Supreme Court to Decide Whether Section 363(m) Is a Jurisdictional Bar to Appeal

The Supreme Court will hear two bankruptcy cases in the term to begin this coming October. Yesterday, the high court granted certiorari to decide whether the failure to obtain the stay of a sale approval order erects a jurisdictional bar to appeal under Section 363(m).

The courts of appeals are split 6-2. Led by the Second Circuit, the minority hold that Section 363(m) is jurisdictional and bars an appeal from any order that is “integral” to a sale order. The Fifth Circuit sides with the Second.

The majority – composed of the Third, Sixth, Seventh, Ninth and Tenth Circuits – hold that Section 363(m) only sets limits on the relief that a court may grant on appeal from a sale order and is not jurisdictional.

With the grant of certiorari, the Supreme Court will review MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 20-1846, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021). To read ABI’s report on the Second Circuit opinion, click here.

The Sears Lease Sale

The facts and procedural history were complicated but boil down to this:

The landlord was the owner of the giant Mall of America. It was objecting to the assignment of a lease by Sears, a chapter 11 debtor. The landlord lost in bankruptcy court.

Initially, the district court reversed, holding that a provision in a lease cannot supplant the requirement in Section 365(b)(3)(A) mandating 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 . . . .” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 613 B.R. 51 (S.D.N.Y. May 11, 2020). (“MOAC I”). To read ABI’s report on MOAC I, click here.

Almost immediately, the purchaser of the lease filed a motion for rehearing. Although having taken a contrary position consistently, the purchaser argued for the first time on rehearing that the appeal should be dismissed under Section 363(m) because the landlord did not obtain a stay pending appeal. Previously, the purchaser had consistently contended that the transaction was not a sale.

The case (and the outcome in the Supreme Court) turned on Section 363(m), which 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.”

On rehearing in MOAC II, MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 616 B.R. 615 (S.D.N.Y. 2020), the district judge said that the buyer now “seeks to benefit from a complete reversal of that representation.” MOAC II, 616 B.R. at 626. Citing In re WestPoint Stevens Inc., 600 F.3d 231, 248 (2d Cir. 2010), and In re Gucci, 105 F.3d 837, 838–840 (2d Cir. 1997), the district judge said that the Second Circuit had twice held that Section 363(m) is “a jurisdiction-depriving statute.” Id. at 624.

In MOAC II, the district judge granted rehearing, concluded that she lacked appellate jurisdiction, vacated her earlier opinion, and dismissed the appeal. To read ABI’s report on MOAC II, click here.

The Effect of ‘Jurisdictional’

The Second Circuit affirmed in a nonprecedential, summary order on December 17.

The circuit panel said that Section 363(m) applied. Following its own precedent, the Second Circuit held that Section 363(m) is jurisdictional and that the section “also limits appellate review of any transaction that is integral to a sale authorized under § 363(b).”

Applying Section 363(m) was outcome determinative. If the appeal had only dealt with the appellate court’s power, the buyer’s failure to raise Section 363(m) earlier would have been waived, and the Second Circuit could have ruled in favor of the landlord on the merits.

Because the Second Circuit held that Section 363(m) was jurisdictional, the buyer was entitled to raise the jurisdiction issue for the first time on appeal.

The circuit panel held that a review of the merits was “foreclosed by our binding precedent in In re WestPoint Stevens Inc., under which § 363(m) deprived the District Court of appellate jurisdiction.” Earlier last year in another nonprecedential opinion citing WestPoint Stevens, a Second Circuit panel held that Section 363(m) is jurisdictional because it “creates a rule of statutory mootness.” Pursuit Holdings (NY) LLC v. Piazza (In re Pursuit Holdings (NY) LLC), 845 Fed. App’x 60, 62 (2d Cir. 2021).

The Second Circuit affirmed the judgment of the district court dismissing the appeal for lack of jurisdiction. Dismissal of the appeal reinstated the bankruptcy court’s decision in favor of the buyer and effectively overturned the district court’s first decision to reverse the bankruptcy court in the landlord’s favor.

The landlord prevailed on the Second Circuit to stay issuance of the mandate and filed a petition for certiorari in March. The respondent opposed in May. The justices of the Supreme Court held a conference on June 23 to consider the petition and granted certiorari in an order on June 27.

The Question Presented

The landlord is urging the Supreme Court to reverse the Second Circuit, based in large part on Arbaugh v. Y & H Corp., 546 U.S. 500, 515 (2006), where the high court held that a statute is jurisdictional only if Congress has “clearly state[d]” that it is jurisdictional. Earlier, the Supreme Court held that federal courts have a “virtually unflagging obligation” to exercise jurisdiction. Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).

In the petition for certiorari, the landlord colloquially stated that the question on appeal was “whether Section 363(m) of the Bankruptcy Code deprives the appellate courts of jurisdiction or instead merely limits the remedies available on appeal from a sale order [that] has arisen in at least seventy appeals at the district and circuit court levels in the past five years.”

Naturally, the petitioner said that the jurisdictional label “is not merely semantic, but carries immense practical consequences [because] [j]urisdictional issues are not subject to waiver or forfeiture.”

The petitioner explained that the jurisdictional label prevents an appellate court from even considering “whether there are remedies available on appeal that do not affect the validity of the sale.”

Assuming there are no inordinate delays in the filing of merits briefs, the case could be argued in the Supreme Court before the year’s end, with a decision by March or April.

Both sides will be well represented by counsel who have argued multiple times in the Supreme Court on complex bankruptcy questions. The petitioner-landlord’s counsel is Douglas Hallward-Driemeier from the Washington, D.C., office of Ropes & Gray LLP. The buyer-respondent’s counsel is G. Eric Brunstad, Jr., from the Hartford, Conn., office of Dechert LLP.

To read the petition for certiorari and the brief in opposition, click here and here.

Previously, the Court granted certiorari in Bartenwerfer v. Buckley, 21-908 (Sup. Ct.), to resolve a split of circuits and decide whether a debtor is saddled with a nondischargeable debt for a false representation or actual fraud under Section 523(a)(2)(A) based entirely on the fraud of a partner or agent. To read ABI’s report on Bartenwerfer, click here.