The United States Fifth Circuit recently delivered a victory for parties both Debtors in bankruptcy and purchaser of property from the Debtors’ estate by affirming that an appeal of a “363 sale” is moot unless either (i) the appealing party obtains a stay of the Sale Order or (ii) can establish that the rights of the parties was “uncertain” at the time the Sale Order was entered by the bankruptcy court. Swiss Re Corp. Sols. Am. Ins. Co. v. Fieldwood Energy III, L.L.C. (In re Fieldwood Energy LLC), 93 F.4th 817 (5th Cir. 2024). Absent such a showing from the appealing party, the appeal will likely be dismissed as moot.
Swiss Re Corp. Sols. Am. Ins. Co. v. Fieldwood Energy III, L.L.C.
Fieldwood Energy LLC filed for bankruptcy in 2020, seeking a reorganization of its debts and other obligations. Prior to filing, “Fieldwood Energy LLC and its affiliates (the “Debtors”) were previously among the largest oil and gas exploration and production companies operating in the Gulf of Mexico.” A critical issue of the Debtors’ reorganization process was determining how to address significant decommissioning obligations imposed upon operators in the Outer Continental Shelf. Under 30 C.F.R §§250.1703), “A company is required, once relevant facilities are no longer used, to take such measures as plugging wells, decommissioning pipelines, removing platforms, and clearing the seafloor of obstructions created by the company's operations.”
The Debtors proposed a complex reorganization plan involving a sale and series of transactions that, among other things, would cause certain “Sureties” (that had insured surety bonds supporting future decommissioning obligations) to lose their subrogation rights. The bankruptcy judge, the Honorable Marvin Isgur, approved the proposed transactions to occur “free and clear” of the Sureties subrogation and other rights, determining that the sale was “unlikely to close” if the Sureties retained their rights. Moreover, Judge Isgur noted that the Government had withheld objections to the sale, that would have effective been a “veto” of the sale, “in large part because of the plan’s increased allocation of responsibility for the oil and gas assets.”
The sale of the Debtors’ assets was governed by 11 U.S.C. 363(f), providing for sales of a Debtors’ assets “free and clear” of all liens, claims, and encumbrances. An appeal of a sale under §363(f) is governed by 11 U.S.C. 363(m), which provides:
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.
Judge Isgur entered a Confirmation Order approving the Plan and the §363 Sale that provided, among other things, the Sureties would not be entitled to claim a right of subrogation from the Debtors. “The Sureties sought, but failed to obtain, a stay of the Confirmation Order from the bankruptcy court” and the reorganization plan went into effect. On appeal, the District Court affirmed the Confirmation Order without reaching the merits of the appeal but, instead, holding that the appeal was statutorily moot under §363(m) and equity moot under the Fifth Circuit caselaw.
The Fifth Circuit affirmed the lower courts ruling by finding the appeal statutorily moot under §363(m). The Fifth Circuit emphasized that “[t]he limits on reversal or modification imposed by Section 363(m) serve the interests of finality and certainty, and by extension, encourage bidding for estate property. If deference were not paid to the policy of speedy and final bankruptcy sales, potential buyers would not even consider purchasing any bankrupt’s property.” (internal quote and cites omitted)
The Sureties argued that §363(m) was narrowed by the recent Supreme Court decision in MOAC Mall Holdings v. Transform Holdco,[1] wherein the Supreme Court held that §363(m) was not jurisdiction and could therefore be waived. 598 U.S. 288, 143 S.Ct. 927, 215 L. Ed. 2d 262 (2023). In MOAC, a purchaser affirmatively indicated that it would not invoke §363(m) if third-party creditor elected to appeal a bankruptcy court’s order. After the purchaser lost on appeal to the district court, the purchaser then elected to raise §363(m) as a defense despite its earlier representations. Although the district court was “appalled,” it held the court was bound to follow and enforce §363(m). However, the Supreme Court vacated the judgment and remanded the case, holding that the protections of §363(m) were not jurisdiction and could be waived. “Nonetheless, the Court recognized that compliance with a precondition may be ‘important and mandatory,’ even when the rule is not jurisdictional. The Fifth Circuit concluded this was not a “narrowing” of §363(m), but merely a clarification that it was not jurisdiction and could be waived. The Fifth Circuit determined this clarification immaterial in this case because there was no evidence waiver.
The Fifth Circuit rejected the final two arguments based on its determination that the stay must be “obtained,” not merely “sought,” and the challenged provisions were not immaterial to the sale. First, the Fifth Circuit concluded that it was immaterial that the Sureties has sought a stay because §363(m) requires that the stay be obtained, not merely sought. This conclusion was based on the plain language of the statute. Second, the Fifth Circuit noted that the court had previously found appeals could proceed, despite the language of §363(m) (the court referenced two prior cases: In re Energytec, Inc., 739 F.3d 215, 220-22 (5th Cir. 2013); In re Walker Cty. Hosp. Corp., 3 F.4th 230, 235 n.5 (5th Cir. 2021). However, in those prior cases, the issues subject to appeal had not been fully resolved by the bankruptcy court at the time the order approving the sale was entered. The Fifth Circuit concluded that when a sales order leaves issues for later determination, the issues are not “integral to the sale” and that failure to obtain a stay may not moot an appeal. However, the Sureties subrogation rights were not left uncertain by the bankruptcy court’s Confirmation Order but, instead, were expressly eliminated. As a result, the Fifth Circuit held that the Sureties appeal was moot as a result of their failure to obtain a stay of the Confirmation Order.
For oil and gas companies seeking to purchase assets out of bankruptcy, this recent ruling highlights the importance of ensuring clarity and certainty in the underlying sale order, in order to safeguard the investment and facilitate a smooth transaction and closing.
[1] 598 U.S. 288, 143 S.Ct. 927, 215 L. Ed. 2d 262 (2023).