Q: A commercial parcel owned by a bankrupt developer is being sold pursuant to §363 of the Bankruptcy Code. Everything seems to be OK with respect to notice provided pursuant to the Bankruptcy Rules, etc. The problem is that we are being asked to close and insure without waiting through the 10-day appeal period. Can we insure?
P. C., Dallas, Texas
A: Generally speaking, bankruptcy court orders are appealable within 10 days. Additionally, Rule 62(a) of the Federal Rules of Civil Procedure provides for a 10-day automatic stay of execution which runs simultaneously with the appeal period. However, Bankruptcy Rule 7062 provides, among other things, that Rule 62(a) is inapplicable to orders confirming sale under §363. And, §363(m) provides a "safe harbor" for good faith purchasers who purchase in reliance on an order confirming sale unless the order has been stayed pending appeal. Therefore, unless a specific stay order has been entered by the bankruptcy court or an appellate court, it is legally possible to close, and have an insurable title, during the 10-day appeal period.
If only life were that simple. While the safe harbor of §363(m) is routinely upheld by bankruptcy courts, it is not self-executing. Nothing stops an aggrieved party from filing an appeal. In order for our insured to avail itself of the protections afforded by the safe harbor should an appeal be filed, a motion to dismiss the appeal as moot must be made. That requires the hiring of counsel, which costs money – an expense covered by title insurance.
A number of questions should be asked before considering whether or not it makes good underwriting sense to close prior to the expiration of the 10-day appeal period. Even with favorable answers given to these questions, each situation has its own dynamics which need to be considered; underwriting assistance is a must. Some basic questions are:
1. Was proper notice of the hearing given to all parties in interest as required under Bankruptcy Rule 2002? Did the order confirming sale contain such a finding?
2. Did any party object to the proposed sale at the hearing?
3. If so, did that party request a stay order in open court from the bankruptcy judge? (This is by a motion ordinarily required to be made pursuant to Bankruptcy Rule 8005.)
4. Did the order confirming sale contain a finding that the proposed purchaser is in good faith and entitled to the protections of §363(m)?
5. Has an appeal been filed?
6. Are we aware that an appeal may be filed or a stay order sought?
It may make sense in some instances to insure during the appeal period, but with an exception in the title insurance policy deleting coverage for legal expenses which may be incurred in the event of an appeal. We should know in advance which law firm the insured proposes to hire to represent its interest in the bankruptcy case should an appeal be filed. For our own protection, we'll want to follow the litigation ourselves, making sure the law firm representing the insured proceeds to our satisfaction. Bottom line: proceed with caution.
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