Uncertainty in Ninth Circuit BAP's Application of the Mootness Doctrine to Sales of Property to Good Faith Purchasers (11 U.S.C. § 363(m))

In Perez v. Bui, No. CC-17-1102-FLKu, slip op. (B.A.P. 9th Cir. Feb. 8, 2018), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed summary judgment in favor of the Chapter 7 Trustee for actual and constructive fraudulent transfer of real property. Before finding that the case was one of the unusual circumstances in which it is proper for a court to grant summary judgment on an issue of intent, the BAP took a narrower look at precedent with respect to constitutional and equitable mootness in order to reach the merits of the appeal.

No federal court may exercise jurisdiction unless there is a case or controversy before it. U.S.. Const., Article III, Section 2. In order for there to be a case or controversy, there must be an actual dispute between adversarial litigants and there must be a possibility that the court can provide "effective relief" if that court decides in a party's favor. If one of these criteria are not met, then a case is constitutionally moot.

In Perez, while the appeal of summary judgment was pending, and with no stay pending appeal in place, the Trustee sold the property to a third party, deemed by the bankruptcy court a good faith purchaser. Section 363(m) provides that, absent a stay pending appeal, the reversal or modification of an authorization to sell property pursuant to Section 363(b) does not affect the validity of a sale thereunder, regardless of whether the good faith purchaser knew of the appeal.

Acknowledging that generally a consummated sale to a third party, who is not a party to an appeal, means that an appeal is one in which no effective relief can be granted, the BAP held that "effective relief" may be equivalent to any equitable relief that does not disturb the rights of third parties not before the court, such as ordering turnover of the sale proceeds even if, as in Perez, that relief was not requested. The ruling leaves open the question of why and when "generally" an appeal can be constitutionally moot for consummation of a sale but not in other cases. Instead, the ruling appears to reserve that determination solely to the discretion of the reviewing court.

As to equitable mootness, where the test is 1) whether the appellant fully pursued her rights by seeking a stay pending appeal, 2) whether a substantial consummation has occurred, 3) whether a remedy exists that does not harm third parties, and 4) whether the court can fashion effective and equitable relief without creating an uncontrollable situation (i.e., that the case presents complex transactions which are difficult to unwind), the BAP acknowledged that even if Perez did not fully pursue her rights, because the BAP could still require the Trustee to turn over sale proceeds (a remedy not sought), the appeal could not be equitably moot. With respect to equitable mootness, the BAP emphasizes "complexity" and the availability of some relief without regard to the other factors or without any additional limiting principle. Equitable mootness appears to be another subject solely of a reviewing court's discretion without clear guidelines as to how the four factors are to be weighed.

While Perez provides great clarity about when summary judgment is appropriate on the issue of intent, the opinion creates uncertainty regarding the constitutional and equitable mootness of appeals related to the sale of property under Section 363(b) and (m). Perez may provide guidance in the future for practitioners whose clients have failed to adequately govern their rights but nevertheless wish to have their appeal heard on the merits.

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