Because Section 363(m) is a jurisdictional bar to overturning a sale in the Second Circuit, Chief District Judge Colleen McMahon of Manhattan could not issue the ruling she believed to be correct, even though she was “appalled” by the buyer’s conduct.

In her new decision on May 11, Judge McMahon vacated “with great regret” the 43-page opinion she handed down on February 27 after working “for over a month on what turned out to be a very complicated appeal.” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 613 B.R. 51 (S.D.N.Y. Feb. 27, 2020).

Before issuing her February decision, Judge McMahon said that neither side suggested “that the court might lack jurisdiction over the appeal.” Confessing that she “does not pretend to [have] expertise in bankruptcy,” the judge said she “was unaware of the possibility that the appeal might be moot.”

Here’s how it happened.

Judge McMahon was ruling on an appeal in the wake of the chapter 11 reorganization of Sears Holdings Corp., where the debtor’s chief executive and others formed a new corporation to buy the bulk of Sears’ assets. The assets included a lease in the Mall of America near Minneapolis. The landlord objected to the assignment of the lease but lost in bankruptcy court.

In February, Judge McMahon made an important ruling when she reversed the bankruptcy court. She held that a provision in a lease cannot supplant the requirement in Section 365(b)(3)(A) that the financial condition of an assignee of a lease must be “similar to the financial condition . . . of the debtor . . . as of the time the debtor became the lessee under the lease . . . .” To read ABI’s report on the February opinion, click here.

Two weeks later, the purchaser of the lease filed a motion for rehearing. Although the purchaser had taken the contrary position throughout the litigation so far, the purchaser contended for the first time in the rehearing motion that the appeal should be dismissed under Section 363(m). Without referring to jurisdiction, the section says that reversal or modification “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 [to a purchaser in good faith] . . . unless such authorization and such sale or lease were stayed pending appeal.”

Judge McMahon carefully recounted the contrary position the purchaser had taken in bankruptcy court. When the landlord sought a stay pending appeal from the bankruptcy judge, the purchaser said that a stay was not required because Section 363(m) did not apply. The purchaser was contending at the time that the transaction approved by the bankruptcy court was not a sale and that Section 363(m) would not moot an appeal.

Likewise, the bankruptcy judge expressed his view that Section 363(m) did not apply and that an appeal would not become moot. Judge McMahon said that the bankruptcy judge relied on the purchaser’s representation in deciding to deny the motion for a stay pending appeal.

On the motion for rehearing, Judge McMahon said that the buyer now “seeks to benefit from a complete reversal of that representation.” She first ruled that the purchaser was entitled to rehearing under Bankruptcy Rule 8022, then turned to the merits regarding Section 363(m).

Judge McMahon said that the Second Circuit has twice held that Section 363(m) is “a jurisdiction-depriving statute.” In re WestPoint Stevens Inc., 600 F.3d 231, 248 (2d Cir. 2010); In re Gucci, 105 F.3d 837, 838–840 (2d Cir. 1997).

Judge McMahon observed that the section “does not exactly suggest that an appellate court lacks the power to reverse or modify an unstayed bankruptcy court order.” She nonetheless found herself “constrained by the words used by my Court of Appeals to describe my power.”

To preclude dismissal of the appeal under Section 363(m), the landlord made arguments based on waiver and estoppel. Judge McMahon concluded that neither “confers jurisdiction over an appeal where Congress has expressly removed it.”

Waiver, Judge McMahon said, “cannot be relied on to create appellate jurisdiction where there is none.”

“[A]s much as I hate to say it,” Judge McMahon said, she decided that judicial estoppel was not applicable because the purchaser had not taken an inconsistent position regarding a fact. She cited authority for the proposition that judicial estoppel does not apply to alternative legal theories.

Judge McMahon granted rehearing, concluded that she lacked appellate jurisdiction, vacated her February opinion, and dismissed the appeal.

Observations

Courts sometimes conflate jurisdiction and power. The Second Circuit should revisit Section 363(m) and consider whether the section deprives the appellate court of jurisdiction or only limits the power of an appellate court to issue some types of relief.

For instance, a court may have jurisdiction but may lack power to impose a remedy in view of a statute limiting the power of the court or for prudential reasons. For example, Section 550(b) limits the power to recover a fraudulent transfer from a transferee but does not deprive the court of jurisdiction.

The appellate jurisdiction of district courts in bankruptcy cases is contained in 28 U.S.C. § 158. There is no jurisdictional carveout for sales in Section 158.

Section 363 deals with sales or leases of property. Section 363(m) does not mention jurisdiction; it confines the power of appellate courts by limiting the relief the court may grant.

Some of the language in Judge McMahon’s opinion could be read to suggest that she was uncomfortable with the idea that Section 363(m) is jurisdictional.

The landlord may have passed up a winning argument on the rehearing motion: The landlord might have contended that the purchaser’s behavior in bankruptcy court amounted to bad faith, putting the appeal under the exception in Section 363(m).

Judge McMahon did not delve into bad faith because it was “not a question that anyone has suggested I answer; it was certainly not raised on the appeal.”

The lack of discussion of the purchaser’s good or bad faith means the opinion will have little precedential or persuasive value in a later case where the landlord does challenge the buyer’s good faith.