BAP: § 363(m) Bars a Collateral Attack on a Prior 363 Sale Order

By Karl Johnson posted 05-03-2018 13:15

Karl J. Johnson, Hellmuth & Johnson, PLLC
Jeffrey D. Klobucar, Bassford Remele, P.A.

 Contributing Editor: Richard J. "Jay" Reding, ASK, LLP

In Fulmer v. Fifth Third Equip. Fin. Co., et al. (In re: Veg Liquidation, Inc.), 2018 WL 1465496 (B.A.P. 8th Cir. Mar. 26, 2018), the Bankruptcy Appellate Panel for the Eighth Circuit affirmed the dismissal of an adversary proceeding on the basis that it was an impermissible collateral attack on a prior 363 sale order.

Two years after the bankruptcy court approved the sale of the debtor’s assets and converted the case from chapter 11 to 7, the trustee initiated an adversary proceeding against parties including the purchaser of the debtor’s assets. The trustee claimed that the 363 sale was a sham and a fraud on the court and that the parties had conspired to manipulate the value of assets in the sale.

The defendants moved to dismiss, describing the adversary proceeding as a disguised collateral attack on the sale order, which had become final and non-appealable nearly two years prior to the adversary action. The bankruptcy court dismissed the case and the trustee appealed to the BAP.

The BAP rejected the trustee’s arguments on appeal, concluding de novo that the claims in the adversary proceeding were a collateral attack on the sale order. The BAP also noted that the protections offered to purchasers under § 363(m) of the Bankruptcy Code extend to third parties as well as to those directly involved in the asset sale.

The BAP side-stepped the trustee’s argument that res judicata did not apply because of a lack of privity based on its decision that § 363(m) rendered the point moot. The BAP also dispensed with the trustee’s attempt to use Rule 60 as a means to re-visit the sale order, finding no basis for the trustee’s due process arguments.

Finally, the BAP rejected the trustee’s argument that the recently-decided Supreme Court case of Czyzewski v. Jevic Holding Corp., ___ U.S. ___, 137 S. Ct. 973 (2017) barred the bankruptcy court from approving a sale that would violate the absolute priority rule because, “the bar of § 363(m) still applies since no appeal was taken and no stay of sale was ever issued.”

Fulmer stands for a straightforward proposition: a court cannot undo a 363 sale once it becomes final. Objections must be made to the sale; not in an adversary proceeding filed after the time to appeal the sale has passed.