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Challenge to Trustee’s Sale of Avoidance Actions Moot

Challenge to Trustee’s Sale of Avoidance Actions Moot

A Chapter 7 Trustee’s sale of avoidance actions under sections 544, 547, and 548 of the Bankruptcy Code withstood a challenge by the targets, who claimed that the actions could not be prosecuted by parties other than the trustee, because the targets failed to obtain a stay of the sale order, rendering their appeal moot. In Schepis v. Burtch (In re Pursuit Capital Management), 874 F.3d 124 (3d Cir. 2017), a creditor group purchased avoidance actions against debtor’s insiders after an auction at which the targets also bid. The purchase price included a cash component and the payment of any net recovery to the estate for distribution to all creditors. The targets objected to the sale on three grounds: (1) the bid accepted by the Trustee was not the highest bid; (2) the Trustee did not comply with the auction procedures; and (3) an avoidance claim cannot be prosecuted by parties other than the trustee in a Chapter 7 context. The Bankruptcy Court overruled the targets’ objections. The targets then appealed the sale order without first seeking a stay of the order. The Third Circuit rejected the appeal because the remedy the appellants sought – a ruling that the avoidance powers did not transfer with the claims themselves – could not be granted without impacting the sale’s validity. Therefore, the appeal was statutorily moot under section 363(m) of the Bankruptcy Code. The court noted that “the purpose of section 363(m) is to promote finality of sales,” and that 363(m) “preserves appellate rights only in those rare circumstances where collateral issues not implicating a central or integral element of a sale are challenged.”

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