This Report summarizes cases granted review on June 27 and 30, 2022 (Part II).
Case Granted Review: MOAC Mall Holdings LLC v. Transform Holdco LLC, 21-1270
MOAC Mall Holdings LLC v. Transform Holdco LLC, 21-1270. The question presented is whether during bankruptcy proceedings 11 U.S.C. §363(m) limits appellate jurisdiction over any order deemed “integral” to a sale order even when a remedy could be fashioned that does not affect the validity of the sale. Section 363(b) permits a trustee, after notice and a hearing, to use, sell, or lease property of the bankrupt estate outside the ordinary course of business. Section 363(m) limits appellate review of such a sale: “The reversal or modification on appeal of an authorization under subsection (b) . . . 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.”
In 1991, MOAC Mall Holdings (MOAC) entered into a lease agreement with Sears to occupy three floors of the Mall of America. Given the strength of the Sears brand at the time, MOAC offered a lease of only $10 per year for 100 years. But Sears filed for bankruptcy in 2018. The company’s former CEO founded Transform Holdco LLC (Transform) with the goal of acquiring Sears’ assets. In February 2019, the bankruptcy court approved the sale of a substantial portion of Sears’ assets to Transform under §363(b). Transform did not receive the MOAC lease, but it acquired a “designation right” with respect to that lease (and about 600 other leases), meaning that following the sale Transform could seek assignment of the MOAC lease, subject to notice and hearing, a chance for other parties to object, and a separate bankruptcy court order. The sale order was not appealed, and the sale closed in February 2019. Two months later, Sears and Transform filed a notice designating the MOAC lease for assignment to Transform. MOAC objected because Transform intended to sublease the space rather than occupy it. The bankruptcy court overruled the objection and approved the lease assignment. MOAC moved for a stay while it appealed the assignment order to the district court, in case Transform argued that §363(m) applied. Transform told the bankruptcy court that §363(m) was inapplicable and that it would not argue otherwise on appeal. The bankruptcy court denied the stay request, agreeing with Transform that §363(m) did not apply to the order being appealed because it was an assignment order rather than a sale order.
On appeal, the district court did not disturb the sale order, but it vacated the assignment order because Transform did not intend to occupy the Mall of America space. Despite its previous stipulation, Transform filed a motion for rehearing in the district court, arguing for the first time that the court lacked jurisdiction over the appeal because §363(m) applied to the assignment order and deprived the court of jurisdiction. The district court vacated its initial order and dismissed the appeal. The court was “appalled” by Transform’s switch and recognized that Transform’s argument would ordinarily be precluded, but it found that §363(m) is jurisdictional and therefore nonwaivable. MOAC appealed, and the Second Circuit affirmed. 2021 WL 5986997. The court held that §363(m) is a limit on appellate jurisdiction, and unless an order is stayed pending appeal, the court can only review challenges to the “good faith” aspect of a sale. The court found that the assignment of the lease to Transform was an “integral” part of the sale because the sale order itself said so.
MOAC observes in its petition that Congress has granted district courts jurisdiction in appeals from bankruptcy proceedings, and it argues that §363(m) does not reflect a “clear statement by Congress stripping the courts of jurisdiction.” For example, the section does not expressly mention “jurisdiction.” The provision forbids only appeals that affect the validity of a sale, not any aspect of such a sale. In MOAC’s view, the section provides defenses or limits the remedies that are available on appeal, but it does not limit the appeal itself. For example, §363(m) prohibits a reviewing court from modifying or setting aside a sale made in good faith, but it does not prevent the court from granting other relief such as redistributing the proceeds from a sale. If the order appealed from is “integral” to a sale order, that will affect the relief that is available, but it will not deprive the court of jurisdiction (preventing the court from proceeding at all). MOAC argues that labeling §363(m) jurisdictional―and therefore unwaivable―can lead to the type of “unscrupulous litigation tactics” that occurred in this case. Because §363(m) is not jurisdictional, Transform’s affirmative waiver of any rights under that section was valid and enforceable. Even if those protections were not waived, the district court could have simply reversed the lease assignment while leaving the sale order in place.
Transform responds that the goal of §363(m) is to encourage sales in bankruptcy cases, and good faith buyers would be less willing to purchase property if doing so included the risk that an appeal will upset expectations. Transform argues that by its terms, §363(m) does not apply if an appellate court can fashion a remedy that does not invalidate the sale, and an inability to grant effective relief on appeal is jurisdictional under the case and controversy requirement of Article III. Here, the only relief MOAC has sought is to invalidate the assignment order, which Transform argues would invalidate the sale order itself because the ability to lease Sears’ numerous properties around the country was a significant part of the sale. Transform also emphasizes MOAC’s failure to obtain or further pursue a stay pending appeal, arguing that Congress may prohibit courts from adjudicating an otherwise legitimate class of appeals in this manner just as it may prohibit untimely appeals. Additionally, says Transform, bankruptcy jurisdiction is fundamentally in rem, and once an asset has been transferred from the estate, the court’s authority over it generally ends. Thus, in the absence of a stay, the court loses its jurisdiction when a good-faith sale becomes final.