If the Supreme Court reaches the merits in MOAC Mall Holdings LLC v. Transform Holdco LLC and decides whether Section 363(m) is or is not jurisdictional, this writer believes that the justices will find the subsection to be a limitation on remedy that is not jurisdictional.
Based on oral argument that took place December 5, it is unclear whether the justices will decide the question for which they granted certiorari, because the respondent argued primarily in the Supreme Court that the question is moot and that the petition should be dismissed because there is no constitutional jurisdiction to underpin an appeal. Indeed, the justices spent more time at oral argument in exploring constitutional appellate jurisdiction than in discussing whether Section 363(m) is jurisdictional.
Should the justices reach the merits, this writer was left with the impression that the Court will decide that Section 363(m) is not jurisdictional. Justice Amy Coney Barrett summed up the Court’s possible approach to the merits when she asked in substance at oral argument, “Why don’t we just answer the question on which we granted certiorari and send the case back down” for the lower courts to decide whether any relief can be given?
The Lease Assignment
The landlord was the owner of the giant Mall of America and ended up being the petitioner in the Supreme Court. In bankruptcy court, the landlord objected to the assignment of a lease by Sears, a chapter 11 debtor. The landlord lost in bankruptcy court.
Reversing, the district court held 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.
The purchaser of the lease, who eventually became the respondent in the Supreme Court, immediately filed a motion for rehearing. Although having taken a contrary position consistently, the purchaser argued for the first time on rehearing in district court 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 taken the position that the transaction was not a sale and that Section 363(m) did not apply.
The issue on rehearing 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.”
Ruling on the motion for 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 Second Circuit Ruling
The Second Circuit affirmed in a nonprecedential, summary order. MOAC Mall Holdings, LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 20-1846, 2021 BL 481940, 2021 US App Lexis 37358 (2d Cir. Dec. 17, 2021). Bound by 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).”
Because the Second Circuit held that Section 363(m) is jurisdictional, the buyer was entitled to raise jurisdiction for the first time on appeal. The appeals court dismissed the appeal for lack of jurisdiction, 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 persuaded the Second Circuit to stay issuance of the mandate and filed a petition for certiorari. In the petition for certiorari, the landlord stated the “question presented” as:
Whether Bankruptcy Code Section 363(m) limits the appellate courts’ jurisdiction over any sale order or order deemed “integral” to a sale order, such that it is not subject to waiver, and even when a remedy could be fashioned that does not affect the validity of the sale.
With regard to the jurisdictional nature of 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.
To resolve the circuit split, the Supreme Court granted certiorari on June 27 and held oral argument on December 5. MOAC Holdings LLC v. Transform Holdco LLC, 21-1270 (Sup. Ct.). To read the transcript of oral argument or listen to an audio recording, click here or here.
Briefing and Argument
In its merits brief as respondent in the Supreme Court, the purchaser of the lease relegated the Section 363(m) jurisdictional issue to second place.
Perhaps fearing that the Justices will not find Section 363(m) to be jurisdictional, the buyer most prominently argued that the Supreme Court has no constitutional appellate jurisdiction because no case or controversy remains. The purchaser based its argument on the idea that an appellate court could give no meaningful relief because the sale was final and the lease could not be taken away from the purchaser in the absence of a stay pending appeal.
The justices obliged by focusing the greater part of oral argument on mootness and constitutional jurisdiction. One of the justices said he “has a hard time” seeing Section 363(m) as jurisdictional but has “trouble coming up with a rule” forcing a good faith purchaser to give up an asset that had been sold three years before.
Similarly, Justice Sonia Sotomayor asked whether the inability to set aside the sale made the appeal constitutionally moot. Or, was there some form of relief that could still be granted? More particularly, she could not understand how the court lost jurisdiction because the buyer had waived its rights under Section 363(m).
Regarding Section 363(m) itself, Justice Sotomayor said that the Court has always required “a clear statement” for a statute to be jurisdictional.
Presaging how the opinion might come down, Justice Sotomayor said that the Court could rule on the merits by deciding that Section 363(m) is not jurisdictional and permit the lower courts to decide about their own jurisdiction on remand.
With regard to appellate jurisdiction, Chief Justice John G. Roberts, Jr. said that courts “stretch it pretty far” in finding the possibility of relief to justify constitutional jurisdiction. Similarly, the Chief Justice said that courts would have jurisdiction to decide whether the buyer was in good faith by having waived its rights under Section 363(m).
Douglas H. Hallward-Driemeier from the Washington, D.C., office of Ropes & Gray LLP argued for the landlord. Colleen R. Sinzdak, an assistant to the U.S. Solicitor General, argued as amicus on behalf of the landlord. However, the government took no position on the relief a court might grant after reversal and remand.
G. Eric Brunstad, Jr., from the Hartford, Conn., office of Dechert LLP, argued for the purchaser.
If the Supreme Court reaches the merits in MOAC Mall Holdings LLC v. Transform Holdco LLC and decides whether Section 363(m) is or is not jurisdictional, this writer believes that the justices will find the subsection to be a limitation on remedy that is not jurisdictional.
Based on oral argument that took place December 5, it is unclear whether the justices will decide the question for which they granted certiorari, because the respondent argued primarily in the Supreme Court that the question is moot and that the petition should be dismissed because there is no constitutional jurisdiction to underpin an appeal. Indeed, the justices spent more time at oral argument in exploring constitutional appellate jurisdiction than in discussing whether Section 363(m) is jurisdictional.
Should the justices reach the merits, this writer was left with the impression that the Court will decide that Section 363(m) is not jurisdictional. Justice Amy Coney Barrett summed up the Court’s possible approach to the merits when she asked in substance at oral argument, “Why don’t we just answer the question on which we granted certiorari and send the case back down” for the lower courts to decide whether any relief can be given?