United States Court of Appeals For the First Circuit
Nos. 16-9012, 16-9015
IN RE: OLD COLD LLC, f/k/a Tempnology, LLC,* Debtor.
MISSION PRODUCT HOLDINGS, INC.,
OLD COLD LLC, f/k/a Tempnology, LLC and SCHLEICHER AND STEBBINS HOTELS LLC,
APPEALS FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Torruella, Lynch, and Kayatta, Circuit Judges.
Robert J. Keach, with whom Lindsay K.Z. Milne and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for appellant/cross- appellee. Christoper M. Desiderio, with whom Daniel W. Sklar and Nixon Peabody LLP were on brief, for appellee/cross-appellant Old Cold LLC. Christoper M. Candon, with whom Sheehan Phinney Bass & Green
* By order dated December 23, 2015, the bankruptcy court granted Debtor's motion to amend the caption by replacing "Tempnology, LLC" with "Old Cold LLC."
PA was on brief, for appellee/cross-appellant Schleicher & Stebbins Hotels LLC.
January 12, 2018
KAYATTA, Circuit Judge. Chapter 11 debtor Tempnology,
LLC ("Debtor") auctioned off its assets pursuant to section 363 of
the Bankruptcy Code. Schleicher and Stebbins Hotels LLC ("S&S")
was declared the winning bidder over Mission Product Holdings,
Inc. ("Mission"). With the bankruptcy court's approval, Debtor
and S&S completed the sale. On appeal, Mission now asks that we
order the bankruptcy court to unwind the sale and treat Mission as
the winning bidder. Because the sale to S&S was completed and S&S
is a good faith purchaser entitled to protection under
section 363(m), we affirm without reaching the merits of Mission's
various challenges to the sale. Our explanation follows.
Debtor made specialized products -- such as towels,
socks, headbands, and other accessories -- designed to remain at
low temperatures even when used during exercise. It marketed these
products under the "Coolcore" and "Dr. Cool" brands. S&S is an
investment holding company with its primary interest in hotels.
Prior to Debtor's bankruptcy, S&S owned a majority interest in
Debtor. Until just under two months before Debtor commenced this
Chapter 11 proceeding, Mark Schleicher and Mark Stebbins -- S&S's
two principals -- sat on Debtor's management committee.
Almost three years before petitioning for bankruptcy,
Debtor executed a Co-Marketing and Distribution Agreement with
Mission. This Agreement granted Mission a nonexclusive, perpetual
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license to Debtor's intellectual property and an exclusive
distributorship for certain of Debtor's manufactured products.
The Agreement forbade Debtor from selling the covered products in
Mission's exclusive territory, which included the United States.
When the relationship between Mission and Debtor soured,
Mission exercised its contractual right to terminate the Agreement
without cause on June 30, 2014. This election triggered a two-
year "Wind-Down Period" through July 1, 2016, during which
Mission's rights remained in effect. Debtor responded by seeking
to terminate the Agreement for cause, claiming as a breach
Mission's hiring of Debtor's former president. Unlike Mission's
election, Debtor's termination for cause, if effective, would have
terminated the Agreement without a Wind-Down Period. The dispute
went before an arbitrator, who found that Debtor's attempted
termination for cause was improper, potentially entitling Mission
to damages for Debtor's failure to abide by the Agreement leading
up to arbitration. The hearing to determine the amount of these
damages has been stayed pending the resolution of Debtor's
As the parties' relationship deteriorated, so too did
Debtor's financial results. Debtor posted multi-million dollar
losses in 2013, 2014, and 2015, for which it blames the Agreement
with Mission. To combat its liquidity problems, Debtor took on
increased debt. S&S, which had already made substantial loans to
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Debtor, loaned additional money, and Debtor obtained a secured
line of credit with People's United Bank for approximately
$350,000. In 2014, after deciding that it would only continue
lending to Debtor on a secured basis, S&S acquired People's United
Bank's line of credit. S&S increased the secured loan limit, first
to $4 million, and later to $5.5 million. This tactic allowed S&S
to gradually convert its unsecured debt into secured debt.
Debtor failed to improve financially. On July 13, 2015,
Debtor's management committee and Stebbins met to discuss Debtor's
outstanding debt. At this meeting, S&S and Debtor agreed to the
outline of a forbearance agreement, which was memorialized and
signed four days later. The forbearance agreement provided for an
additional $1.4 million in funding for Debtor on the condition
that it file for bankruptcy and sell substantially all of its
assets in a section 363 sale. See 11 U.S.C. § 363(b).
Stebbins and Schleicher both stepped down from Debtor's
management committee following the July 13 meeting. Thereafter,
neither had contact with Debtor's management regarding Debtor's
operation or subsequent bankruptcy.
Debtor then engaged Phoenix Capital Resources, a crisis
management, investment banking, and financial services firm, to
explore its options. Phoenix concluded that Debtor's best route
was to be put up for sale. It then solicited approximately five
companies to serve as the stalking horse bidder for Debtor's
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assets. In the context of a bankruptcy sale, a stalking horse
bidder is an initial bidder whose due diligence and research serve
to encourage future bidders, and whose bid sets a floor for
subsequent bidding. See ASARCO, Inc. v. Elliott Mgmt. (In re
ASARCO, L.L.C.), 650 F.3d 593 , 602 n.9 (5th Cir. 2011). None of
the firms solicited by Phoenix were interested in taking on the
expense of this role. In August of 2015, Phoenix approached S&S,
which agreed to be the stalking horse bidder.
On September 1, 2015, Debtor filed a petition for
Chapter 11 bankruptcy. On the same day, S&S formally became the
stalking horse bidder by signing an agreement to purchase Debtor's
assets for $6.95 million, composed almost entirely of forgiven
pre-petition debt owed by Debtor to S&S. This strategy of
offsetting a purchase price with the value of a secured lien is
called credit bidding, and it is permitted in a section 363 sale
"unless the court for cause orders otherwise." 11 U.S.C. § 363(k).
A provision in the Agreement also left Debtor able to back out in
favor of a superior bid at the auction.
The next day, Debtor moved for approval of its proposed
asset sale procedures. It also moved to reject a number of its
executory contracts, including the Mission Agreement. The
bankruptcy court ultimately granted that motion, and Mission's
challenge to that order is the subject of our separate opinion
issued this date in appeal No. 16-9016.
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Because the stalking horse bidder -- S&S -- was an
insider of Debtor, both the United States Trustee and Mission
sought the appointment of an independent examiner to evaluate the
proposed sale and bidding procedures. Although Debtor initially
resisted, it ultimately concurred in the recommendation. The court
agreed, and appointed an examiner.
On October 8, the bankruptcy court held a hearing on the
sale motion. In light of a concern raised in the examiner's
interim report and echoed by the court about S&S's pre-petition
credit bid, S&S agreed at the hearing to change the composition of
its stalking horse bid and to lower its value from approximately
$7 million to just over $1 million. Its revised bid consisted of
$750,000 in post-petition debt and the assumption of about $300,000
in pre-petition liabilities. As the bankruptcy court concluded,
this agreement was a concession intended to defer to a later day
a possible fight over S&S's credit-bidding rights.
The bankruptcy court approved the sale procedures on
October 8, after which Phoenix sent 164 emails to companies that
Phoenix determined might be interested in bidding for Debtor's
assets. Included with its standard email was a confidentiality
agreement and an invitation to visit a data room, in which Phoenix
had deposited Debtor's confidential business information. Despite
conducting 112 follow-up calls, and a few visits by interested
companies to the data room, Phoenix failed to secure any party --
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other than Mission and S&S -- willing to bid at the auction.
Potential bidders were deterred by, among other things, Debtor's
poor financial track record, its dispute with Mission, the size of
the market opportunity, and S&S's ability to credit bid. Debtor
had also given Phoenix a list of parties not to contact, comprised
of Debtor's customers. Debtor believed that these customers would
be less likely to continue their relationship with Debtor if they
knew that Debtor was undergoing an asset sale, and that their
withdrawal would further threaten Debtor's already precarious
Through an affiliate, S&S continued to lend to Debtor
during the run-up to the auction. S&S included the full amount of
this disbursed and imminent loan -- $750,000 -- as post-petition
debt in a revised stalking horse bid, submitted at the beginning
On November 2, 2015, Mission placed a qualifying overbid
of $1.3 million, entitling the company to bid at auction. Three
days later, on November 5, Debtor's counsel held an auction for
Debtor's assets, at which S&S and Mission were the only bidders.
The bid procedures allowed negotiations to be conducted off the
record. Although S&S had revised its stalking horse bid to exclude
forgiven pre-petition debt, its first bid at auction -- for a total
of $1.4 million -- included such a credit bid. Mission then
asserted that S&S had no right to credit bid pre-petition debt,
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and announced that it would bid under protest for the remainder of
the auction. The next opportunity to bid went to Mission. To
beat S&S's proposal, Mission increased the value of its previous
bid, to the apparent confusion of some present, by agreeing to
leave in the estate $200,000 in cash, thus increasing the total
value of its bid to $1.5 million. Bidding continued to proceed in
this fashion: S&S increased its bid using credit, and Mission
agreed to leave additional assets in the estate, including Debtor's
finished goods inventory and accounts receivable. Given Mission's
bidding structure, Debtor then revalued its accounts receivable
and inventory to reflect their liquidation value as opposed to
their book value. This revaluation reduced the bidding value of
the accounts receivable by twenty percent, to $80,000, and the
bidding value of the inventory by ninety percent, to $120,000.
Mission's counsel, after being informed that Debtor would
recalculate the inventory value, responded that "[a]s long as it's
apples to apples, I don't care." Mission's counsel did not object
to the new figures after Debtor announced them.
The parties then broke for lunch. Back on the record,
Debtor's counsel informed those present that, after a negotiation
between Debtor's counsel and S&S off the record, S&S intended to
adopt Mission's bid structure by leaving assets in the estate. In
its next bid, S&S credit bid only its post-petition debt, assumed
all pre-petition liabilities other than rejection damages and
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disputed liabilities, assumed post-petition accounts payable, and
left in the estate all accounts receivable, inventory, and cash.
In subsequent bidding, S&S increased its bid by credit bidding
pre-petition debt, and Mission increased its bid with cash.
Mission soon ceased to bid and declined to be designated the backup
bidder, ending the auction. S&S's winning bid, for a total value
of $2.7 million, consisted of forgiven pre-petition debt, forgiven
post-petition debt, the assumption of post-petition accounts
payable, the assumption of certain pre-petition unsecured debt,
and cash, inventory, and accounts receivable left in the estate.
For this consideration, S&S acquired "all of [Debtor's] assets,
properties and businesses," excluding, among other things, the
assets left in the estate.
Before ruling on Debtor's motion to approve the sale,
the bankruptcy court held two days of evidentiary hearings. A
Phoenix partner, Debtor's two top officers, and Mark Stebbins of
S&S all testified. To support its contention that the sale process
was tainted by fraud and collusion, Mission relied on cross-
examining Debtor's witnesses, but did not present any witnesses of
At the second day of the hearing, on November 23, 2015,
the bankruptcy court noted that it would have an order "very, very
quickly." Debtor informed the court that the parties were "ready
to close as soon as an order is entered." In its proposed order,
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submitted on December 1, Debtor requested that the automatic stay
provision of rules 6004(h) and 6006(d) be waived. Debtor had also
submitted this request in an earlier draft order. On December 15,
2015, Debtor submitted a status report informing the court that if
it could not close the sale by December 18, it would need to draw
an additional $150,000 on its post-petition line of credit.
On December 18, 2015, the bankruptcy court posted its
order and opinion approving the sale of Debtor's assets to S&S.
In re Tempnology, LLC, 542 B.R. 50 (Bankr. D.N.H. 2015). In its
analysis, the court looked to whether the sale process provided
creditors the same substantive protections as the confirmation
process, and also weighed the business reasons for the proposed
transaction, including whether it made sense in the overall context
of the reorganization. It held that the transaction did not
subvert Chapter 11's substantive creditor protections. The court
determined that the absolute priority rule was not implicated
because "S&S will not retain its equity interest or receive any
distribution on account of it, but is instead purchasing the
Debtor's assets." Id. at 66. Because an assumption of liabilities
"is common practice and there are sound business reasons why some
are assumed and others are not," the court ruled that S&S's
assumption of liabilities "does not constitute an attempt to
circumvent" the Code's prohibition against intra-class
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discrimination. Id. The court held that S&S was permitted to
credit bid under section 363(k). Id. at 69.
The court further found that "there is no evidence in
the record establishing any misconduct or collusion in the sale
process by the Debtor and S&S." Id. at 67. In doing so, it
credited the testimony of Stebbins and Debtor's top officers.
Based in part on this finding, the court held that S&S was a "good
faith purchaser" within the meaning of section 363(m). Relying on
testimony presented at the November 23 hearing, the court
concluded that, whatever their initial relationship, "Stebbins and
S&S essentially divorced themselves from the Debtor when it became
clear that a reorganization was needed." Id. at 72. According to
the court, Mission had "failed to demonstrate that the proposed
transaction is anything other than an arm's length transaction."
Id. The court also noted that the entire transaction was overseen
by both the United States Trustee and an independent examiner,
neither of whom lodged any objection to the sale. Id. at 72.
In its order approving the sale, as Debtor had requested,
the bankruptcy court waived the automatic stay in rules 6004(h)
and 6006(d). In doing so, it stated:
This Court expressly finds and rules that there is no just reason for delay in the implementation of this Order and expressly directs entry of judgment as set forth herein and the stay imposed by Bankruptcy Rules 6004(h) and 6006(d) are hereby waived and this Order shall be effective immediately
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upon its entry and the Debtor is hereby authorized and directed to consummate the sale of the Assets to the Successful Bidder . . . .
Later that day, S&S and Debtor consummated the sale. Mission
appealed to the Bankruptcy Appellate Panel for the First Circuit
After the bankruptcy court's order, but prior to the
BAP's ruling, Debtor sold its remaining finished goods inventory
to S&S, which had left this asset in the estate as part of its
winning bid at the auction. On February 25, 2016, Debtor filed a
comfort motion seeking approval of the inventory sale. Debtor
took the position in its motion that, because "[a]ll of the
Debtor's inventory currently consists of branded product," then,
"[a]s a result of S&S's acquisition of the Debtor's trademarks and
tradenames, the only party who can purchase the branded inventory
without violating S&S's intellectual property rights is S&S."
Although the initial motion listed the price as seventy-five
percent of cost, S&S later raised the price to one-hundred percent
Mission challenged the inventory sale. On March 22,
2016, the bankruptcy court held a hearing, in which it ultimately
approved the sale of the inventory to S&S. It determined the price
to be fair and noted that it would be difficult to get a higher
price for inventory given that Debtor was in liquidation.
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Mission's appeal to the BAP also proved unsuccessful.
Mission Prod. Holdings, Inc. v. Old Cold, LLC (In re Old Cold,
LLC), 558 B.R. 500 (B.A.P. 1st Cir. 2016). Section 363(m), the
BAP held, limited its review to the issue of good faith in the
absence of a stay. Id. at 513. Because "[n]othing in the record"
persuaded the BAP "that the bankruptcy court's good faith finding
was clearly erroneous," it held that section 363(m) barred further
review. Id. at 515. The BAP also held that the bankruptcy court
applied the correct legal standards and that the post-sale conduct
regarding inventory did not upset the good faith finding below.
Id. at 520-21.
We begin our analysis of Mission's arguments on appeal
by summarizing the statutory framework. Section 363(b) of the
Bankruptcy Code permits a debtor-in-possession,1 "after notice and
a hearing," to "sell . . . property of the estate." 11 U.S.C.
§ 363(b)(1). In a section 363(b) asset sale, the debtor-in-
possession may sell the estate property "free and clear of any
interest in such property of an entity." Id. § 363(f). According
1 Although this provision of the statute only refers to the powers of a trustee, per 11 U.S.C. § 1107(a), a Chapter 11 "debtor in possession shall have all the rights . . . and powers, and shall perform all the functions and duties, . . . of a trustee serving in a case under this chapter." See also Mason v. Official Comm. of Unsecured Creditors, for FBI Distrib. Corp. & FBC Distrib. Corp. (In re FBI Distrib. Corp.), 330 F.3d 36 , 42 n.8 (1st Cir. 2003) (citing this provision).
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to an observer, asset sales have become increasingly common as a
substitute for Chapter 11 confirmation plans. See Kimon Korres,
Bankrupting Bankruptcy, 63 Fl. L. Rev. 959, 960 (2013). Asset
sales provide speed and efficiency to the estate and may maximize
the value of the underlying assets by subjecting them to a
competitive auction. Id. But, because of a concern that a debtor-
in-possession may use an asset sale to circumvent the creditor
protections of Chapter 11, section 363(b) does not grant a "carte
blanche." Comm. of Equity Sec. Holders v. Lionel Corp. (In re
Lionel Corp.), 722 F.2d 1063 , 1069 (2d Cir. 1983). Instead, the
bankruptcy court must determine whether there is a "good business
reason" for the sale, and whether the sale adheres to the
substantive protections of Chapter 11. Id. at 1071.
Should the bankruptcy court approve the sale, the
Bankruptcy Code provides a degree of finality to the estate and
the purchaser. Section 363(m) provides that:
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). The effect of this provision is to render
statutorily moot any appellate challenge to a sale that is both to
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a good faith purchaser, and not stayed. See Anheuser-Busch, Inc.
v. Miller (In re Stadium Mgmt. Corp.), 895 F.2d 845 , 847 (1st Cir.
So, is Mission's appellate challenge to the now-
consummated sale moot? To establish otherwise, Mission advances
two arguments: First, it argues that section 363(m) does not
control because S&S was not a good faith purchaser. Second, it
argues that Mission was given no chance to seek a stay of the sale,
and thus we should overlook the absence of a stay. We address
each argument in turn.
Good faith, in the context of section 363(m), is a "mixed
question of law and fact." Mark Bell Furniture Warehouse, Inc. v.
D.M. Reid Assocs. (In re Mark Bell Furniture Warehouse, Inc.), 992
F.2d 7 , 8 (1st Cir. 1993). On appeal from a decision by the BAP,
"[w]e accord no special deference to determinations made by the
[BAP]," and instead "train the lens of our inquiry directly on the
bankruptcy court's decision."2 Wheeling & Lake Erie Ry. Co. v.
2 We do nevertheless pay great attention to the considered opinion of the three experienced bankruptcy judges who sit on the BAP. Among other things, our consideration of such an opinion reduces the likelihood that our court of general appellate jurisdiction is blindsided by the effect that a decision might have on matters or issues of bankruptcy law and practice that are beyond the ken of the parties in a particular proceeding.
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Keach (In re Montreal, Maine & Atl. Ry., Ltd.), 799 F.3d 1 , 5 (1st
Cir. 2015). Mission accepts the proposition that we review the
determination of good faith for clear error unless the bankruptcy
court's analysis is "infected by legal error." Prudential Ins.
Co. of Am. v. SW Bos. Hotel Venture, LLC (In re SW Bos. Hotel
Venture, LLC), 748 F.3d 393 , 402 (1st Cir. 2014) (quoting Winthrop
Old Farm Nurseries, Inc. v. New Bedford Inst. for Sav. (In re
Winthrop Old Farm Nurseries, Inc.), 50 F.3d 72 , 73 (1st Cir.
1995)). Absent legal error, this is a "formidable standard," and
we will not reverse if the "bankruptcy court's account of the
evidence is plausible in light of the record viewed in its
entirety." Id. (quoting Goat Island S. Condo. Ass'n v. IDC
Clambakes, Inc. (In re IDC Clambakes, Inc.), 727 F.3d 58 , 64 (1st
Cir. 2013)). Only if "on the whole of the record, we form a
strong, unyielding belief that a mistake has been made" will we
upset the bankruptcy court's determination under a clear error
standard. Id. (quoting Cumpiano v. Banco Santander P.R., 902 F.2d
148 , 152 (1st Cir. 1990)).
Mission argues that the bankruptcy court did indeed
commit legal error in finding that S&S was a good faith purchaser.
Reasons Mission, because S&S was an insider, the bankruptcy court
was required to apply "heightened scrutiny," yet failed to do so.
To reject this argument, we need not decide whether heightened
security was required. Rather, we can rest our rejection of
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Mission's argument on the fact that the bankruptcy court did bring
heightened scrutiny to bear in its relevant findings. It prefaced
its findings of fact by expressly stating that it employed a
greater level of scrutiny because section 363 "sales to insiders
are subject to a higher scrutiny," and observed that, in this
context, "higher scrutiny requires a debtor to demonstrate that
the assets are being sold for the highest price attainable and
that the insider transaction is the result of a bona fide arm's
length transaction and not driven by other factors." In re
Tempnology, LLC, 542 B.R. at 65 (quotation marks and alterations
omitted). The court also applied a "greater level of scrutiny"
because of its concern that a sale close "to the heart of the
reorganization process" might evade Chapter 11 protections. Id.
at 64. Finally, the court expressly rested its finding of good
faith upon those findings made under heightened scrutiny. Id. at
72. In sum, there is no basis to claim that the bankruptcy court
applied a standard of scrutiny too favorable to Debtor or S&S. We
therefore review for clear error.
So the question remains: Did the bankruptcy court commit
clear error in finding that S&S is a good faith purchaser within
the meaning of section 363(m)? Although the Bankruptcy Code does
not define "good faith purchaser," we have defined this phrase in
the context of section 363(m) as "one who buys property in good
faith and for value, without knowledge of adverse claims." In re
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Mark Bell Furniture Warehouse, Inc., 992 F.2d at 8. We address
each prong of this three-part definition in turn.
First, and true to its name, a good faith purchaser must
act "in good faith." Id. This means that the party must purchase
without fraud, misconduct, or collusion, and must not take
"'grossly unfair' advantage of other bidders." Id. (quoting In re
Andy Frain Servs., Inc., 798 F.2d 1113 , 1125 (7th Cir. 1986)); see
also Oakville Dev. Corp. v. FDIC, 986 F.2d 611 , 614 (1st Cir.
Mission posits that the following alleged events, as
Mission characterizes them, evidence collusion or other
misconduct: Debtor did not negotiate the forbearance agreement;
Stebbins exercised control over Debtor; Debtor instructed Phoenix
not to contact certain customers in its marketing efforts; S&S's
stalking horse bid included a credit bid of funds not yet
disbursed; Debtor and S&S discussed S&S's bid during a break at
the auction; and Debtor changed the value of inventory and accounts
receivable to their liquidation value at the auction. The
bankruptcy court carefully addressed the gist of these
allegations. It concluded, based in part on two days of
evidentiary hearings, that "there is no evidence in the record
establishing any misconduct or collusion in the sale process by
the Debtor and S&S." In re Tempnology, LLC, 542 B.R. at 67. The
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court found, among other things, that Debtor's marketing efforts
were sufficient and appropriate, that Stebbins did not exert
influence over Debtor after stepping down from its management
committee, that the forbearance agreement and stalking horse bid
were negotiated by counsel, that any issue regarding the stalking
horse bid's funding was resolved prior to the auction, that S&S
was entitled to credit bid at the auction, that the revaluation of
the assets at auction applied equally to both bidding parties,
that the sale procedures permitted ex parte communication, and,
finally, that S&S's bid was superior to Mission's. We see no clear
We therefore shift our focus to Mission's alternative
argument that information that emerged after the bankruptcy court
ruled undercut the basis for its ruling by revealing evidence of
collusion during the auction. To briefly recapitulate, both
Mission and S&S increased the value of their bids at the auction
by leaving the finished goods inventory in the estate, which
consisted of branded consumer products ready for sale. After the
auction, Debtor sold this inventory to S&S3 for its book value with
approval from the bankruptcy court. Although Debtor took the
position that the goods could only be sold to S&S to avoid
3 In its brief and at oral argument, Debtor claimed that it had offered the inventory to Mission, who failed to respond to the offer. Because Debtor does not provide support in the record, we do not consider its assertion.
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violating S&S's newly-acquired intellectual property rights, the
bankruptcy court "ignore[d]" this theory. It further stated that,
if there were such restrictions, it might "prove [Mission's
Mission seizes on the bankruptcy court's statement to
argue that, if faced with the question of good faith again, the
bankruptcy court might not hold fast to its prior ruling. Relying
on a recent decision from the Ninth Circuit's Bankruptcy Appellate
Panel, Mission argues that we can consider post-sale conduct in
evaluating the purchaser's good faith. See Hujazi v. Schoenmann
(In re Zuercher Tr. of 1999), No. 12-32747, 2016 WL 721485 , at *1
(B.A.P. 9th Cir. 2016) (unpublished opinion).
In reviewing Debtor's sale motion, the BAP expressed
skepticism about whether it was appropriate for an appellate court
to take this tack. Nevertheless, it reviewed Debtor's conduct and
concluded that the post-closing sale of inventory did not render
the bankruptcy court's finding clearly erroneous.
We share the BAP's reticence to consider post-closing
conduct in the first instance. Doing so risks placing an appellate
court in the shoes of a trial court and undermines the policy of
finality underlying section 363(m). In this particular instance,
however, it makes no difference who decides the issue, because we
see nothing in the record capable of upsetting the bankruptcy
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Mission points to two infirmities with Debtor's post-
closing sale of inventory. First, Mission argues that the sale to
S&S is evidence of a prior secret agreement, thus supporting its
allegation of collusion. The record does not support this
proposition. Mission, not S&S, introduced the concept of leaving
inventory in the estate at the auction. Only after S&S
restructured its bid to reflect Mission's strategy did S&S choose
to leave inventory in the estate. Further, the examiner concluded,
prior to the inventory sale, that S&S was the logical buyer because
it had "just acquired a business with potential sales orders and
no inventory." Selling the remaining inventory to the most logical
buyer at a price the bankruptcy court determined to be fair does
not constitute collusion.
Second, Mission argues that the existence of
intellectual property restrictions reduced the value of the
inventory, thus calling into question the superiority of S&S's
bid: If only S&S could purchase the inventory, Mission contends,
the market value of the inventory would be decreased. Although it
is true that an intellectual property restriction, if it exists,
would reduce the market value of the inventory, Mission has offered
no counter to the bankruptcy court's apparently apt observation at
the motion hearing that such a restriction would have reduced the
value of Mission's bid in the same manner, had it prevailed.
Therefore, even if a restriction altered the absolute value of the
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parties' bids, it did not materially change their relative
Further, as we read the record, the bankruptcy court's
statements do not reflect a hesitance to abide by its prior good
faith determination, as Mission contends. When the court stated
that a restriction on who might buy the inventory might "prove
[Mission's counsel's] point," we read it as referring to the point
made by Mission's counsel that a restriction could reduce the value
of S&S's bid, not that there is evidence of collusion pointing to
bad faith, as Mission now argues. Mission's counsel never made a
point about good faith or collusion at the hearing. Adding support
to our reading, later in the proceeding, the court again referenced
its decision to proceed on the theory that any party could purchase
the inventory, and stated that a restriction "could effectively
reduce its value to next to nothing" and that the court did not
want to make the assumption that "either side" -- meaning S&S or
Mission, the two bidders at the auction -- was following this
Therefore, we agree with the bankruptcy court that S&S
acted in good faith, thus satisfying the first requirement of the
good faith purchaser test.
The second prong of the good faith purchaser definition
requires the buyer to have purchased the property "for value."
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Greylock Glen Corp. v. Comty. Sav. Bank, 656 F.2d 1 , 4 (1st Cir.
1981). If a purchaser buys in good faith at a fairly-conducted
auction, paying the auction price is sufficient evidence of having
paid value. Licensing by Paolo, Inc. v. Sinatra (In re Gucci),
126 F.3d 380 , 390 (2d Cir. 1997). This turns the inquiry primarily
back to the issue of good faith, id., which ends our second-prong
inquiry because we have already affirmed the bankruptcy court's
finding that S&S purchased in good faith.
Third, and finally, a good faith purchaser must not have
knowledge of adverse claims. Greylock Glen Corp., 656 F.2d at 4.
Mission contends that, because S&S knew of Mission's challenge to
its right to credit bid, S&S had knowledge of an adverse claim.
But a likely appellate challenge to the sale itself is not the
type of "adverse claim" that, if known, deprives the purchaser of
good faith status. See 11 U.S.C § 363(m) (stating that the
statutory protection applies "whether or not [the purchaser] knew
of the pendency of the appeal"). Nor does knowledge of an
objection to the sale procedures constitute knowledge of an adverse
claim. As the Fifth Circuit recently held, there "is a
difference . . . between simply having knowledge that there are
objections to the transaction and having knowledge of an adverse
claim." TMT Procurement Corp. v. Vantage Drilling Co. (In re TMT
Procurement Corp.), 764 F.3d 512 , 522 (5th Cir. 2014) (per curiam);
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see also Shupak v. Dutch Inn of Orlando, Ltd. (In re Dutch Inn of
Orlando, Ltd.), 614 F.2d 504 , 506 (5th Cir. 1980) (per curiam)
("[M]ere knowledge of the claims . . . that are the basis of this
appeal does not deprive [the purchaser] of the protection accorded
to a good faith purchaser."). Because Mission does not point to
any knowledge that would deprive S&S of the protection of
section 363(m), S&S satisfies this third and final prong of the
good faith purchaser inquiry.
In sum, for the foregoing reasons, the bankruptcy court
did not clearly err in finding S&S to be a good faith purchaser.
We turn to the second requirement of section 363(m):
that the sale be unstayed. It is undisputed that the sale closed
in the absence of any stay. Normally, this would end our inquiry.
Mission, however, raises an argument based on the interaction
between section 363(m) and Bankruptcy Rule 6004(h). The latter
rule, in normal course, automatically stays the effect of an order
authorizing a sale of the type at issue here. Among other things,
this automatic stay creates a window within which an objector might
seek a longer stay -- in the bankruptcy court or on an expedited
appeal -- in order to preserve the possibility of an appeal.
Rule 6004(h), however, also expressly allows the bankruptcy court
to waive the automatic stay, which is what the bankruptcy court
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did here, allowing the sale to close promptly upon issuance of the
order approving the sale.
Mission's argument is not that a bankruptcy court cannot
waive the automatic stay. Nor does it argue that such a waiver
automatically renders section 363(m)'s bar on appellate review
inapplicable. Instead, it argues that the Due Process Clause of
the United States Constitution requires that we create an exception
to the appellate bar in section 363(m) if the absence of a stay
arises from a Rule 6004(h) waiver issued without notice and basis.
Mission advances this argument with scant support or
analysis of the embedded due process issues. We need not ourselves
dive into such issues because the factual premises upon which
Mission rests its argument are incorrect. Debtor repeatedly gave
notice -- both in writing and orally -- that it needed to conduct
the sale immediately upon approval, and no later than December 18,
2015. On December 1, Debtor submitted its proposed order. This
order, like the one it had previously submitted on September 2,
requested that the automatic stay be waived. At the November 23
hearing on the motion to approve the sale, Debtor's counsel stated
that "I believe we're ready to close as soon as an order is
Debtor also explained why it needed to close on
December 18. After the court on November 23 had urged Debtor to
avoid obtaining further loans because "it's only going to
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complicate things," Debtor submitted a status report informing the
court that "[i]n the event the Debtor cannot close a transaction
on or before December 18th, it anticipates it will need to draw an
additional $150,000 on its post-petition line of credit." Three
days later, on December 18, the bankruptcy court approved the sale
and waived the automatic stays on the "express" finding that "there
is no just reason for delay."
In short, Mission had notice of the fact that Debtor was
seeking a waiver of the stay, and the record made clear the basis
for the requested waiver. Mission's due process argument therefore
fails on its own terms.
As a final shot, Mission argues that Czyzewski v. Jevic
Holding Corp., 137 S. Ct. 973 (2017) -- decided by the Supreme
Court over a year after the bankruptcy court's order -- controls
the outcome of this appeal. In Jevic, the Supreme Court held that
structured dismissals must follow the same priority rules as
confirmation plans. The Court, however, carved out from its ruling
interim distributions that further "significant Code-related
objectives." Id. at 985. Thus, the Court did not call into
question the validity of first-day wage orders or critical vendor
orders that violate priority rules. But in a structured dismissal
that "does not preserve the debtor as a going concern" and is
"attached to a final disposition," the Court concluded that the
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violation of ordinary priority rules did not serve "any significant
offsetting bankruptcy-related justification." Id. at 986.
Mission argues that Jevic's enforcement of priority
rules applies to all end-of-case distributions, including asset
sales. As part of its winning bid, S&S agreed to assume
approximately $657,000 of Debtor's liabilities. This action,
Mission asserts, violates two creditor protections. First, it
runs afoul of the prohibition against intra-class discrimination,
which requires "the same treatment for each claim or interest of
a particular class," 11 U.S.C. § 1123(a)(4), because it provides
for payment to creditors of the same class as Mission, without
paying Mission's equal priority claim. Second, it violates the
absolute priority rule, which prevents a junior claim holder from
receiving value before certain senior claim holders are paid in
full, see id. § 1129(b)(2)(B)(ii), because it provides for the
payment of certain unsecured claims before Mission's
administrative claims. Debtor replies, simply, by contending that
Jevic -- which, on its face, pertains only to structured dismissals
-- does not apply to section 363(b) asset sales, which likely
involve potentially "offsetting bankruptcy-related
justification[s]" not present in structured dismissals. See
Jevic, 137 U.S. at 986.
We need not -- and do not -- consider this challenge to
the propriety of the sale. As we have explained, section 363(m)
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applies even if the bankruptcy court's approval of the sale was
not proper, as long as the bankruptcy court was acting under
section 363(b). In re Stadium Mgmt. Corp., 895 F.2d at 849.
Section 363(m) sets forth only two requirements: that there is a
good faith purchaser, and that the sale is unstayed. Nothing in
Jevic appears to add an exception to this statutory text. Nor
does Mission offer any argument that there is such an exception.
Rather, it simply asserts -- in one sentence -- that such a
purchaser would not be a good faith purchaser. Mission offers no
explanation for why this is so. See United States v. Zannino, 895
F.2d 1 , 17 (1st Cir. 1990) ("[I]ssues adverted to in a perfunctory
manner, unaccompanied by some effort at developed argumentation,
are deemed waived."). Certainly the fact that a sale is improper
cannot mean ipso facto that there is no good faith purchaser.
Otherwise, section 363(m) would not preclude any challenges to the
propriety of consummated sales.
We conclude that S&S is a good faith purchaser entitled
to the protection of section 363(m). Mission's remaining
challenges to the sale order are therefore rendered statutorily
moot. For the foregoing reasons, the bankruptcy court is affirmed.
Costs are awarded to appellees/cross-appellants.
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