You've Got To Have Faith When Purchasing Bankruptcy Sale Assets, As Appellate Panel Widens Section 363(m) Protection

Section 363(m) of the Bankruptcy Code protects purchasers of assets in a bankruptcy sale. The provision promotes finality of bankruptcy court orders approving sales and is intended to maximize the value that a debtor or bankruptcy trustee is able to realize in a sale of bankruptcy estate assets by providing third-party purchasers with certainty that the validity of a bankruptcy sale will not be subject to subsequent challenges. The rule protects a bankruptcy sale as long as the effectiveness of the order from the bankruptcy court approving the sale is not stayed pending resolution of an objection and the purchaser acts in "good faith."

A recent decision by the Bankruptcy Appellate Panel for the Eighth Circuit (BAP) extends the protection afforded under Section 363(m) by permitting a purchaser's "good faith" to be implied from the absence of evidence that the purchaser acted in "bad faith." However, the dissent concluded that the absence of evidence that a purchaser lacks good faith is insufficient to support an inference of good faith. According to the dissent, the proponent of a bankruptcy sale should bear the evidentiary burden of showing that a purchaser acted in good faith. The BAP majority demonstrates the importance for an objecting party to raise all of its challenges to a sale in the bankruptcy court. Although the majority implied good faith on behalf of the purchaser because the objecting party did not produce any evidence that the purchaser acted in bad faith, the dissent's conclusion cautions sale proponents to consider the evidence of a purchaser's good faith that is proffered to the bankruptcy court.

Analysis

In Roper, 2025 WL 3639281, No. 25-6008 (B.A.P. 8th Cir. 2025), a consumer Chapter 7 debtor owned real property jointly with their co-debtor former spouse. The bankruptcy court granted the Chapter 7 trustee's motion to sell the bankruptcy estate's interest in the jointly held real property over an objection by the debtor that was based on, among other things, the former spouse's interest. The debtor appealed the bankruptcy court's decision to approve the sale and sought to stay the effectiveness of the sale order pending appeal. The Chapter 7 trustee responded by consummating the sale and moving to dismiss the nondebtor's appeal as statutorily moot under Section 363(m) of the Bankruptcy Code.

As observed by the BAP, the bankruptcy court's findings concerning the purchaser's good faith were sparse. The BAP court began its analysis by noting that Section 363(m) protects the reasonable expectations of good faith third-party purchasers and that, absent the assurance provided by Section 363(m), bidding among potential purchasers would be chilled due to uncertainty surrounding the finality of the bankruptcy court's sale order.

The BAP noted that the plain language of the statute only applies to "an entity that purchased or leased such property in good faith" and that the parties had conceded that the sale was not stayed prior to its consummation. The BAP reasoned that appellate relief clearly would not be possible without affecting the validity of the completed real property sale because the Chapter 7 debtor sought to challenge the bankruptcy court's decision to approve the sale.

The Chapter 7 debtor argued that the even in light of the forgoing, the appeal was not statutorily moot pursuant to Section 363(m) because "good faith" was in dispute. The BAP rejected this argument, and reasoned that "[t]he record before the bankruptcy court is devoid of any allegations or evidence that the purchaser ... acted in bad faith." According to the BAP, the debtor waived its arguments concerning the purchaser's good faith on appeal by failing to argue the point before the bankruptcy court. Accordingly, the majority dismissed the debtor's appeal as statutorily moot under Section 363(m) of the Bankruptcy Code.

The dissent quoted the above cited language from the majority, but further observed that "the converse is also true: there are no allegations or evidence that the purchaser is a good faith purchaser. In the absence of such evidence, the limited safe harbor of [Section] 363(m), by its express terms, does not apply to this appeal." Observing the strong policy favoring finality in court-approved distressed asset sales, the dissent reasoned that the plain language of Section 363(m) only applies to an entity that purchased property in good faith.

The dissent found the U.S. Supreme Court's MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288 (2023) decision instructive in construing the scope of Section 363(m). In that case, the Court held that Section 363(m) is not jurisdictional. As observed by the dissent, the Court determined that Section 363(m) merely restricts the power that a subsequent court may exercise with respect to a "covered authorization." According to the dissent, under the MOAC decision:

1. Section 363(m) does not create a per se rule that any unstayed sale may not be challenged;
2. The provision does not create a "presumption" that a purchaser is deemed to have acted in good faith absent evidence to the contrary; and
3. A sale proponent who does not introduce evidence of good faith may forfeit the ability to rely on Section 363(m) as a safe harbor.

The dissent further reasoned that because a purchaser's good faith is a factual determination, the sale proponent should bear the burden to demonstrate good faith before relying on Section 363(m).

Takeaways

While many sale orders are formulaic and contain boilerplate language stating that a sale may not be challenged on appeal or in subsequent bankruptcy court proceedings, the dissent's reasoning suggests that proponents of a sale should take care to ensure that they have introduced sufficient evidence to support a specific finding that the purchaser has acted in good faith. Purchasers and sellers should also refer in the sale order to the record—including any evidence of good faith that supports applying Section 363(m) to a sale. To ensure the finality of a bankruptcy sale, purchasers and sellers should consummate a sale as soon as is practicable following entry of a sale order by the bankruptcy court.

The Roper decision also highlights the significance of acting quickly and introducing evidence on the good faith of a purchaser before the bankruptcy court for parties that seek to challenge a bankruptcy sale. A party that wishes to challenge a bankruptcy sale should consider challenging a purchaser's good faith before the bankruptcy court and should immediately seek to stay effectiveness of the sale immediately upon entry of a sale order by the bankruptcy court.

For More Information

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