558 B.R. 500
1st Cir. BAP2016Background
- Debtor (Tempnology, later Old Cold, LLC) operated the Coolcore fabric business and entered chapter 11 after severe liquidity problems; S&S was a lender, majority equity owner, stalking-horse bidder, and eventual purchaser.
- S&S held large secured and prepetition claims, provided DIP financing, and proposed a § 363 sale including substantial credit-bidding of pre- and post-petition claims. An examiner was appointed because the sale involved an insider and credit bid.
- Phoenix Capital ran a marketed sale process; only Mission (a counterparty under a rejected licensing/distribution agreement) and S&S submitted competing bids; an auction followed with bidding back and forth and S&S’s final (credit) bid accepted.
- The bankruptcy court thoroughly reviewed the record, applied heightened scrutiny for an insider sale, concluded there was no fraud or collusion, found S&S a good-faith purchaser under 11 U.S.C. § 363(m), and entered a Sale Order approving the transaction; the sale closed December 18, 2015.
- Mission appealed contesting the sale approval and good-faith finding and argued procedural unfairness, collusion, improper credit bidding, and that heightened scrutiny was not applied; Appellees argued statutory and equitable mootness because the sale closed without a stay.
Issues
| Issue | Mission's Argument | S&S/Debtor's Argument | Held |
|---|---|---|---|
| Whether appeal is statutorily moot under 11 U.S.C. § 363(m) | Sale should be reversed; no stay obtained is irrelevant because S&S lacked good faith | § 363(m) bars reversal of an unstayed sale to a good-faith purchaser; only good-faith issue remains | Appeal not entirely statutorily moot: because Mission challenged good faith, appellate review limited to that issue (court evaluates good faith) |
| Whether appeal is equitably moot | Post-closing conduct doesn’t create reliance preventing relief; reversal is practicable | Sale closed and third parties have relied on it (payments, hires, inventory purchases), making meaningful relief impracticable | Appellees did not meet burden to show equitable mootness; appeal not equitably moot |
| Whether S&S was a "good-faith purchaser" (11 U.S.C. § 363(m)) | S&S was an insider and colluded with Debtor (forbearance, limited marketing, off-record contacts, underfunded credit bids, post-sale inventory deals) — ergo not in good faith | No evidence of fraud or collusion; examiner and U.S. Trustee found process adequate; S&S bid for value and process was competitive | Bankruptcy court’s finding that S&S was a good-faith purchaser was not clearly erroneous; affirmed |
| Whether bankruptcy court applied proper (heightened) scrutiny to insider sale | Court failed to apply required heightened scrutiny for insider sales outside a plan | Court acknowledged and applied heightened scrutiny: appointed examiner, reviewed marketing, valuations, auction conduct and post-sale facts | Court correctly applied heightened scrutiny and sufficiently addressed insider concerns |
Key Cases Cited
- Anheuser-Busch, Inc. v. Miller, 895 F.2d 845 (1st Cir. 1990) (§ 363(m) bars reversal of an unstayed sale to a good-faith purchaser)
- Canzano v. Ragosa (In re Colarusso), 382 F.3d 51 (1st Cir. 2004) (appellate review of unstayed sale limited to purchaser’s good faith)
- Licensing by Paolo v. Sinatra (In re Gucci), 105 F.3d 837 (2d Cir. 1997) (same; statutory limitation of appellate relief under § 363(m))
- Mark Bell Furniture Warehouse, Inc. v. D.M. Reid Assocs. (In re Mark Bell Furniture Warehouse, Inc.), 992 F.2d 7 (1st Cir. 1993) (definition and mixed-question treatment of good-faith purchaser)
- Oakville Dev. Corp. v. Fed. Deposit Ins. Corp., 986 F.2d 611 (1st Cir. 1993) (failure to obtain stay can render appeal moot where sale proceeds and reliance cannot be undone)