In Re: MSR Resort Golf Course LLC

Filing 28

OPINION AND ORDER. Were the Court to consider the merits of the Appellant's claim, it would almost certainly conclude, as Judge Buchwald did, that it is "hard to conceive of how any court could reach a decision contrary to" the Bankrup tcy Court's careful and well-reasoned decision. (2/28/13 Tr. 4:17-18). As it happens, however, this appeal is moot. First, it is moot as a statutory matter under § 363(m), because the Bankruptcy Court did not commit clear error in finding t hat the Purchaser acted in good faith, and because the relief the Appellant seeks would affect the validity of the sale of the Resorts. On this basis, the Court lacks jurisdiction to hear any other argument and the appeal must be dismissed. Even had the Purchaser not acted in good faith, this appeal would remain equitably moot. The Court cannot order relief here without disturbing the transaction as a whole. Such appeals are not permitted when the sale of a debtor's assets has been substant ially consummated. The Resorts have been sold, title has transferred, the creditors have been paid, and the Purchaser has proceeded to act as the new owner of the Resorts in every respect. Given this unquestioned consummation, the Appellant cannot be permitted to proceed with an appeal threatening the disruption of the sale itself. Accordingly this appeal is dismissed. The Clerk of Court is respectfully directed to close the case. (Signed by Judge Katherine Polk Failla on 1/7/2014) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
:
:
:
MSR RESORT GOLF COURSE LLC, et al.,
:
Debtors.
:
------------------------------------------------------------:
FIVE MILE CAPITAL PARTNERS LLC,
:
:
:
Appellant,
:
v.
:
:
MSR RESOURT GOLF COURSE LLC, et al.,
:
:
Appellees.
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED:______________
01/07/2014

13 Civ. 2448 (KPF)
OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:
This bankruptcy appeal stems from the financial collapse of a group of
vacation resort properties (the “Resorts”). On February 22, 2013, the
Honorable Sean H. Lane, United States Bankruptcy Judge for the Southern
District of New York, issued an order (the “Confirmation Order”) that confirmed
a plan (the “Plan”) liquidating the debtor entities and transferring their portfolio
of resorts to GIC Real Estate, Inc. (“GIC” or the “Purchaser”). GIC, it bears
mentioning, is both the sovereign wealth fund of the Government of Singapore
and, as a result of certain mezzanine financing it arranged, a pre-petition
creditor of the bankrupt debtor entities that collectively owned and managed
the Resorts.
Appellant Five Mile Capital Partners LLC (the “Appellant”) is also a prepetition mezzanine lender, and was the only such creditor to receive no return

on its investment from the Plan. In this appeal, the Appellant seeks to modify
the confirmed Plan in an effort to change that fact. For the reasons set out in
the remainder of this Opinion, the appeal is dismissed.
BACKGROUND 1
A.

Procedural History
1.

The Parties and the Debt Structure

The entities involved in this bankruptcy (the “Debtors”) are numerous
and interrelated. A real estate investment trust, MSR Hotels & Resorts, Inc.
(the “REIT”), sat at the top of the corporate structure. 2 The REIT owned a
number of entities, some of which are Debtors in the bankruptcy proceeding

1

The facts are drawn from the Opening Brief in Support of Appellant Five Mile Capital
Partners LLC’s Appeal from the Bankruptcy Court’s February 22, 2013 Confirmation
Order (“Appellant Br.”); the Brief of 450 Lex Private Limited, C Hotel Mezz Private
Limited, and Certain of Their Affiliates in Opposition to Five Mile Capital Partners LLC’s
Appeal from the Bankruptcy Court’s Confirmation Order (“Purchaser Opp.”); Appellee’s
Response Brief in Opposition to Appeal from the Bankruptcy Court’s Confirmation
Order (“Debtor Opp.”); the Reply Brief in Further Support of Appellant Five Mile Capital
Partners LLC’s Appeal from the Bankruptcy Court’s February 22, 2013 Confirmation
Order (“Appellant Reply”); the Amended Declaration of Adam Gallistel (“Gallistel Decl.”);
the Findings of Fact, Conclusions of Law, and Order Confirming the Second Amended
Joint Plan of Reorganization of MSR Resort Golf Course LLC, et al., Pursuant to Chapter
11 of the Bankruptcy Code (“Conf. Order”); the February 26, 2013 Order entered by the
Honorable Naomi Reice Buchwald, United States District Judge (“2/26/13 Order”); and
the transcripts of the Bankruptcy Court’s bench decision on good faith of October 25,
2012 (“10/25/12 Tr.”), the Plan confirmation hearing on February 4, 2013 (“2/4/13
Tr.”), and February 5, 2013 (“2/5/13 Tr.”), the Bankruptcy Court’s bench decision of
February 20, 2013 (“2/20/13 Tr.”), the Bankruptcy Court’s stay hearing on February
27, 2013 (“2/27/13 Tr.”), and the District Court’s stay hearing on February 28, 2013
(“2/28/13 Tr.”).

2

As described by the Bankruptcy Court:
A REIT is a corporation or business trust where investors combine their
capital to own and, in most cases, operate income-producing real estate
like the resorts here. The earnings of a REIT are taxed only at the
shareholder level, assuming that the REIT satisfies other applicable
requirements which are not at issue in this case.
(2/20/13 Tr. 7:12-15). See generally In re MSR Resort Golf Course LLC, 471 B.R. 783,
786 (Bankr. S.D.N.Y. 2012); 26 U.S.C. § 856.

2

from which the instant appeal was taken. (Conf. Order at 13). Certain Debtors
actually owned the “the land, buildings, and improvements” on the Resorts.
(Id. at 8). Other Debtors leased the Resorts from the Owner Debtors and paid
corresponding rent. (Id.). Still other Debtors acted as managers, managing the
Resorts under contract with each Tenant Debtor in exchange for management
fees. (Id. at 8-9). And other Debtor entities acted as brokerages, selling and
leasing elements of and rental rights in the Resorts. (Id. at 9).
The Owner Debtors borrowed under a mortgage in the original principal
amount of $1 billion (2/20/13 Tr. 7:23); this mortgage was placed into a
securitization trust (the “Mortgage Trust”) and serviced by Midland Loan
Services, Inc. (Purchaser Opp. 3; Gallistel Decl. ¶ 3). The mortgage was
secured by all the assets of the Debtors as a whole, including the Resorts
themselves. (Conf. Order at 7). The Debtors also took out four mezzanine
loans of decreasing priority, as well as certain other financing agreements not
at issue here. (Id. at 15). The first mezzanine loan was in the amount of $115
million and held for purposes of this bankruptcy by MetLife. (2/20/13 Tr. 8:37). The second and third mezzanine loans, for $110 million and $250 million,
respectively, were held by 450 Lex Private Limited and C Hotel Mezz Private
Limited (Id. at 8:8-14); these entities are affiliates owned and controlled by the
Purchaser, GIC. The fourth, and most junior, mezzanine loan for $50 million
was held by Appellant Five Mile Capital Partners LLC. (Id. at 8:15-19).

3

2.

The 2011 Bankruptcy Filings
The Debtors filed Chapter 11 cases on February 1, 2011. (Appellant

Br. 6). The following week, the Purchaser made an offer to serve as “stalking
horse bidder” 3 in an asset auction to purchase “substantially all of the
[D]ebtors’ assets pursuant to a Chapter 11 plan.” (2/20/13 Tr. 9:3-4). 4 From
its inception, the stalking horse bid suggested by the Purchaser provided no
value to the Appellant. As the juniormost mezzanine lender, the Appellant
would be out of the money under the Purchaser’s proposed bid, recovering
neither the $50 million principal nor the $8 million in owed interest. (Id. at
9:17-21). 5
The Purchaser’s initial offer, and a renewed offer made on April 25, 2011,
were rejected by the Debtors. (2/20/13 Tr. 9:5-8). Instead, the Debtors
entered into a settlement with all its creditors that allowed the Debtors to
3

A stalking horse bidder in a bankruptcy proceeding makes an initial bid to purchase the
assets of a debtor on the theory that the initial bidder’s “initial research, due diligence,
and subsequent bid may encourage later bidders.” In re 310 Associates, 346 F.3d 31,
34 (2d Cir. 2003). Stalking horse bidders often contract to receive a “break-up fee”
compensating it for its bidding activities should a higher bid ultimately emerge and win
an eventual asset auction. See In re Integrated Res., Inc., 147 B.R. 650, 659 (S.D.N.Y.
1992).

4

A straight asset sale was more attractive to the Purchaser, among other reasons,
because it would allow the Purchaser to acquire the Resorts at a high basis with respect
to the calculation of tax liability, should it later decide to sell the Resorts. (2/4/13
Tr. 18:8-12)

5

On appeal, as below, the Appellant suggests that the Debtors filed an eleventh-hour
amendment to the Plan that, impermissibly and for the first time, sought to eliminate
its right to recover the principal and owed interest via indemnification provisions in the
formation documents of certain Debtor entities. (See, e.g., Appellant Br. 11 (“Thus, on
the eve of the Confirmation Hearing, the new Plan did a 180 degree about-face on the
Debtors’ indemnification obligations.”)). This Court agrees with Judge Lane that “the
debtors’ amendment to the plan was merely a memorialization of the debtors’ not-sosecret position that no such indemnification obligations exist under the operative
agreements; and thus, it does not constitute some sort of separate attempt to eliminate
any indemnification obligations that exist under those agreements.” (2/20/13
Tr. 23:14-20).

4

pursue alternative restructuring bids, while guaranteeing that the Purchaser’s
stalking horse bid would be entered into an asset auction with stipulated
bidding procedures if and when the negotiated period expired or the Purchaser
failed to receive interest payments on its mezzanine loans. (Conf. Order 18-19).
In the interim, the Debtors successfully conducted a number of valuemaximizing restructuring initiatives. (Id. at 17-18). These initiatives included
reaching individual settlements with the mortgage lender and the creditors in
general, all of which permitted the Debtors to solicit restructuring plans and to
obtain concessions with respect to unpaid default interest owed on the
mortgage and mezzanine loans. (Id. at 19-20). Finally, during this time, the
Debtors assiduously sought an alternative to the Purchaser’s stalking horse bid
to acquire their assets, preferring “to structure their restructuring as a
reorganization or equity sale to present the best recovery to all stakeholders.”
(Id. at 20). No such alternative materialized during this interval. (Id. at 21).
The interest payment owed to the Purchaser in August 2012 was not
made, thus triggering the Debtors’ obligation to initiate an asset auction.
(Purchaser Opp. 4). Even then, however, the Purchaser’s bid was not
immediately accepted. The auction process began in September 2012 and
Debtors sought a superior bid to that proposed in the Purchaser’s stalking
horse bid. (Id. at 4-5). During this period, the Debtors “identified dozens of
parties potentially interested in acquiring the resorts, negotiated over thirty
confidentiality agreements, launched and maintained a data room, and

5

satisfied numerous incoming diligence requests.” (Conf. Order 15). No other
party ultimately entered a bid. (Purchaser Opp. 5).
The Purchaser’s stalking horse bid was an offer to purchase the Debtors’
assets for $1.50004 billion, which figure included a $378.8 million credit bid of
the principal, non-default interest, fees, and expenses attributable to the
Purchaser’s mezzanine loans to the Debtors. (Gallistel Decl. ¶ 4). 6 This bid
relied on concessions from the mortgage holder and the senior mezzanine
lender to reduce their claims for default interest in the respective amounts of
$56 million and $7.8 million. (Purchaser Opp. 5; see also 2/27/13 Tr. 40:2022 (noting that the senior creditors would as of March 1, 2013, forgo a total of
$73 million in default interest)).
3.

GIC’s Relationship with KSL

Prior to the filing of the Chapter 11 cases, the Purchaser had entered into
agreements with KSL Capital Partners LLC, a non-party to this dispute and a
former equity owner of the Resorts. (Purchaser Opp. 10). First, the Purchaser
agreed, subject to certain triggering events, to purchase up to 100% of KSL’s
stake in the Mortgage Trust. (Id.). Second, KSL agreed, should the Purchaser
ultimately acquire the Resorts, to serve as asset manager for those properties.
(Id.). Third, each party agreed to permit the other to acquire up to 50% of any
investment opportunity in the various loans or the Resorts. (Id. at 11). Despite

6

This total ultimately increased to $1,502,033,939.24. (Gallistel Decl. ¶ 4).

6

this last option, KSL did not participate in the Purchaser’s stalking horse bid or
the eventual acquisition of the Resorts. (Id.). 7
Focusing principally on the Purchaser’s relationship with KSL, the
Appellant contended that the Purchaser was not acting in good faith. (See
2/20/13 Tr. 58:16-19). A hearing on that subject was held on October 25,
2012 (the “Good Faith Hearing”), after which the Bankruptcy Court ruled that
the Purchaser’s good-faith status was at that time not ripe for decision,
inasmuch as the relevant Bankruptcy Code provisions focus on actual, not
prospective, purchasers. (10/25/12 Tr. 30:9-18). Though the Bankruptcy
Court found no evidence that KSL had an interest in acquiring the Resorts, it
concluded nonetheless that the Purchaser’s disclosures at that time regarding
its relationship with KSL were incomplete. (Id. at 29:2-30:7). As a matter of
“best practices” (2/20/13 Tr. 59:6), the Bankruptcy Court concluded that the
Purchaser, if it eventually intended to seek a finding of good-faith status,
should either amend its agreement with KSL or make additional disclosures
regarding KSL’s involvement in, obligation to, and potential compensation
resulting from the Purchaser’s bid, especially whether KSL stood to receive a
fee in exchange for not entering a bid of its own for the Resorts. (10/25/12
Tr. 30:19-32:1). 8

7

In response to an inquiry from the Debtors regarding what participation, if any, KSL
would undertake in connection with the stalking horse bid, the Purchaser disclosed via
e-mail (i) the agreement giving KSL a participation option and (ii) the fact that KSL was
advising and would serve as the asset manager should the Purchaser ultimately acquire
the Resorts. (Purchaser Opp. 11).

8

As the Bankruptcy Court later recounted:

7

The Purchaser made certain additional disclosures at the Good Faith
Hearing, and later provided further clarification regarding its relationship with
KSL at the Confirmation Hearing held on February 4 and 5, 2013. (See
2/20/13 Tr. 60:11-13 (recounting history)). The Bankruptcy Court eventually
explicitly concluded, on the basis of the extensive record created at the Good
Faith Hearing and the Confirmation Hearing, that the Purchaser had indeed
acted in good faith in connection with the sale of the Resorts. (Id. at 60:14-16,
71:8-16; Conf. Order 51-53).
4.

The Asset Auction

In December 2012 the Purchaser was selected as the winner of the asset
auction — a foregone conclusion in the absence of any bid from any other
party. (2/20/13 Tr. 58:9-10). Significantly for purposes of the present appeal,
all parties were on notice, throughout the pendency of the Chapter 11 cases,
that an asset sale as contemplated by the Purchaser’s stalking horse bid would
create a large tax liability in the REIT that would go unfunded. (Conf. Order at
21-22; see also 2/28/13 Tr. 22:7-21). 9 Indeed, the Appellant accessed on four

The Court suggested, but did not require, that GIC RE provide additional
disclosures to clarify its relationships between GIC RE and another
potential bidder, KSL, who is a business partner with GIC RE, and stated
that any such additional disclosures would be considered in any
subsequent hearing on the issue of good faith.
(Conf. Order 17).
9

“[N]ormally, a REIT doesn’t pay any taxes. This is a creature of — from Congress. And
what it does is, as the REIT’s assets produce income, it passes those — that income as
dividends to the shareholders. And what the Internal Revenue Code does is [it] allows
the REIT to deduct … the dividend it pays to the shareholders, and offsets that against
the gain it receives from getting that income…. [A]nd as a result, as long as the REIT is
having income to give to its shareholders, it offsets the gain and it doesn’t face a tax.
But what’s happening here is that the older entities are deciding to sell the asset. It’s

8

separate occasions, “far in advance … of an order approving [the Purchaser] as
a stalking horse bidder,” a tax analysis by the Debtors’ financial advisor that
indicated the nature and likely magnitude of the REIT’s tax liability. (Conf.
Order at 22).
Understandably concerned about the anticipated tax consequences, the
Appellant argued to the Bankruptcy Court that (i) an indemnification provision
in the formation agreements of the nine limited partnership Debtors obliged the
Debtors to indemnify the REIT for this tax liability, and (ii) a guarantee of
obligations by the REIT to the Appellant meant that it could stand in place of
the REIT to assert a senior claim for indemnification against the Debtors,
subject to the total principal and interest owed under the Appellant’s fourth
mezzanine loan. (2/20/13 Tr. 19:16-21, 20:16-21:1). 10 This argument
constituted, at confirmation, the “central bone of contention” (id. at 18:21), and
the “only remaining objection” (id. at 19:16); indeed, the Bankruptcy Court
observed that the Appellant and the Debtors “agree[d] that feasibility hinges
upon whether the debtors have an indemnification obligation” for the REIT tax
liability (id. at 23:2-3). There was no dispute that the Plan could not fund this
liability, if it existed; the senior creditors had already compromised on certain

over-levered. So the proceeds of that sale aren’t going to the REIT; the proceeds of the
sale are going to the creditors that are senior in the stack. And when that happens,
there’s no income for the REIT to dividend up to its shareholder to offset the gain. And
as a result, the REIT gets stuck with the tax.” (2/4/13 Tr. 19:5-21 (statement of
counsel for the Debtors)).
10

The United States also argued at the Confirmation Hearing that the indemnification
provisions at issue required the Debtors to fund the tax liability generated by the sale.
(Appellant Br. 10). The Government did not seek a stay pending appeal and is not a
party to this appeal.

9

owed payments like default interest in order to reach agreement on a total sum
acceptable to the Purchaser. (See id. at 42:1-10).
The Bankruptcy Court examined the parties’ dispute over this issue at
great length and concluded for a multiplicity of reasons that neither the
indemnification provisions nor the guarantee of recourse obligations could be
read as the Appellant urged. (2/20/13 Tr. 23:21-43:18). Accordingly, the
order confirming the Plan issued on February 22, 2013. (Conf. Order 95).
5.

The Requests for a Stay

The Appellant requested a stay of confirmation pending appeal at the
conclusion of the Bankruptcy Court’s bench order confirming the plan on
February 20, 2013, which request the Bankruptcy Court denied. (2/20/13
Tr. 72:2-25). The Appellant then sought a “limited stay” from Judge Buchwald,
requesting that the amount of its claim be withheld from distribution to
creditors pending resolution of the appeal. The District Court denied that
appeal as procedurally barred, concluding that the Appellant had failed to
request from the Bankruptcy Court the “limited stay” it was then seeking.
(2/26/13 Order 3-5).
Returning to the Bankruptcy Court, the Appellant applied for a “limited
stay” or “holdback.” (2/27/13 Tr. 11:8, 11:16). The Bankruptcy Court denied
this application as failing to meet the Bankruptcy Code’s requirements for
stays pending appeal. (Id. at 34:24-44:16). The Appellant then returned once
again to Judge Buchwald to seek its limited stay. The District Court — noting
that “undisputed facts in this record … strongly, even dramatically, militate
10

against granting a stay pending appeal” (2/28/13 Tr. 3:16-18), and further
observing that it was “hard to conceive of how any court could reach a decision
contrary to” the Bankruptcy Court’s decision (id. at 4:17-18) — denied the stay
application for a second time (id. at 16:25-17:4).
The sale transaction closed with the deposit into escrow of the
appropriate sums on February 27, 2013 (Purchaser Opp. 21), and the Plan
took effect with the distribution of those sums to creditors on February 28,
2013 (id. at 22).
B.

The Instant Litigation
The Appellant filed a notice of appeal on April 12, 2013. (Dkt. #1). By

stipulation filed on April 29, 2013, the parties established a briefing schedule.
(Dkt. #8). The Appellant filed its opening brief on May 10, 2013. (Dkt. #9). On
June 7, 2013, the Debtors filed a brief in opposition (Dkt. #10) and a
supporting declaration (Dkt. #11), and the Purchaser filed its own opposition
(Dkt. #14) and supporting declaration (Dkt. #15) on the same day. The
Appellant filed its reply brief on June 28, 2013. (Dkt. #26).
DISCUSSION
A.

The Standard of Review
Under 28 U.S.C. § 158(a), district courts have jurisdiction to hear

appeals from “final judgments, orders, and decrees” of bankruptcy courts. A
district court may “affirm, modify, or reverse a bankruptcy judge’s judgment,
order, or decree.” Fed. R. Bankr. P. 8013. “Findings of fact, whether based on
oral or documentary evidence, shall not be set aside unless clearly
11

erroneous….” Id. Legal conclusions by the bankruptcy judge receive de novo
review on appeal. In re Charter Commc’ns, Inc., 691 F.3d 476, 483 (2d Cir.
2012), cert. denied, 133 S. Ct. 2021 (2013).
“While the bankruptcy court’s findings of fact are not conclusive on
appeal, ‘the party that seeks to overturn them bears a heavy burden.’” In re
Lehman Bros. Holdings, Inc., 415 B.R. 77, 83 (S.D.N.Y. 2009) (quoting H&C
Dev. Group, Inc. v. Miner (In re Miner), 229 B.R. 561, 565 (2d Cir. BAP 1999)).
“A finding is ‘clearly erroneous’ when” the reviewing court is “left with the
definite and firm conviction that a mistake has been made.” In re Ames Dep’t
Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009) (quoting United States v. U.S.
Gypsum Co., 333 U.S. 364, 395 (1948)). “In regards to mixed questions of law
and fact, the Court must review findings of fact under the clearly erroneous
standard and the conclusions of law de novo.” In re Premier Operations, 294
B.R. 213, 217 (S.D.N.Y. 2003) (citing In re United States Lines, Inc., 197 F.3d
631, 640–41 (2d Cir. 1999)); see also Truck Drivers Local 807, Int’l Bhd. of
Teamsters, Chauffeurs, Warehousemen & Helpers of Am. v. Carey Transp. Inc.,
816 F.2d 82, 88 (2d Cir. 1987). 11
11

There is some ambiguity in the correct standard of review for mixed questions of law
and fact in bankruptcy appeals. The Second Circuit has adopted alternative positions
to the one relied upon here, including that mixed questions should receive de novo
review, see In re Vebeliunas, 332 F.3d 85, 90 (2d Cir. 2003), and that the court should
engage in a balancing analysis and apply the appropriate standard of review “depending
on whether the question is predominantly legal or factual,” Italian Colors Rest. v. Am.
Express Travel Related Servs. Co., 554 F.3d 300, 316 n.11 (2d Cir. 2009), vacated on
other grounds sub nom. Am. Express Co. v. Italian Colors Rest., 130 S. Ct. 2401 (2010).
In this regard, there is some question as to whether it is still appropriate to rely on the
Second Circuit’s Italian Colors decision, as ordinarily vacatur “‘eliminat[es] a judgment,’”
Anderson v. Green, 513 U.S. 557, 560 (1995) (modifications in original) (quoting United
States v. Munsingwear, Inc., 340 U.S. 36, 40 (1950)), and “avoids ‘giving preclusive
effect to [the] judgment’” so disposed of, Van Wie v. Pataki, 267 F.3d 109, 115 (2d Cir.

12

B.

Analysis
This appeal is moot for two reasons. It is statutorily moot under

§ 363(m) of the Bankruptcy Code because the Purchaser qualifies for the
protections accorded a good-faith purchaser of a debtor’s assets; since § 363(m)
imposes a jurisdictional bar, the Court may not, even were it inclined to do so,
examine the merits of the Appellant’s arguments. This appeal is also equitably
moot because the Appellant has not (and cannot) overcome the presumption
that an appeal of an unstayed, substantially consummated sale is moot; here,
no effective relief can be fashioned without undoing the Plan in its entirety.
Accordingly, this appeal is dismissed.
1.

Statutory Mootness
a.

The Purchaser Qualifies as a Good Faith Purchaser
Under § 363(m)

Section 363(m) of the Bankruptcy Code 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.
11 U.S.C. § 363(m). In short, this section “limits appellate jurisdiction over an
unstayed sale order issued by a Bankruptcy Court to the narrow issue of
2001). Perhaps because the Italian Colors vacatur was on other grounds, judges in this
District continue to rely on it in discussing the appropriate standard for appellate
bankruptcy review. See, e.g., In re Strawbridge, No. 11 Civ. 6759 (PAE), 2012 WL
701031, at *4 (S.D.N.Y. Mar. 6, 2012), appeal dismissed (June 5, 2012). Irrespective of
this abstract lack of clarity in the law, there is no question that bankruptcy court
determinations of good-faith conduct are factual conclusions subject only to clear error
review. See In re Lehman Bros., 415 B.R. at 84.

13

whether the property was sold to a good faith purchaser.” In re Motors
Liquidation Co., 428 B.R. 43, 53 (S.D.N.Y. 2010). Section 363(m) allows sales
to achieve finality without “the risk of endless litigation,” In re Gucci, 126 F.3d
380, 387 (2d Cir. 1997) (“Gucci II”), and maximizes the value of assets without
the need to discount for the possibility of “challenge even after closing the sale,”
In re WestPoint Stevens, Inc., 600 F.3d 231, 249 (2d Cir. 2010).
The Second Circuit has explained that § 363(m) amounts to “an imposed
jurisdictional limit on [a court’s] authority to review the Bankruptcy Court’s
sale order.” In re WestPoint Stevens, Inc., 600 F.3d at 247 (citing In re Gucci,
105 F.3d 837, 838 (2d Cir. 1997) (“Gucci I”) (“We hold that ... we have no
jurisdiction to review an unstayed sale order once the sale occurs, except on
the limited issue of whether the sale was made to a good faith purchaser.”)
(modification in original)). Though § 363(m) does not with absolute clarity
forbid a court that is reviewing a bankruptcy order of sale to a good faith
purchaser from ordering “some form of relief other than invalidation of the
sale,” Gucci I, 105 F.3d at 840 n.1, it does explicitly forbid courts from
“revers[ing o]r modif[ying]” the sale, and courts have “regularly ruled that the
appeal [from such a decision] is moot,” id. at 839. “[U]nder section 363(m),
[courts] lack jurisdiction to review the entire Sale Order — not just the actual
sale transaction.” In re WestPoint Stevens, Inc., 600 F.3d at 248. “Moreover,
section 363(m) applies even when a stay was denied by the district court after a
motion for a stay was timely made because statutory mootness recognizes that
a reviewing court ‘may be powerless to undo or rewrite the terms of the
14

consummated sale.’” In re Motors Liquidation Co., 428 B.R. at 53 (quoting Gucci
I, 105 F.3d at 840) (emphasis in original).
“‘The Bankruptcy Court’s finding of good faith ... is either a factual
question or mixed question of fact and law that must be reviewed for clear
error.’” Dist. Lodge 26, Int’l Ass’n of Machinists & Aerospace Workers, AFL-CIO
v. United Technologies Corp., 610 F.3d 44, 51-52 (2d Cir. 2010) (quoting In re
Motors Liquidation Co., No. 09 Civ. 7794 (RWS), 2010 WL 1730802, at *7
(S.D.N.Y. Apr. 28, 2010)); see also In re Lehman Bros. Holdings, Inc., 415 B.R.
77, 84 (S.D.N.Y. 2009) (“The good-faith purchaser determination is a mixed
question of law and fact. Thus, this Opinion must review the issue of whether
the Bankruptcy Court applied the correct legal standard de novo; and it must
review the court’s factual determinations under the clearly erroneous
standard.” (internal quotation marks and citation omitted)).
The Bankruptcy Court did not commit clear error in concluding, as a
factual matter, that the Purchaser acted as a good faith purchaser of the
Debtors’ assets. 12 In positing the contrary, the Appellant contends that the
Purchaser was party to a secret anticompetitive agreement with KSL, which
agreement it only disclosed after it “obtained an unsuccessful result from the

12

The Appellant submits that the good faith purchaser determination should receive de
novo, not clear error, review. As observed above, the standard of review applicable to
mixed questions of law and fact is indeed subject to some dispute. What is not in
question, however, is that a bankruptcy court’s determination whether a purchaser’s
conduct during a sale satisfies the good-faith requirement of § 363(m) is a factual one
subject to review only for clear error. See, e.g., Dist. Lodge 26, 610 F.3d at 51-52; In re
Motors Liquidation Co., 2010 WL 1730802, at *7; In re Lehman Bros., 415 B.R. at 84; In
re Metaldyne Corp., 421 B.R. 620, 625 (S.D.N.Y. 2009); In re Angelika Films 57th, Inc.,
Nos. 97 Civ. 2293 (MBM), 97 Civ. 2241 (MBM), 1997 WL 283412, at *6 (S.D.N.Y. May
29, 1997).

15

Good Faith Hearing,” and that this post hoc disclosure cannot serve to cure its
misconduct. (Appellant Br. 24). These arguments are mistaken at best and
disingenuous at worst. 13 The Bankruptcy Court never “found” anything with
regard to the “salience of the fact” that the Purchaser’s agreements with KSL
were not disclosed before the Good Faith Hearing. (Appellant Reply 4). Nor is
it correct to say that the Bankruptcy Court “did not find that [the Purchaser]
was a good faith purchaser as a consequence of its actions prior to September
10, 2012” (id. at 9), except insofar that the Bankruptcy Court made no
conclusive findings at all at the Good Faith Hearing (10/25/12 Tr. 30:10-14;
2/20/13 Tr. 58:22-59:5). The Appellant’s characterizations are no more
correct now than they were at the Confirmation Hearing, when the Bankruptcy
Court rejected them by finding that the Appellant “has misinterpreted the
Court’s prior ruling on good faith.” (2/20/13 Tr. 58:22-23).
At the Good Faith Hearing, the Bankruptcy Court ruled only that it was
then “premature to rule on the issue of good faith … because [the Code
sections] contemplate protections for a successful purchaser” and, at the time,
“[n]o sale ha[d] occurred” in the Debtors’ Chapter 11 cases. (10/25/12
Tr. 30:10-14). The additional disclosures the Purchaser ultimately made
regarding its relationship with KSL were suggested by the Bankruptcy Court
(id. at 31:3-24), as a matter of “best practices” (2/20/13 Tr. 59:6), to ensure
that KSL and the Purchaser were indeed independent actors with respect to
13

Fully aware of the marked divergence between the Appellant’s position and the express
terms of the Bankruptcy Court’s oral Order, the Court prefers to conclude that the
Appellant has severely misunderstood the record.

16

bidding for the Debtors’ assets (10/25/12 Tr. 30:24-31:20). The Bankruptcy
Court found that these additional disclosures clarified the record on this issue
and, despite its continued claims to the contrary, the Appellant has never
adduced “any evidence or rationale suggesting the auction process was unfair;
that [the Purchaser] and KSL colluded to affect price, that there was any fraud,
or that there was any action that would deny” the Purchaser the protections of
§ 363(m). (2/20/13 Tr. 63:5-8).
These, then, are the factual results the Appellant must overturn on
appeal to defeat § 363(m)’s jurisdictional bar. It cannot meet the “heavy
burden” necessary to do so. In re Lehman Bros., 415 B.R. at 83. The Appellant
simply has not provided any reason to doubt the Bankruptcy Court’s
conclusion that the agreement between the Purchaser and KSL had no effect
on the sale price of the Debtors’ assets, much less sufficient evidence to provide
a “definite and firm conviction” that the Bankruptcy Court was in error.
Indeed, KSL twice declined the opportunity to cooperate in the Purchaser’s
financial activities regarding the Resorts: in 2010, when the Purchaser
acquired the second mezzanine loan, and again in 2011, after the Purchaser
made its first offer to serve as a stalking horse in an eventual asset auction.
(Purchaser Opp. 13; 10/25/12 Tr. 14:19-21). To this day, KSL has never
shown an interest in entering a bid on its own behalf for the Debtors’ assets.
(10/25/12 Tr. 35:13-17).
Unlike in the cases the Appellant cites, the relationship between the
parties here was not aimed at controlling the price in the auction and, in fact,
17

had no effect on the course of bidding or the eventual sale. For example, the
Appellant seeks to rely on In re Beck Indus., Inc., 605 F.2d 624 (2d Cir. 1979),
which involved an agreement designed to “eliminate” an interested party as a
bidder by effecting collusion between two potential bidders on their mutual
behalf, concealing the possible profitability of a break-up of the debtor’s assets
rather than a unitary sale, and thereby “keep[ing] the price down” at the
eventual auction. Id. at 633-36. Moreover, the content of the agreement at
issue was kept a secret until after the auction had closed and the colluding
bidders had won. Id. at 629-32. Under these circumstances, the auction itself,
in Judge Friendly’s memorable phrase, “became a game of blind-man’s buff.”
Id. at 636. Nothing of the kind took place here: the appropriate disclosures
were made long in advance of the auction, and the agreements at issue in no
way influenced the conduct or outcome of the auction of the Debtors’ assets.
In re Hat, 310 B.R. 752 (Bankr. E.D. Cal. 2004), is equally off the mark.
Just as in Beck, Hat concerned a winning bidder who had secretly colluded
with two actively interested potential bidders, with the express intention of
removing these parties from bidding so as to minimize the price of the sale. Id.
at 758-59. But KSL never expressed any interest at all in bidding on the
Debtors’ assets, much less the kind of active engagement with the auction
(preparatory, of course, to collusive arrangements with the “winning” bidder)
evinced by the parties in Hat and Beck. Here, there is simply no evidence that
the Purchaser’s agreement with KSL had any effect on the conduct or
conclusion of the auction.
18

As the Second Circuit has made clear, the Court has jurisdiction to hear
a single class of argument against an unstayed order authorizing the sale of a
debtor’s assets: “challenges to the good faith aspect of the sale.” In re
WestPoint Stevens, 600 F.3d at 248. The Appellant cannot unseat the
Bankruptcy Court’s determination that the Purchaser acted in good faith in
acquiring the Resorts here. Accordingly, this appeal is moot.
b. Section 363(m) Applies Here Because the Purchaser Bought
the Debtors’ Assets Outright and the Relief the Appellant
Seeks Would Affect the Validity of the Plan
As a last-ditch effort to avoid statutory mootness, the Appellant makes
two equally unpersuasive arguments disputing the applicability of § 363(m) in
the first instance. First, the Appellant submits, the Purchaser was not a
purchaser at all, but simply a recipient of “an excess distribution in its capacity
as a junior mezzanine creditor before senior claims were paid in full. Had some
other party outbid [the Purchaser] and purchased the assets in good faith, this
would still be the case.” (Appellant Br. 4). The content of this argument is left
as an exercise for the reader, but might be interpreted as the position that the
Purchaser, rather than purchasing title to the Resorts, actually acquired the
interest of the senior creditors in the various financing instruments burdening
the Resorts and then received their entire value as an in-kind distribution.
This labored view of events would effectively bar any creditor from receiving the
benefit of § 363(m)’s protections when acquiring the assets of a debtor and
cannot be correct, especially as pre-petition creditors routinely acquire the
assets of debtors and receive the protection of § 363(m). See, e.g., In re
19

Metaldyne Corp., 421 B.R. at 622; see also In re 255 Park Plaza Assocs. Ltd.
P’ship, 100 F.3d 1214, 1217-18 (6th Cir. 1996) (refusing to “endorse a rule that
would cast a shadow over the finality of” asset sales to creditors).
What happened here was a sale, pure and simple. The Purchaser had
offered throughout to acquire the Resorts outright rather than participating in
a non-sale reorganization. (Conf. Order 18). The Debtors sought at length
throughout the pendency of the Chapter 11 cases “to structure their
restructuring as a reorganization or equity sale to present the best recovery to
all stakeholders,” rather than the asset sale the Purchaser offered; these efforts
were unsuccessful. (Id. at 20-21). Indeed, the structure of the transaction as
an asset sale was critical to the Purchaser. Any alternative approach had
significant negative tax implications for the Purchaser, especially with regard to
any future effort to sell the acquired assets. (2/4/13 Tr. 17:25-18:12).
Conclusively, the Confirmation Order explicitly acknowledged that “the
Property shall be transferred to and vest in the Purchaser free and clear of all
Liens, Claims, charges, or other encumbrances” on the effective date of the
sale. (Conf. Order 57). The Purchaser bought the Resorts, it did not receive a
distribution, and § 363(m) applies.
Second, the Appellant argues that § 363(m) is irrelevant because the
relief it seeks would not “‘[a]ffect the validity of the sale.’” (Appellant Br. 23
(quoting 11 U.S.C. § 363(m))). In this regard, the Appellant insists it is seeking
one of two permissible forms of relief not barred by § 363(m): either the Court
should order the Purchaser to pay the Appellant, subject to the Plan’s
20

requirement of “payment in full of all unsecured and administrative claims”; or
the Purchaser should transfer to the Appellant a prorated share of its
“ownership interests” in the Resorts. (Id. at 4). Indeed, the Appellant insists it
“is not seeking to upend the Plan but to enforce it.” (Id. at 22 (emphasis in
original)).
As Judge Cote wrote when confronting similar arguments, the line the
Appellant seeks to draw between its sought relief and impermissible
invalidation of the sale “is a specious distinction.” In re Metaldyne, 421 B.R. at
626. The parties arrived at the dollar value of the sale after extensive
negotiation regarding the value of the assets and the claims of the creditors.
Indeed, though the Appellant suggests that the Plan required payment “in full”
of all claims against the Debtors, the payments actually made under the Plan
were tailored to significant compromises by the senior creditors against the
total sums owed. (See 2/27/13 Tr. 40:20-22; see also 2/20/13 Tr. 53:6-7
(noting that “there are creditors senior to [the Appellant] who have not been
paid in full”)). As the Bankruptcy Court held, the Appellant “will not be
permitted to argue that it is no longer subordinated merely because certain
lenders have made concessions.” (2/20/13 Tr. 42:13-15).
The Plan itself was conditioned on the sale of the Resorts to the
Purchaser free and clear of all claims. (See Conf. Order 28 (“The
Indemnification Claims are Disallowed.”); id. at 57 (“the [Resorts] shall be
transferred to and vest in the Purchaser free and clear of all Liens, Claims,
charges, or other encumbrances….”)). More than that, the very claim the
21

Appellant asserts here — inventive as it was — was the “central bone of
contention” (2/20/13 Tr. 18:21) at the Confirmation Hearing, and all the
parties “agree[d] that feasibility hinge[d] upon whether” the Appellant had a
right to the recovery it seeks here (id. at 23:2-3). The Bankruptcy Court
found — and it did not clearly err in finding — that the Plan could not have
been confirmed had the Appellant’s indemnification claim been allowed.
Whether structured as some form of joint tenancy, as the Appellant suggests
(Appellant Reply 6), or simply as a payment of $58 million from the Purchaser
to the Appellant, the allowance of the Appellant’s indemnity claim would upset
and invalidate the delicate balance struck by the parties and confirmed by the
Bankruptcy Court. The Appellant’s ipse dixit that it seeks only to reallocate the
assets in question does not diminish the extent to which its relief would affect
the validity of the sale.
The Appellant cites three cases in support of its position, all confronting
markedly dissimilar factual settings. In Mission Iowa Wind Co. v. Enron Corp.,
291 B.R. 39, 41-42 (S.D.N.Y. 2003), the court permitted an effort to seek a true
reallocation of cash when a substantial portion of the payment from the
purchaser to the sellers would, due to the corporate structure implicated, flow
back upstream into the bankrupt estate and so return to the bankruptcy
court’s jurisdiction after the asset sale was complete. In re S. Edge LLC, 478
B.R. 403, 412 (D. Nev. 2012), permitted an appeal in the face of § 363(m) when
the issues on appeal all “related only to the potential impact of Plan provisions
on litigation claims or defenses in other actions” between the debtors and
22

various creditors. And In re C.W. Mining Co., 641 F.3d 1235, 1239 (10th Cir.
2011), allowed an appeal to proceed when relevant authority suggested that the
appellant would be able to receive monetary relief for its claims without
disturbing the terms of the sale. All three cases are inapposite. Here, no funds
remain under the jurisdiction of the Bankruptcy Court from which the
Appellant could seek distribution; the issues on appeal relate solely to whether
the critical disallowal of its claim was correct (and, by extension, whether the
Plan was rightly confirmed); and it is impossible for the Appellant to recover on
its claim without invalidating the sale as a whole. Section 363(m) precludes
such appeals.
Because § 363(m) applies and because the relief the Appellant seeks
would affect the validity of the sale, the Court has jurisdiction to hear a single
argument: whether the Purchaser qualified as a good faith purchaser for
§ 363(m) purposes. The Bankruptcy Court concluded that it did, and this
conclusion was not clear error. This appeal is moot.
2.

Equitable Mootness

Even were the Court to conclude that the Bankruptcy Court committed
clear error in finding that the Purchaser acted in good faith, this appeal would
still be equitably moot because the Court cannot fashion effective relief.
Equitable mootness is a prudential doctrine allowing dismissal of a
bankruptcy appeal “‘when, even though effective relief could conceivably be
fashioned, implementation of that relief would be inequitable.’” In re Charter
Commc’ns, Inc., 691 F.3d at 481 (quoting In re Chateaugay Corp., 988 F.2d
23

322, 325 (2d Cir. 1993) (“Chateaugay I”)). Equitable mootness “is concerned
with whether a particular remedy can be granted without unjustly upsetting a
debtor’s plan of reorganization.” Id. “‘[E]quitable mootness applies to specific
claims, not entire appeals’ and must be applied ‘with a scalpel rather than an
axe.’” Id. at 481-82 (quoting In re Pac. Lumber Co., 584 F.3d 229, 240-41 (5th
Cir. 2009) (modification in original)).
“[A]n appeal is presumed equitably moot where the debtor’s plan of
reorganization has been substantially consummated.” In re Charter Commc’ns,
691 F.3d at 482. “Constitutional and equitable considerations dictate that
substantial consummation will not moot an appeal” when five specific factors
are satisfied. In re Chateaugay Corp., 10 F.3d 944, 952–53 (2d Cir. 1993)
(“Chateaugay II”). Those five requirements, all of which are necessary to
overcome the presumption of equitable mootness, are:
(a) the court can still order some effective relief;
(b) such relief will not affect the re-emergence of the
debtor as a revitalized corporate entity;
(c) such relief will not unravel intricate transactions so
as to knock the props out from under the
authorization for every transaction that has taken
place and create an unmanageable, uncontrollable
situation for the Bankruptcy Court;
(d) the parties who would be adversely affected by the
modification have notice of the appeal and an
opportunity to participate in the proceedings; and
(e) the appellant pursued with diligence all available
remedies to obtain a stay of execution of the
objectionable order if the failure to do so creates a

24

situation rendering it inequitable to reverse the orders
appealed from.
Chateaugay II, 10 F.3d at 952-53 (internal quotations, citations, and
modifications omitted). There is no dispute here that the Plan is substantially
consummated and has been since the transfers of title and funds took place on
February 28, 2013. (See Appellant Br. 21; Purchaser Opp. 17; Debtor Opp. 9).
The Appellant thus must satisfy all five of the above requirements to defeat the
presumption of mootness. This it cannot do.
As the Appellant itself frames the issue, the analysis here requires
determining whether the Court would have to disturb the Plan to grant the
relief it seeks. (Appellant Reply 4). The Court has already found that ordering
the Purchaser to pay the Appellant $58 million or to transfer an equivalent
interest in the Resorts to the Appellant would have just that effect. This
conclusion is of a piece with the positions taken by the Appellant and all the
other parties to this dispute during confirmation and adopted by the
Bankruptcy Court:
[T]he issue of indemnification is one that stands in the way of
confirmation. There’s no dispute that the current plan does not
provide sufficient funds to pay this transaction tax. Indeed,
[Appellant] and the debtors agree that feasibility hinges upon
whether the debtors have an indemnification obligation for the
transaction tax.
(2/20/13 Tr. 22:23-23:3; see also id. at 21:12-20 (observing that the Appellant
had “vigorously prosecuted” the position that the “indemnification obligations
were a bar to confirmation” “throughout the confirmation process”)).

25

Before this Court, the Appellant suggests that it simply wants the Court
to order the Purchaser to “writ[e] one check” to the Appellant for $58 million.
(Appellant Reply 5). Whatever the rhetorical appeal of that phrase, the true
substance of the Appellant’s application is something quite different, viz.,
recognition and allowance of a claim it contends had priority over in-the-money
claims and thus should have been paid as part of the sale transaction.
The Appellant’s claim is not against the Purchaser directly, but against
the estates of the Debtors. Payment of that claim should come out of the sale
funds, not out of the Purchaser’s pocket; the Appellant’s argument is not that
the Purchaser should have made a separate $58 million dollar transfer, but
that the Plan should have provided for an extra $58 million to be deposited in
escrow and distributed to the Appellant. Now, however, the funds allocated for
the sale transaction have been distributed to all the in-the-money creditors.
The Appellant cannot simply demand that the Purchaser make another,
separate payment. For the Appellant to have received $58 million, the
Purchaser would have had to agree to pay that $58 million in the first place.
And had the Appellant’s claim been a deal term, the Purchaser might have
sought additional concessions from other parties; or it might have tried to
negotiate concessions from the Appellant itself to accept a lesser sum in
satisfaction; or the Purchaser might simply have walked away from the deal
altogether. The Court cannot determine alternative forms the Plan might have
taken. For that very reason, the Court cannot order effective relief without
disassembling the Plan in its entirety and the Appellant cannot satisfy the
26

Chateaugay factors. See In re Metromedia Fiber Network, Inc., 416 F.3d 136,
145 (2d Cir. 2005) (“If appellants’ claims are substantial (as they urge), it is as
likely as not that the bargain struck by the debtor and the released parties
might have been different….”); see also In re Source Enterprises, Inc., 392 B.R.
541, 550 (S.D.N.Y. 2008) (“It is clear … that courts have found it difficult to
sever one piece of a Plan….”); In re Delta Air Lines, Inc., 374 B.R. 516, 523
(S.D.N.Y. 2007) (observing that nullifying one element of a consummated
bankruptcy plan “while leaving the remainder of the consummated Settlement
intact would ignore the tradeoff that allowed the parties to settle in the first
instance and would treat a non-severable provision of the Settlement
Agreement as dispensable”), aff’d sub nom. Ad Hoc Comm. of Kenton Cnty.
Bondholders v. Delta Air Lines, Inc., 309 F. App’x 455 (2d Cir. 2009) (summary
order).
Nor can the Appellant find any succor in its repeated avowals that the
Plan requires payment in full of all claims, given that the senior creditors only
recovered subject to substantial concessions. (2/20/13 Tr. 42:11-15). And
regardless of what payments the Plan obliged the Purchaser to make, there is
no doubt that the Appellant’s claim was never among them. Indeed,
disallowing that claim was the essential final step allowing the Plan to be
confirmed and the sale to proceed. Had the Bankruptcy Court allowed the
Appellant’s claims, there would have been no sale at all.
Compelling the Purchaser to pay that claim now would disturb the sale
for the same reason that it was an obstacle to confirmation: in the Purchaser’s
27

business judgment, the Resorts lack adequate value to justify the additional
expenditure of paying the Appellant’s claim. It was for this reason that
provisions in the Plan and the Confirmation Order expressly disallowed the
claim at issue — provisions subject to the Plan’s nonseverability clause. See In
re Charter Commc’ns, 691 F.3d at 485 (observing that “a nonseverability clause
may be one indication that a particular term was important to the bargaining
parties”). In sum, for the same reason that the Appellant’s sought relief would
affect the validity of the Plan, as discussed above with respect to § 363(m), the
Court cannot order effective relief here without tearing the Plan itself apart.
This appeal is equitably moot.
CONCLUSION
Were the Court to consider the merits of the Appellant’s claim, it would
almost certainly conclude, as Judge Buchwald did, that it is “hard to conceive
of how any court could reach a decision contrary to” the Bankruptcy Court’s
careful and well-reasoned decision. (2/28/13 Tr. 4:17-18). As it happens,
however, this appeal is moot. First, it is moot as a statutory matter under
§ 363(m), because the Bankruptcy Court did not commit clear error in finding
that the Purchaser acted in good faith, and because the relief the Appellant
seeks would affect the validity of the sale of the Resorts. On this basis, the
Court lacks jurisdiction to hear any other argument and the appeal must be
dismissed.
Even had the Purchaser not acted in good faith, this appeal would
remain equitably moot. The Court cannot order relief here without disturbing
28

the transaction as a whole. Such appeals are not permitted when the sale of a
debtor’s assets has been substantially consummated. The Resorts have been
sold, title has transferred, the creditors have been paid, and the Purchaser has
proceeded to act as the new owner of the Resorts in every respect. Given this
unquestioned consummation, the Appellant cannot be permitted to proceed
with an appeal threatening the disruption of the sale itself.
Accordingly this appeal is dismissed. The Clerk of Court is respectfully
directed to close the case.
SO ORDERED.
Dated: January 7, 2014
New York, New York

__________________________________
KATHERINE POLK FAILLA
United States District Judge

29