MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 2023 WL 2992693, at *1 (U.S. Apr. 19, 2023)

Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest written by Maggie E. Schroedter of Robberson Schroedter LLP, analyzing MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 2023 WL 2992693, at *1 (U.S. Apr. 19, 2023) (“MOAC”). 

SUMMARY

In MOAC, the Supreme Court held that 11 U.S.C. § 363(m) of the Bankruptcy Code is not jurisdictional, reversing the Second Circuit Court of Appeals and resolving a Circuit split over whether section § 363(m) limits appellate jurisdiction over § 363 sale orders or instead just limits the appellant’s remedies on appeal in the event there is a sale or lease to a good-faith purchaser or lessee.

To read the full published decision click here. 

FACTS

Sears leased retail space at the Mall of America in Minnesota from MOAC Mall Holdings LLC. In 2018, Sears filed a voluntary Chapter 11 petition. In 2019, Sears sold substantially all of its assets to Transform Holdco LLC outside the ordinary course of business under § 363(b). The Bankruptcy Court entered an order approving the sale agreement (the “Sale Order”).

As part of the sale, Transform purchased “designation rights” to the leases for which Sears was the lessee. These rights allowed Transform to designate assignees for the leases, including the lease with Mall of America.

As applicable here, § 365 requires that an assignment of an unexpired lease be to an assignee with “adequate assurance of future performance by the assignee.” § 365(f)(2)(B). Section 365(b)(3) provides additional adequate assurances, among other things, that the financial condition and operating performance of the proposed assignee be similar to that of the debtor, that the percentage of rent not decline substantially, and that the assignment will not disrupt any tenant mix or balance in the shopping center.

After the entry of the Sale Order, Transform designated the Mall of America lease for assignment to its wholly owned subsidiary. MOAC objected on grounds that the Transform subsidiary did not meet the adequate assurance of future performance requirement of § 365(b)(3). The bankruptcy court overruled MOAC’s objection and entered an order approving the assignment (the “Assignment Order”). 

MOAC, concerned that § 363(m) would limit or bar any appeal of the Assignment Order by Transform, asked the bankruptcy court to stay the order. The bankruptcy court denied the request to stay the appeal, reasoning that an appeal of the “Assignment Order did not qualify as an appeal of an authorization described in § 363(m).” The bankruptcy court emphasized that Transform “had explicitly represented that it would not invoke § 363(m) against MOAC’s appeal.” Id., at *4. The Assignment Order became effective, and Sears assigned the lease to Transform. 

MOAC appealed the Assignment Order to the District Court. The District Court agreed with MOAC, and held that Transform did not satisfy the adequate assurance requirements of § 365. To the extent the Assignment Order approved the assignment of the MOAC lease to Transform, it vacated the order.

Transform sought rehearing. Notably, it walked back its previous representation not to invoke § 363(m), arguing for the first time that § 363(m) deprived the District Court of jurisdiction to hear the appeal. “The District Court was ‘appalled’ by Transform’s gambit of waiting to invoke § 363(m) until after losing the merits of the appeal, but determined that Second Circuit precedent bound it to treat § 363(m) as jurisdictional, and thus not subject to ‘waiver [or] judicial estoppel.’” Sears II, 616 B.R. at 624–625. The District Court held that § 363(m) applied and required it to dismiss the appeal. MOAC, at *4. 

The Supreme Court granted MOAC’s petition for certiorari to resolve a circuit split. Compare In re Stanford, 17 F.4th 116 (11th Cir. 2021) (§ 363(m) is not jurisdictional), and In re Energy Future Holdings Corp., 949 F.3d 806, 820 (3rd Cir. 2020) (same), with In re WestPoint Stevens, Inc., 600 F.3d 231, 248 (2nd Cir. 2010) (§ 363(m) is jurisdictional). It ultimately held that (§ 363(m) is not jurisdictional.

REASONING

Mootness

Transform first argued that the case was moot because the lease had already been transferred out of the estate. According to Transform, relief was impossible because avoidance under § 549 provided the only vehicle for reconstitution – and Sears’s right to utilize § 549 was waived in the Sale Order and also the time to use § 549 expired. 

The Supreme Court stated that its “cases disfavor these kinds of mootness arguments” – that go to “the legal availability of a certain kind of relief,’ and thus ‘confuse mootness with the merits.’” Id., at *5. It clarified that a “case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” Chafin v. Chafin, 568 U.S. 165, 172 (2013) (internal quotation marks omitted). “The case remains live ‘[a]s long as the parties have a concrete interest, however small, in the outcome of the litigation.” Ibid., [internal citations omitted.] Here, according to the Court, MOAC simply sought “typical appellate relief: that the Court of Appeals reverse the District Court and that the District Court undo what it has done.”  Ibid.

Jurisdictional

Statutes may contain preconditions, such as filing deadlines and exhaustion requirements, which do not necessarily mean that the rule is jurisdictional. “The ‘jurisdictional’ label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal.” Id., at *6. Jurisdictional rules relate to the power of the court rather than the rights or obligations of the parties. “And jurisdictional rules are impervious to excuses like waiver or forfeiture. [internal citations omitted]. Courts must raise and enforce jurisdictional rules sua sponte.” Id. at *7.

As such, the Court will only treat a Congressional statute as jurisdictional if Congress “clearly states as much,” as jurisdictional character is an exception to our system of litigation which can sometimes result in “harsh consequences.” Id., at *6, internal citations omitted.

 Against this backdrop, the Court did not see anything in § 363(m) that purported to limit a court’s “adjudicatory capacity.” [internal citations omitted]. Id., at *9. § 363(m) states:

The reversal or modification on appeal of an authorization under [§ 363(b) or § 363(c)] 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.

Looking to the statute’s plain language, § 363(m) contemplates that appellate courts might “revers[e] or modif[y]” any covered authorization, except that the decision would not affect the sale or lease to a good faith purchaser or lessee. Id. at *9. The “caveat itself is caveated” – the constraint does not apply if the sale or lease were stayed pending appeal. The Court also pointed out that the appellate court could do something other than “revers[e] or modif[y]” the order, in which case § 363(m) would not apply. Ibid. There is nothing in § 363(m) to suggest that Congress intended to include a jurisdictional precondition.

The Court remarks about the §363(m): “[t]his is not the stuff of which clear statements are made.” Ibid. The lack of clarity, concludes the Court, evidences the non-jurisdictional nature of the statute and also suggests that it was designed to give good-faith purchasers or lessees protection of their newly acquired property interest, even if a party appeals. In other words, §363(m) is simply a “statutory limitation” that requires a party to take certain steps at certain times. The Court further supports its interpretation of § 363(m) by noting that is not linked to other jurisdictional provisions such as 28 U.S.C. §§ 1334(a)—(b), (e), 157 and 158.

The Court rejects two “creative retorts” offered by Transform. First, Transform insists that “§ 363(b) sales of estate assets must proceed under a court’s in rem jurisdiction,” and that “the transfer to a good-faith purchaser removes it from the bankruptcy estate” and thus from the court’s in rem jurisdiction. Id at 11-12. The Court concludes that Transform’s arguments ignore § 363(m)’s text and context, and its “relationship to traditional in rem jurisdiction merely offer a reason to think Congress intended § 363(m) to be jurisdictional,” which is not enough. Id. at 12.

Next, the Court summarily rejected Transform’s final plea that § 363(m) was “transplanted” from former Federal Rule of Bankruptcy Procedure 805 and therefore “imbibed the jurisdictional character that Rule 805 incorporated from the historic practice.” Id at 14. 

AUTHOR’S COMMENTS

MOAC is a prime example of why the “jurisdictional” label is so important. The District Court expressly stated that the doctrine of judicial estoppel would have been applied to preclude Transform from belatedly raising the § 363(m) bar on appeals arising from sale orders, especially after Transform promised the lower court it would not invoke the argument.  Holding its nose, the Court ruled that “not even such egregious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule.” Id at 8. 

The opinion relies on the plain text of the statute, contrasting it to clearly jurisdictional provisions like § 305, which provides that an order under § 305(a) “is not reviewable by appeal . . .”

Further, MOAC will likely impact the “statutory mootness” doctrine, which the Second Circuit Court relied upon in holding that § 363(m) was indeedjurisdictional. The Second Circuit Court of Appeals held that “[b]y restricting the exceptions to the application of section 363(m) to an entry of a stay or a challenge to the ‘good faith’ aspect of the sale, section 363(m) moots a broader range of cases than are barred under traditional doctrines of mootness.” In re WestPoint Stevens, Inc., 600 F.3d 231, 247 (2d Cir. 2010), abrogated by MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 2023 WL 2992693 (U.S. Apr. 19, 2023). MOAC impliedly limits the availability of the statutory mootness doctrine to cases where the parties have no interest in the outcome of the litigation or where the result “will not matter” – a standard unlikely to be met in most cases. 

These materials were written by Maggie E. Schroedter of Robberson Schroedter LLP, in San Diego, California (maggie@theRSfirm.com). Editorial contributions were provided by Marc A. Lieberman of FLP Law Group, LLP, Los Angeles, California (marc.lieberman@flpllp.com).