Business Law

MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corporation)

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The following is an update analyzing a recent case of interest:

A District Court vacated and remanded a Bankruptcy Court order authorizing the assumption and assignment of a lease between Sears and Mall of America, because the District Court found that the Bankruptcy Court had improperly allowed a provision in the lease to override the statutory mandate of Bankruptcy Code section 365(b)(3)(A) requiring similar financial condition.  MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corporation), 2020 WL 953528 (S.D.N.Y. 2/27/20).

To view the opinion, click here:


This proceeding presented a matter of first impression.  It arose out of the Sears bankruptcy, in which 660 of Sears’ leases were being assumed and assigned to a new entity formed by Sears’ former CEO (“Assignee”).  The Assignee planned to continue operating Sears stores at 400 of the locations.  But as for the other 260 locations, Assignee did not intend to occupy them, but rather to seek out new tenants, yet to be identified.

The lease with the famed Mall of America (“Mall”) fell into the latter category, and the Mall objected to its lease being so assumed and assigned, on two different grounds.  The Bankruptcy Court for the Southern District of New York overruled the objections and allowed the assumption and assignment.  On appeal, the District Court for the Southern District of New York agreed with the Bankruptcy Court on one ground, but – struggling to do so – disagreed on the other ground, overturned the decision, and remanded.



Section 365(f)(2)(B) requires a debtor assigning a lease to a third party to show “adequate assurance of future performance.”  This general standard is heightened when the lessor is a shopping mall, as section 365(b)(3) requires additional showings, one of which – 365(b)(3)(D) – is that the assignment “will not disrupt the tenant mix or balance at the shopping center.  Here, the Mall argued that this section was violated, as the future tenant was unknown.

The key facts were not in dispute – including the fact that the lease was somewhat unusual in terms of how favorable it was to Sears.  The lease had no provision limiting tenant mix, other than one which restricted Sears space to uses “compatible with and not detrimental to” a mall and prohibited nuisances and industrial uses.  Sears had the right under the lease to “go dark,” use the space for offices, or to sublease to a user who was not obligated to run a department store; and the Mall had no right to veto such a sublease – on “tenant mix” or any other ground – other than the few minor ones above.  And the scope of tenants at the Mall varied enormously and included hotels, a miniature golf course, an amusement park, a comedy club, an aquarium, a 2,500-square foot mirror maze, and a waterpark.

The Bankruptcy Court overruled the Mall’s objections, and the District Court agreed.  Because Section 365 does not define the term “tenant mix,” the District Court looked first to Congressional intent, which the District Court found to be “protecting the landlord’s contractual rights.”  So the District Court then looked to the lease itself, which as described above placed almost no restrictions on Sears’ use of the premises.  Under those circumstances the District Court found that no landlord could have expected to control the tenant’s use of the space.  So the District Court affirmed the assumption and assignment of the lease, finding that, even with a yet-to-be-identified tenant,  it would not upset the tenant mix of the Mall, and Section 365(b)(3)(D) was satisfied.  Despite exhaustive treatment of the issue, the District Court did not to struggle with the issue, given the incredibly broad scope of the use provisions in the lease.  The District Court’s struggle came with the second issue.


As described above, the general standard of “adequate assurance of future performance” found in section 365(f)(2)(B) is heightened when the lessor is a shopping mall.  For shopping mall lessors, section 365(b)(3)(A), requires a showing “that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease….”

The Bankruptcy Court had found that the Assignee had not made the showing required under section 365(b)(3)(A) using even the most lax standards employed by other courts.  But the Bankruptcy Court approved the assumption and assignment anyway, finding it “highly likely” that the Assignee satisfied another standard entirely – one not based on “financial similarity,” but rather based on the Assignee’s net worth or shareholder equity.  The reason that the Bankruptcy Court made this finding was because under the lease, Sears could be relieved of its obligations as long as it assigned its lease to an entity with a net worth or shareholder equity of $50 million or more. The Bankruptcy Court concluded that if this level of assurance about an assignee’s financial stability was sufficient for the Mall outside the bankruptcy context, then it provided “adequate assurance of future performance” under the Bankruptcy Code – even though it bore no resemblance to the standard set out in section 365(b)(3)(A).

This was a matter of first impression, and it was here that the District Court disagreed with the Bankruptcy Court.  Again, the District Court treated the issue exhaustively.  It noted that while there were many cases construing section 365(b)(3)(D), it could find only three cases construing section 365(b)(3)(A).  The District Court noted that while the former group relied heavily on language in the particular leases involved – because Congress left the term “tenant mix” undefined – the latter group did not look to the lease language  at all, but rather focused on the balance sheets of the assignees.

The District Court then wrote:

I am not persuaded by the learned bankruptcy judge’s reasoning. For one thing, I disagree with his premise. Congress did indeed create “independent requirements” for actual assurance of future performance when it passed §365(b)(3) – four separate independent requirements, over and above those set out in § 365(f) – each of which needs to be met before a bankruptcy court can approve the assignment of a shopping center lease. In re Ames does not authorize a bankruptcy court to dispense with any congressionally mandated “independent requirement” for adequate assurance of performance. Rather, it comes up with a logical way to interpret one of those requirements (subsection (D)’s nondisruption of tenant mix) because Congress left that term undefined. Courts do that all the time; it is our proper role….

But when it turned to subsection (A), the Bankruptcy Court did not simply come up with a way to interpret the phrase “similar … financial condition and operating performance” as between the Debtors and the assignee. Instead, the court adopted an alternative standard for determining adequacy of assurance after concluding that the statutory standard was not met. Put otherwise, the Bankruptcy Court, stretching In re Ames past its breaking point, read §365(b)(3)(A) out of the statute, effectively rewriting it and overriding the express wishes of the legislature.

Based on that reasoning, the District Court vacated the Bankruptcy Court’s order authorizing the assumption and assignment of the lease and remanded the matter for proceedings consistent with its opinion.


I found two aspects of this case interesting (three, really, if you count the amazing mix of tenants at the Mall of America, to which I’ve never been).

One, at first read, I was struck by the disparity between the focus on the lease language in the District Court’s analysis of section 365(b)(3)(D), and the lack of focus on the lease language in the section 365(b)(3)(A) analysis.  But once the District Court’s rationale for the disparity became clear – Congress provided no guidance for the former, and clear guidance on the latter – the case made sense.

Two, I could almost feel the District Judge squirming awkwardly each time he told the “learned Bankruptcy Judge” why the lower decision was wrong.  The District Judge then wrapped it up perfectly at the end, when he wrote:

Like [the Bankruptcy Judge], I freely admit that I might be wrong. This is a difficult question, and making a decision has not been helped by knowing that Congress could not possibly have had an extraordinary lease like the Sears Lease in mind when it passed § 365(b)(3). I admit to having gone back and forth several times.

When all is said and done here, I felt the District Court got it right.

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  These materials were written by Christopher V. Hawkins, an attorney with Sullivan Hill Rez & Engel, a member of the ad hoc group and the CLA’s Commercial Transactions Committee, with editorial contributions by the Hon. Meredith A. Jury, United States Bankruptcy Judge, C.D. Cal. (Ret.), a member of the ad hoc group.  The opinions expressed herein are solely those of the author.

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