dairies, 788 F.2d at 149–50; In re Perona Bros., Inc., 186 B.R. 833, 839–840 (D.N.J. 1995); In re Primel, 629 B.R. 790, 799 (Bankr. W.D. Pa. 2021); Factory Mutual Ins. Co. v. Panda Energy Int'l, Inc. (In re Hereford Biofuels, L.P.), 466 B.R. 841, 860 (Bankr. N.D. Tex. 2012).
Other courts do not. See, e.g., Harbison-Fischer Mfg. Co. v. Zinke (In re Zinke), 97 B.R. 155, 156–157 (E.D.N.Y. 1989) (declining to adopt the Abbotts Dairies rule); T.C. Investors v. Joseph (In re M Cap. Corp.), 290 B.R. 743, 748 (B.A.P. 9th Cir. 2003) ("Because findings of 'good faith' made at the time of the sale may be premature because they are made before the really interesting facts emerge, the Ninth Circuit does not require that a finding of 'good faith' be made at the time of sale and has rejected the Third Circuit's contrary rule.") (citations and internal quotation marks omitted).
Courts also disagree as to whether any entity asserting a lien on, or other interest in, property to be sold free and clear under section 363(f) of the Bankruptcy Code must be provided with advance notice of the sale for the purchaser of the property to be entitled to the protection of section 363(m). See generally Collier at ¶ 363.11 ("The protection afforded by section 363(m) has been held not to protect even an otherwise good faith purchaser when no notice was given to the lienholder, resulting in the purchaser taking the property subject to the lien."). Compare Archer-Daniels-Midland Co. v. Country Visions Cooperative, 29 F.4th 956 (7th Cir. 2022) (affirming lower court rulings denying a motion to bar an entity holding a right of first refusal on property purchased from a debtor "free and clear" pursuant to section 363(f) from continuing state court litigation seeking to enforce its right and holding that, because the buyer had actual and constructive knowledge of the right of first refusal, yet never informed the bankruptcy court, the buyer had not acted in good faith and was not entitled to the protections of section 363(m)); United States v. Moberg Trucking, Inc. (In re Moberg Trucking, Inc.), 112 B.R. 362, 363–364 (B.A.P. 9th Cir. 1990) (section 363(m) requires that a sale be authorized under section 363(b), which specifically requires notice and a hearing; thus, section 363(m) mootness is not applicable when the appellant seeks to attack the section 363 sale of estate property on the grounds of improper notice), with In re Edwards, 962 F.2d 641, 645 (7th Cir. 1992) (a purchaser at a section 363(b) sale took clear title even though the lienholder did not receive notice at the time of the sale); In re Motors Liquidation Co., 529 B.R. 510 (Bankr. S.D.N.Y. 2015) (lack of notice will not invalidate a sale, unless party can show prejudice).
A purchaser or lessee bears the burden of establishing good faith under section 363(m). TMT Procurement, 764 F.3d at 520.
Human Housing
Human Housing Henrietta Hyatt, LLC (the "debtor") owned nine parcels of residential real estate in Kentucky (the "properties"). The properties served as collateral for secured debt held by Toorak Repo Seller I Trust ("Toorak"). The debtor's membership interests were held by Paulette Long ("Long") (51%) and Clarisse D. Clemons-Ferrara ("Ferrara") (49%), with Long acting as the managing member. Long and Ferrara guaranteed the debt to Toorak.
In 2022, the debtor filed a petition as a small-business debtor under subchapter V of chapter 11 in the Western District of Kentucky with the intention of selling the properties. As of the petition date, approximately $1.1 million of the Toorak debt was outstanding, and the debtor valued the properties in its schedules at approximately $864,000.
In February 2022, Toorak moved for relief from the automatic stay to foreclose on the properties or, in the alternative, for an order directing the debtor to make adequate protection payments.
Shortly afterward, the debtor sought bankruptcy court authority to sell the properties free and clear of liens to Develco-Louisville, LLC ("Develco") in a private sale for $700,000. Develco was owned by Long's husband, John.
Toorak and the debtor opposed each other's motions. However, in an agreed order, they later agreed that Toorak would receive $975,000 in full satisfaction of its claim, and in exchange, the debtor and the guarantors would be released from all liability. The order further provided that, if the debtor did not pay the $975,000 within the specified time, the terms of the order would be incorporated into a chapter 11 plan.
In June 2022, having failed to pay Toorak before the deadline specified in the agreed order, the debtor proposed a liquidating chapter 11 plan providing that: (i) Long and Ferrara would retain 100% of the debtor's equity; (ii) Long would remain the debtor's manager; (iii) Toorak would be paid $975,000 from the proceeds of the sale of the properties to Develco, with certain adjustments; and (iv) the debtor, Long, and Ferrara would be released from any liability on the debt and the guaranties. The plan established a May, 27, 2022, deadline for closing the Develco sale, but the court ultimately extended the deadline to March 31, 2023. The plan also provided that if the sale did not close by the deadline, the Long and Ferrara guaranties would not be released and the subchapter V trustee (the "trustee") would have the power to sell the properties, after which Toorak would receive any net sales proceeds in excess of certain administrative expenses, real estate taxes, or penalties.
The bankruptcy court confirmed the debtor's chapter 11 plan on June 24, 2024. Long and Ferrara (essentially plan proponents) did not object to confirmation or appeal the confirmation order.
After the Develco sale failed to close by the appointed deadline, the trustee moved in August 2023 to sell one of the properties (the "Drake property") for $85,000 to Colin Drake ("Drake"). In her motion, the trustee sought a finding by the court that Drake was buying the Drake property in good faith and therefore entitled to the protections of section 363(m). In November 2023, the trustee filed motions to sell the remaining eight properties to Impulse LLC ("Impulse") for $725,000, again requesting a finding that the buyer was a good-faith purchaser within the meaning of section 363(m). Only a county taxing authority responded to the sale motions to ensure that its tax claims would be satisfied from the sale proceeds. Toorak supported the sale motions.
At a November 2023 hearing to consider approval of the sales, Ferrara informed the court that there was a competing offer of $825,000 for the properties from an entity later revealed to be Clearview Eastern Fund LLC ("Clearview"), with which Ferrara had some connection, but without committed financing. Despite adjournment of the hearing to give Clearview an opportunity to present a concrete offer for the properties or for the parties to object to the sales in writing, neither Clearview, Long, nor Ferrara ever did so. At the continued hearing, the trustee informed the court that she had received a nonbinding commitment from Clearview to purchase the properties, with certain conditions and contingencies. Clearview did not object to the sale motions.
On November 29, 2023, the bankruptcy court granted the sale motions. Each of the orders approving the sales included a finding that the buyers were non-insider good-faith purchasers entitled to the protections of section 363(m).
Clearview moved for reconsideration, arguing that it had submitted a higher offer for the properties. On January 3, 2024, Clearview sought a stay of the sale orders pending appeal. Clearview never raised any objection concerning the conduct of the buyers. The bankruptcy court denied both motions. Immediately afterward, Clearview filed an affidavit with the court claiming for the first time that Clearview had entered into binding contracts with the trustee to purchase some or all of the properties that pre-dated the trustee's agreements for the sale of the properties to Drake and Impulse. Clearview did not claim in its affidavit that either Drake or Impulse had acted in bad faith.
Clearview, Long, and Ferrara (collectively, the "appellants") appealed the sale orders and the order denying reconsideration to the BAP.
The Bankruptcy Appellate Panel's Ruling
A three-judge BAP affirmed the bankruptcy court's orders.
Writing for the panel, Chief BAP Judge Randal S. Mashburn ruled that Long and Ferrara had standing to appeal the sale orders under the "person aggrieved" standard because they would be "directly and adversely affected pecuniarily" by the orders, given their potential exposure under the guarantees. Human Housing, 666 B.R. at 345 (citations and internal quotation marks omitted).
The BAP concluded that Clearview did not have appellate standing to challenge the sale orders as a "disappointed bidder" because it did not challenge "the intrinsic structure of the sale [as being] tainted by fraud, mistake, or unfairness" and demonstrate that there was a "bankruptcy interest" served by the appeal, such as an increased return to creditors. Id. at 346 (citations and internal quotation marks omitted). According to Judge Mashburn, "a potential bidder without a pecuniary interest cannot upend a sale process blessed by the bankruptcy court through a confirmed plan by subsequently claiming that a bidding process would have been better." Id. However, because Clearview argued that it had enforceable pre-existing contracts for the sale of some or all of the properties, the BAP held that Clearview had standing to appeal the sale orders. Id. at 347.
Next, the BAP determined that any arguments raised by Clearview in its post-sale-ruling affidavit were waived because they were untimely. Id. at 348.
The trustee's principal argument before the BAP was that the appeal was moot under section 363(m) of the Bankruptcy Code. Id. at 349. The BAP agreed, finding that the appeal of the sale orders was moot because Long, Ferrara, and Clearview waived any challenge to the bankruptcy court's finding that Drake and Impulse were good-faith purchasers—the "only reviewable issue" when the provision apples in accordance with Sixth Circuit precedent. Id. (citations omitted).
Initially, Judge Mashburn explained that the mootness rule set forth in section 363(m) applies to all kinds of bankruptcy asset sales, including sales by a post-confirmation plan liquidation trustee or agent. Id.
According to the BAP, an issue not raised before the bankruptcy court is generally waived on appeal unless it involves "novel questions," which was not the case here. Id. at 350 (citing Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 552 (6th Cir. 2008)). Moreover, Judge Mashburn noted, consistent with the Sixth Circuit's general waiver rule, "courts in other jurisdictions specifically hold that a challenge to a buyer's good faith may not be raised for the first time on appeal." Id. (citations omitted).
In addition, the BAP emphasized that the good-faith standard focuses on the purchaser's conduct with respect to the sale, rather than the conduct of the debtor (or, in this case, the trustee). Id. at 351. According to Judge Mashburn, Clearview argued that the trustee was being unfair in not permitting it to bid or in rejecting its offer, which is "not relevant except to the extent of fraud or collusion with the purchaser, neither of which were alleged." Id.
He also noted that although "value" is a factor in good faith, "that element does not require the absolute highest value that could conceivably be obtained." Id. Thus, the fact that Clearview may have been willing to submit a higher offer (albeit subject to "serious financing contingencies") did not indicate that the purchasers' offers were not for value. Id.
The BAP also determined that the purchasers did not have notice of adverse claims or interests that would defeat their good-faith purchaser designation. Id. at 352–353. Having a competing bid, Judge Mashburn explained, does not constitute an "adverse interest"—otherwise "no winning bidder would ever be considered a good-faith purchaser entitled to the protections of § 363(m)." Id. at 352 (citation omitted). Moreover, he emphasized, Clearview never argued to the bankruptcy court that the purchasers had notice of an adverse contractual interest based upon purported pre-existing sale agreements, and at all times conducted itself as a competing bidder rather than a binding contract counterparty. Id. at 352–353.
By failing to challenge the buyers' good faith in the bankruptcy court, despite having been informed that the trustee was seeking a good-faith finding in connection with the proposed sales, the BAP concluded that the appellants waived any appellate challenge on the basis of good faith. Id. at 353.
The BAP accordingly affirmed the sale orders and the related order denying Clearview's motion for reconsideration. Id. at 353–354.
Outlook
There are several key takeaways from the BAP's ruling in Human Housing:
- First, the BAP reinforced the principle that the finality of orders authorizing bankruptcy asset sales is an indispensable part of U.S. bankruptcy law, without which it would be far more difficult to monetize estate assets for the benefit of all stakeholders. Statutory mootness of unstayed sale or lease orders is the gatekeeper to finality and, at least in the Sixth Circuit, section 363(m) categorically bars appeals of such orders on any ground other than that the purchaser or lessee did not act in good faith.
- Second, the protections provided to good-faith purchasers under section 363(m) are not limited to sales transactions entered into by bankruptcy trustees or chapter 11 debtors, but also include their agents (including liquidating trustees).
- Third, the good-faith standard focuses on the conduct of the purchaser in connection with the sale, not the seller.
- Fourth, a party challenging a bankruptcy asset sale on the basis of lack of good faith waives the argument on appeal by failing to raise the issue in the bankruptcy court.
- Fifth, the good-faith status of a buyer of estate property in bankruptcy is not impugned merely because the buyer is aware of objections to the proposed sale. Instead, such claims must rise to the level of an "adverse interest" in the property to defeat good-faith status under section 363(m). The existence of a competing bid is not an "adverse interest."
