Official Comm. of Unsecured Creditors of Walker Cnty. Hosp. Corp. v. Walker Cnty. Hosp. Dist. (In re Walker Cnty. Hosp. Corp.)

• Citation: 3 F.4th 229
• Decision Date: 12 July 2021
• Docket Number: No. 20-20572,20-20572
• Parties: In the MATTER OF: WALKER COUNTY HOSPITAL CORPORATION Debtor, The Official Committee of Unsecured Creditors of Walker County Hospital Corporation, doing business as Huntsville Memorial Hospital, Appellant, v. Walker County Hospital District; Huntsville Community Hospital, Incorporated, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

3 F.4th 229

In the MATTER OF: WALKER COUNTY HOSPITAL CORPORATION Debtor,The Official Committee of Unsecured Creditors of Walker County Hospital Corporation, doing business as Huntsville Memorial Hospital, Appellant,

v.Walker County Hospital District; Huntsville Community Hospital, Incorporated, Appellees.

No. 20-20572

United States Court of Appeals, Fifth Circuit.

FILED July 12, 2021

Jason S. Brookner, Gray Reed & McGraw, L.L.P., Dallas, TX, Jackson D. Toof, Emily Baver Slavin, Arent Fox, L.L.P., Washington, DC, for Appellant.

Peter Sabin Willett, Esq., Morgan, Lewis & Bockius, L.L.P., Boston, MA, Danny Scot Ashby, Esq., Justin Roel Chapa, Morgan, Lewis & Bockius, L.L.P., Dallas, TX, Thomas Cullen Wallace, Attorney, Morgan, Lewis & Bockius, L.L.P., Houston, TX, for Appellees.

Before Jolly, Duncan, and Oldham, Circuit Judges.

E. Grady Jolly, Circuit Judge:

A creditor disputes last-minute modifications to the terms of a bankruptcy sale. Because it failed to seek a stay, its appeal fails.

I.

Walker County Hospital Corporation (the "Hospital" or the "Debtor") operated a not-for-profit community hospital in Huntsville, Texas.¹ It is the county's largest healthcare provider; to be sure, few other options exist for residents in this rural area. The Hospital had financial troubles and was on the brink of closing, a matter of great concern to the citizens of Walker County. On November 11, 2019, the Hospital filed for Chapter 11 bankruptcy and made an effort to auction off its assets and operations. But none of the thirty-six parties that received the Hospital's offering memorandum submitted a bid.

But the Hospital did have some hope: a "stalking horse bid"² from Huntsville Community Hospital, a joint venture between Walker County Hospital District (the "District") and Community Hospital Corporation (collectively, the "Buyers"). At approximately the same time that the Buyers’ bid was being organized and considered, a committee was appointed to represent the interests of the Debtor's unsecured creditors (the "Committee" or the "Creditors"). The Committee believed the Buyers’ bid undervalued what the Hospital was worth and would have left little for the Creditors (i.e., the Committee). After weeks of negotiation, the Debtor, the Buyers, and the Committee reached a Settlement that would govern the sale of all of the Hospital's assets and operations to the Buyers. In exchange, the Committee agreed not to bring its objections. This Settlement was memorialized in an email exchange between the parties on December 18, 2019. Two days later, the bankruptcy court held a hearing to approve the sale on the agreed terms and subsequently entered a Sale Order pursuant to 11 U.S.C. § 363(b), which attached and referenced the Settlement reached among the parties as well as a Purchase Agreement between only the Debtor and the Buyers.

Key features of these documents would later form the basis for this dispute. As noted above, the Committee agreed to waive its objections to the sale based on the terms agreed to in the Settlement. In exchange, the Committee received more favorable terms of sale for the Debtor than originally contemplated by the transaction. This would, of course, translate into more funds being available to flow from the Debtor to the Committee—i.e., to pay off unsecured creditors.

In exchange for less favorable terms, the Buyers retained certain rights. First, the Buyers’ bid was conditioned on raising financing from a third-party lender (the "Lender"); without such financing, the Buyers were not obligated to consummate the transaction. Second, the Hospital was slated to receive a large future payment associated with a certain Medicaid program; the Buyers scheduled the transaction's closing date such that that payment was supposed to be received after they owned all of the Hospital's assets—including its accounts receivable—meaning that the Buyers would be entitled to receive that payment. However, if the sale closed after the Hospital received the payment from Medicaid, the payment would be included in an "Accounts Receivable Sharing Waterfall," a complex formula devised to divide the Hospital's accounts receivable between the Buyers and the Debtor's estate (that would eventually flow to the Committee). In short, if the payment reached the Hospital before the sale closed, the Buyers would receive substantially less than expected.

After the Sale Order was entered, the Lender began its due diligence process, reviewing the Hospital's records to determine if it was willing to finance the Buyers’ acquisition of the Hospital. The process was slow, issues were found, and closing was delayed past the date originally planned. During this period of delay, the Buyers and the Hospital negotiated some side agreements to keep the Hospital running, since it was very close to shutting its doors due to financial difficulties. As part of these side agreements, the Buyers conditioned their ability and willingness to close the transaction on the Hospital's having not yet received the Medicaid payment; the Buyers did not want to lose that asset because of the delay.

The Lender remained unwilling to finalize financing for the Buyers’ acquisition before finishing its diligence on the Hospital—when on or about February 25, 2020, the Hospital received the Medicaid payment. The sale had not yet closed. The Buyer informed the Debtor that losing the Medicaid payment would sink its ability to receive financing to close the transaction.

On February 26, 2020, the Debtor filed an emergency motion in bankruptcy court seeking to amend the Sale Order. In it, the Debtor noted the side deals that had been reached between the Debtor and the Buyers to keep the hospital running and also explained about the delayed closing, the Medicaid payment, and the need for financing. The Debtor asked the court to adjust downward the purchase price the Buyers would be paying and also grant the Buyers an administrative expense claim (which would, in effect, also decrease the sale price for the Buyers). According to the Debtor, this compromise constituted the agreement the Debtor and the Buyers had reached to allow the transaction to still go forward. Without it, there would be no deal, and the hospital would have to cease operations. The Debtor thus claimed that the relief it sought was "in the best interests of the Debtor, its estate, creditors, and all parties in interest."³ Because "timely consummation of the sale" was of "critical importance," the Debtor also asked the court to waive the standard fourteen-day stay usually required by Federal Rule of Bankruptcy Procedure 6004(h). FED. R. BANKR. P. 6004(h) ("An order authorizing the use, sale, or lease of property ... is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise .") (emphasis added).

The Debtor filed its motion on February 26, 2020, at 8:42 a.m., and the Committee acknowledges receiving notice "shortly after." Indeed, the Committee says that its counsel called the bankruptcy court to inform the court that it objected to the motion and wanted time to confer with the Debtor and the Buyers, but this evidence does not appear in the record. What is in the record is that one of the Buyers filed a joinder to the Debtor's motion the next day, stating that the "Buyers will not be able to close this transaction without the relief sought in the Debtor's Emergency Motion." And that same day, February 27, 2020, at 9:20 a.m.—about twenty-four hours after the Debtor's motion was filed—the bankruptcy court entered an order amending the Sale Order (the "Amendment Order") and granted the Debtor and the Buyers the relief they had requested.

The Amendment Order was "effective immediately upon its entry," and it authorized the Debtor and the Buyers to "close the sale of the Purchased Assets immediately." It also was explicit that "[a]ny party objecting to this order must exercise due diligence in filing an appeal and pursuing a stay within the time prescribed by law and prior to the Closing Date, [sic] or risk its appeal will be foreclosed as moot." That did not leave much time, because less than twenty-four hours later, the sale of the Hospital's assets closed—at 12:01 a.m. on February 28, 2020.

The Committee did not seek a stay at any point, but about two weeks later, on March 11, 2020, it did appeal the bankruptcy court's Amendment Order to the district court, claiming various bankruptcy rules were not followed and that its procedural due process rights were violated. The Buyers moved to dismiss the Committee's appeal. They argued it was mooted by 11 U.S.C. § 363(m), which provides that the "modification on appeal" of certain authorized bankruptcy sales "does not affect the validity of" such a sale "to an entity that purchased ... such property in good faith ... unless" that sale was "stayed pending appeal." 11 U.S.C. § 363(m). Since the Committee did not even seek a stay, the Buyers argued that the sale could not be modified.

The District Court ruled that the Committee's appeal was statutorily moot.⁴ It did not address the Committee's due process arguments.

This appeal by the Committee followed.

II.

"In reviewing the rulings of ... the district court sitting in bankruptcy, we review findings of fact for clear error and conclusions of law de novo." In re TMT Procurement Corp. , 764 F.3d 512, 519 (5th Cir. 2014). "We review mixed questions of law and fact de novo." Id.

III.

The district court held that the Committee's appeal was statutorily moot under 11 U.S.C. § 363(m), which provides that the "modification on appeal" of a "sale ... of property" authorized under § 363(b) "does not affect the validity of" such a sale "to an entity that purchased ... such property in good faith ... unless" that sale was "stayed pending appeal." 11 U.S.C. § 363(m). The purpose of § 363 is to "promote the finality of bankruptcy sales[,] thereby maximizing the purchase price of estate assets." NORTON § 44:37. "Without...