# In Re Joshua Slocum Ltd D/B/A Js Acquisition Corporation. Appeal of George Denney, Party in Interest

> Court of Appeals for the Third Circuit · January 28, 1991 · 922 F.2d 1081

URL: https://www.frixlaw.com/law-library/cases/9481190

## Case

- **Full name:** In Re JOSHUA SLOCUM LTD D/B/A JS Acquisition Corporation. Appeal of George DENNEY, Party in Interest
- **Court:** Court of Appeals for the Third Circuit
- **Decided:** January 28, 1991
- **Citations:** 922 F.2d 1081
- **Precedential status:** Published
- **Opinion:** Dissent by Sloviter
- **Judges:** Higginbotham, Sloyiter, Alito
- **Cited by:** 70 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9481190

## How later opinions describe it (automated extraction)

- concluding that “average sales” provision of lease which permits either landlord or tenant to terminate the lease after either three or six years if annual sales are below a certain level is “material in the sense that it goes to the very essence of the contract, i.e., the bar…
- recognizing that “[e]ven under the tightly-drawn definition of ‘adequate assurance’ in the shopping center context, Congress did not envision literal compliance with all lease provisions”
- finding that debtor’s operation of sidewalk café was not a material default of lease
- holding that section 365 “on its face permits the court to ignore so-called ipso facto and forfeiture clauses.”

## Opinion text

*1093 SLOVITER, Circuit Judge,
dissenting.
I would not reach the majority’s plausible view of the merits because I believe that the appeal is moot. I recognize that such a determination may let stand trial court errors, but that inevitable byproduct of an order dismissing an appeal as moot does not relieve us of the compulsion to restrain ourselves when there is no longer a case to decide. Moreover, in this case the majority’s decision to ignore the mootness of the appeal overturns a transaction that has long since been consummated involving a non-party, good-faith purchaser. Thus, the requirement that we refrain from deciding this appeal because of mootness is also the better policy because it places the consequences on the party that could have prevented this situation by moving to stay the transaction during the pendency of this appeal.
I am concerned that the decision of the majority to proceed to the merits will undermine the finality of bankruptcy lease assignments, which may lower the value of debtors’ estates and thereby reduce the amount available to satisfy creditors. Declining to correct lower court errors, when weighed against this result, is less onerous. Cf. In re Sax, 796 F.2d 994, 997-98 (7th Cir.1986) (“At this juncture, it matters not whether the authorization [by the bankruptcy court] was correct or incorrect. The point is that the proper procedures must be followed to challenge an authorization....”).
Section 363(m) provides that good-faith purchasers are protected from the reversal of a sale or lease of property on appeal unless there is a stay pending appeal. 11 U.S.C. § 363 (m) (1988). Although the assignment of leases is covered by section 365 rather than 363, and thus the language of section 363(m), which governs only “authorization under [363(b) or (c) ] of a sale or lease of property,” is inapplicable, some circuits have used section 363(m) to hold that the assignment of a lease is moot as well. See, e.g., In re Stadium Management Corp., 895 F.2d 845 (1st Cir.1990); In re Exennium, 715 F.2d 1401 (9th Cir.1983); see also American Grain Ass’n v. Lee-Vac, Ltd., 630 F.2d 245 (5th Cir.1980) (mootness found under Rule 805, predecessor to section 363(m)). I agree with the majority that we should not stretch the language of section 363(m) so far. However, I think well-established rules of justi-ciability found in the cases of this court and others, along with the particular need for finality in bankruptcy, require that we find the appeal of a completed lease assignment to a non-party moot unless the appellant has sought a stay pending appeal.
This court has long held in non-bankruptcy contexts that challenges to transactions consummated after the approval of a district court are moot if the appellant has not sought a stay of the transaction. In Brill v. General Indus. Enter., 234 F.2d 465 (3d Cir.1956), plaintiff shareholders sought to enjoin the sale of a corporation’s assets on the ground that the sale would violate the antitrust laws. The district court refused to grant the injunction, the sale was then consummated, and plaintiffs appealed. We held that the appeal was moot because “[n]o order was sought by the plaintiffs to maintain the existing status pending their appeal.” Id. at 469. “[W]here the act sought to be restrained has been performed, the appellate courts will deny review on the ground of mootness.” Id.
Our decision in a bankruptcy case, In re Cantwell, 639 F.2d 1050 (3d Cir.1981), relied on Brill for the proposition that “where, pending appeal, an act or event sought to be enjoined has been performed or has occurred, an appeal from the denial of the injunction will be dismissed as moot.” Id. at 1054. We held that because the creditors who sought a stay of the bankrupt’s discharge failed to appeal the discharge, an appeal from the district court’s order dissolving the stay was moot. We stated, “[generally, an appeal will be dismissed as moot when events occur during the pendency of the appeal which prevent the appellate court from granting any effective relief.” Id. at 1053; see also In re Highway Truck Drivers, 888 F.2d 293 (3d Cir.) (appeal from grant of relief from automatic stay mooted when state supreme court order relieved debtor from liability to *1094 appellants), cert. denied, 490 U.S. 1022 , 109 S.Ct. 1748 , 104 L.Ed.2d 185 (1989).
The majority apparently seeks to distinguish Cantwell and Highway Truck Drivers on, inter alia, the ground that in this case the assignment of the lease did not occur during the pendency of the appeal. See Maj.Op. at 1085. Although the precise date of the assignment of the lease to European Collections is not in the appendix, it clearly occurred subsequent to the bankruptcy court’s decision. Therefore, there is no basis for the technical distinction the majority seeks to make, and the rationale of Cantwell and Highway Truck Drivers applies whether the lease assignment occurred during the brief period between the bankruptcy court’s order and the appeal to the district court, during the appeal to the district court, or during this appeal.
The majority argues, however, that the assignment of the lease “is not the action appealed from and not the action upon which [it bases its] decision.” Maj.Op. at 1086. The majority characterizes the issue before us narrowly as the power of the bankruptcy court to excise paragraph 20 of the lease.
The order from which Denney appeals is the district court’s order affirming the bankruptcy court’s final order titled “Order Authorizing Trustee’s Application to Assume and Assign Lease,” which granted the trustee’s motion to assume and assign the lease. Although the excision of paragraph 20 is appellant’s principal objection to the bankruptcy court’s order, his appeal is not so limited. Indeed, in his initial brief appellant states that this case “concerns the assumption and assignment of a lease,” and he contends that the Bankruptcy Court “erred in entering its orders authorizing the assumption and assignment of a certain lease over Denney’s objections.” Appellant’s Brief at 4. In response to the appel-lee’s strong argument that the appeal is moot, the appellant, in apparent recognition of the force of that argument, retracted somewhat by arguing that “[e]ven if Denny’s appeal is moot with respect to the assignment of the lease, it is not moot with respect to the excision of Paragraph 20.” Reply Brief at 9 (emphasis added).
Thus, it is misleading to state that “Den-ney has not challenged the assignment of the lease.” Maj.Op. at 1085. The excision was an integral part of the authorization. The bankruptcy court concluded that without excising paragraph 20 “the value of the Lease would obviously be nominal,” and that European Collection’s offer to pay for the right to obtain the lease “was expressly predicated on its receiving the right to utilize the ... store for at least the remaining four years of the lease,” which it would be unlikely to be able to do if it had to meet the terms of paragraph 20 based on the debtor’s poor sales record. App. at 227.
Moreover, the practicalities of the situation make clear why the issue of paragraph 20 cannot be divorced from that of the assignment of the lease. Paragraph 20 provides that if annual gross sales for the first six years do not average $711,245, appellant Denny, the landlord, inter alia, could terminate the lease. In light of the poor sales by the debtor during its years of operation, the bankruptcy court found that “a new tenant in the Debtor’s store would be compelled to generate about $400,000 gross sales by July, 1989” to meet the requirement of paragraph 20. App. at 213. It continued, “[t]he parties all apparently agreed that accomplishing such a volume of sales in this time-frame would be a difficult proposition for any new store.” Id.
Although the majority asserts that this appeal does not require us to reach the issue of the assignment, Maj.Op. at 1086 n. 2, its decision will undeniably have the effect of fundamentally changing the terms of the assignment and thereby effectively rescinding it. The assignee relied on the excision of paragraph 20 just as it relied on the assignment of the lease in general. Regardless of whether the appellant challenges the power to authorize the lease assignment or challenges the assignment only because it excluded paragraph 20, the appellant had an obligation to seek a stay pending appeal to prevent the substantial reliance of a non-party on the bankruptcy court’s final order.
*1095 Another ground on which the majority seeks to distinguish Cantwell as well as Highway Truck Drivers is that in those cases we were unable to review the intervening court decisions that permitted the actions which rendered the appeals moot, and thus we “could not provide effective relief.” Majority Op. at 1085. This reasoning fails to account for our decision on mootness in Brill, a case where we had direct review of the district court decision which permitted the consummated sales transaction that mooted the appeal. In any event, I believe that Cantwell and Highway Truck Drivers are closer analogs to this case than the majority acknowledges because the only way we can provide relief here is to annul a transaction which involves an entity over which we do not have jurisdiction. The majority cites no cases, and I have found none, in which a consummated sale or assignment to a non-party purchaser has been vitiated on appeal.
Moreover, the majority’s position is in stark contrast to the position this court has taken on the necessity of stays to prevent mootness. We stated in Highway Truck Drivers that “in addition to those situations covered under 11 U.S.C. § 363 (m) and § 364(e), a myriad of circumstances can occur that would necessitate the grant of a stay pending appeal in order to preserve a party’s position.” 888 F.2d at 298 . Those situations are by no means limited to cases in which we could not review intervening court decisions. It is a general principle of law that when a stay is not obtained, the prevailing party may treat the judgment of the district court as final. Id. at 297-98 . In Highway Truck Drivers, 888 F.2d at 298 , we quoted at length from In re Kahihikolo, 807 F.2d 1540, 1542 (11th Cir.1987) (per curiam), which in turn cited American Grain Ass’n, 630 F.2d 245, 247 (5th Cir.1980), for the proposition that,
in the absence of a stay, action of a character which cannot be reversed by the court of appeals may be taken in reliance on the lower court’s decree. As a result, the court of appeals may become powerless to grant the relief requested by the appellant.
In Kahihikolo , the bankruptcy court lifted an automatic stay and thereby permitted a creditor to repossess the debtor’s automobile, even though the court had approved the debtor’s plan under Chapter 13 under which the creditor would have been repaid in full. The trustee appealed the lifting of the automatic stay, but did not seek to stay the bankruptcy court’s decision. The court of appeals ruled the appeal moot because the creditor, after the bankruptcy court’s decision, sold the automobile. 807 F.2d at 1541-42 .
In Highway Truck Drivers, we observed that “[tjhere are decisions in other circuits in which events not identified as requiring a stay in the Bankruptcy Code occurred while the automatic stay had been lifted thereby rendering the pending appeal moot.” 888 F.2d at 297 . Among the cases we cited was Central States Pension Fund v. Central Transp., Inc., 841 F.2d 92 (4th Cir.1988), where an appeal of a reorganization plan was held to be moot because the plan had been substantially implemented and thus reversal “would require undoing financial transactions involving third parties, not participants in this litigation.” Id. at 96. The court declined to do so when the appellant could have halted implementation of the bankruptcy court decision by obtaining a stay.
The need for finality of transactions involving parties in bankruptcy which underlay these decisions is also the premise behind section 363(m). That section “reflects the salutary policy of affording finality to judgments approving sales in bankruptcy by protecting good faith purchasers, the innocent third parties who rely on the finality of bankruptcy judgments in making their offers and bids.... The finality and reliability of the judicial sales enhance the value of the assets sold in bankruptcy.” In re Stadium Management Corp., 895 F.2d at 847. “This policy concern is implicated not only when property is sold to a third party but also when a lease or option is granted to a third party in reliance on an order of a bankruptcy court.” American Grain Ass’n, 630 F.2d at 248 .
*1096 Moreover, the general rule long predates both section 363(m) and its predecessor, Rule 805. As the court noted in Algeran, Inc. v. Advance Ross Corp., 759 F.2d 1421, 1424 (9th Cir.1985), “[t]he rule that failure to obtain a stay pending appeal renders the issue moot did not originate in the Bankruptcy Rules. Rather, it is a judicial doctrine which developed from the general rule that the occurrence of events which prevent an appellate court from granting effective relief renders an appeal moot, and the particular need for finality in orders regarding stays in bankruptcy.”
There is no contention that European Collections was not a good faith purchaser in this case. And though it purchased a lease rather than purchased or leased property (which would have put it within section 363(m)), the same policy concerns are equally applicable to lease assignments and to sales or leases of property. Assignment of a lease is, after all, simply the purchase of a right to lease property, albeit not that of the debtor. European Collections paid substantial consideration for that right in reliance on thep finality of the bankruptcy court’s decision to permit the assignment. It then moved into the premises and established its business, creating the same reliance interest as if it had leased or purchased the property directly from the landlord.
Similar policy considerations may have led to the decisions of those courts holding section 363(m) or its predecessor applicable to lease assignments. See Stadium Management, 895 F.2d at 848-49 (holding appeal moot in absence of stay after trustee, with approval of bankruptcy court, sold debtor’s stadium pursuant to section 363(b) and assigned debtor’s lease for the land underneath it pursuant to section 365); In re Exennium, 715 F.2d 1401, 1404 (9th Cir.1983) (assignment of lease could not be voided because appellant had not obtained a stay); see also American Grain Ass’n, 630 F.2d at 247-48 .
The general principle that appeals are moot in the absence of a stay is broadly applied to bankruptcy orders other than assignment of leases. In Miami Center Ltd. Partnership v. Bank of New York, 838 F.2d 1547 (11th Cir.1988), the court stated, “[t]he Eleventh Circuit, like other circuits, has recognized the continuing viability and applicability of the mootness standard in situations other than transfers by a trustee under § 363(b) or (c).” Id. at 1553 (citations omitted). The court found the appeal from the confirmation of a liquidation plan was moot even though the transaction was not governed by section 363(m). Miami Center relied in part on Markstein v. Massey Assoc., 763 F.2d 1325 (11th Cir.1985), where the court held that it could not rescind a foreclosure sale on the debtor’s property, which was permitted after the bankruptcy court lifted an automatic stay on the property because the debtor did not obtain a stay. The sale did not come under section 363(m), but the court nevertheless invoked the “rule of law” that “a court is powerless to rescind the sale on appeal.” Id. at 1327 ; see also In re Sun Valley Ranches, Inc., 823 F.2d 1373, 1374-75 (9th Cir.1987) (to the general rule that “the debtor’s failure to obtain a stay pending appeal renders an appeal moot after assets ... are sold,” the court “carved out a narrow exception ... where real property is sold to a creditor who is a party to the appeal”).
In this case, the appellants had the opportunity to seek a stay pursuant to Bankruptcy Rule 8005 and thereby halt the transaction that European Collections justifiably believed was final. The court’s decision today will permit the appellant landlord effectively to evict European Collections from the property it has now occupied for several months in reliance on the bankruptcy court’s final order. The decision will send a signal to future purchasers of assets from debtors’ estates that their purchases may be revoked long after they receive approval by the bankruptcy court and after they have placed substantial reliance on the finality of that approval. That can only have the effect of lowering the value of the debtors’ estate. See Stadium Management, 895 F.2d at 847; In re Sax, 796 F.2d 994, 998 (7th Cir.1986). It also effectively expands this court’s jurisdiction beyond its previous limits, because *1097 the court today fashions a remedy which we formerly considered ourselves powerless to compel. Because I believe the majority’s decision to overlook the mootness of the issue it reaches is in derogation of our prior precedent and is not consistent with the policy considerations that have informed the Bankruptcy Code and cases here and elsewhere, I respectfully dissent.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9481190. Public record. Not legal advice.