Business Law

MOAC Mall Holdings LLC v. Transform Holdco LLC (U.S.)

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The following is a case update written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, analyzing a recent decision of interest:

SUMMARY

On June 27, 2022, the U.S. Supreme Court granted a petition for writ of certiorari on the issue of whether Bankruptcy Code § 363(m) is a jurisdictional bar to appellate review of certain sale-related orders. MOAC Mall Holdings LLC v. Transform Holdco LLC, et al., No. 21-1270, 2022 WL 2295163 (U.S. June 27, 2022).

To view the petition, click here.

FACTS

Petitioner MOAC Mall Holdings LLC does business as the famous Mall of America, which is a 5.6 million square-foot shopping center in Bloomington, Minnesota. Respondent Transform Holdco LLC was formed by Eddie Lambert, the former chief executive officer of Sears Holdings Corporation, the parent entity of Sears, Roebuck and Co., formerly a titan of retail.

In 1991, MOAC leased a three-floor space to Sears as an anchor tenant on extraordinarily favorable terms: The lease is triple-net (requiring Sears to pay taxes, utilities, insurance, and common area maintenance) but requires only $10.00 per year in rent for a 100-year term. According to Transform’s opposition brief, the lease agreement also permits Sears to assign the lease with virtually no restrictions.

Sears commenced proceedings under chapter 11 of the Bankruptcy Code on October 15, 2018, before the U.S. Bankruptcy Court for the Southern District of New York. Just under four months later, on February 8, 2019, the bankruptcy court entered an order approving the sale of a substantial portion of Sears’ assets to Transform pursuant to Bankruptcy Code § 363(b). With the sale, Transform also acquired a “designation right” with respect to approximately 600 leases, including the MOAC lease, allowing Transform to later select leases and seek to have them assumed and assigned to Transform. The sale order included what MOAC characterizes as “stock language” to the effect that the eventual assignment agreements are “integral” to the sale agreement.

The sale closed, and later Transform gave notice that it was designating and assuming the MOAC lease. MOAC objected, arguing that the requirements of Bankruptcy Code § 365 were not met, that Transform is not a retail business, that Transform does not intend to occupy the space but instead to sublease it, and that Transform is not an appropriate assignee. The bankruptcy court disagreed and entered an order approving assumption and assignment of the lease on September 5, 2019.

MOAC timely appealed the assignment order to the U.S. District Court for the Southern District of New York and also moved for a stay pending appeal in bankruptcy court. Transform opposed the motion and, apparently in open court, argued that a stay was not necessary because (1) Bankruptcy Code § 363(m) does not apply and (2) Transform would not attempt to argue otherwise on appeal. The bankruptcy court agreed that § 363(m) does not apply because the assignment order involved only § 365, not a sale under § 363. Accordingly, the bankruptcy court denied MOAC’s motion for a stay pending appeal.

The district court vacated the assignment order on the grounds that Transform, a newly-formed entity, never intended to occupy or operate the premises and did not satisfy the requirement of § 365(b)(3) that its financial condition and operating performance be similar to Sears’ at the time Sears entered into the lease. Transform moved for rehearing, arguing for the first time that § 363(m) applies to the assignment order and that it is jurisdictional and therefore cannot be waived.

The district court was “appalled” by Transform’s conduct but agreed, “reluctantly” and with “deep regret,” that § 363(m) is a jurisdictional provision that prevents the court from hearing the appeal, that it is non-waivable, and that it is not subject to judicial estoppel. Lack of a stay pending appeal was crucial as § 363(m) applies only to “unstayed” orders. The district court dismissed the appeal, and MOAC timely appealed to the U.S. Court of Appeals for the Second Circuit.

The Second Circuit agreed with the district court’s ruling, citing “binding precedent” and explaining that, although separate, the assignment order was “integral” to the sale order such that § 363(m) applies. The Second Circuit then proceeded to hold that § 363(m) is jurisdictional and not subject to waiver or judicial estoppel. MOAC timely filed a petition for writ of certiorari, which the U.S. Supreme Court granted on June 7, 2022.

REASONING

Section 363(b) and (c) provide for bankruptcy-court approval of uses, sales, and leases of estate assets under certain circumstances. Section 363(m) provides: “The reversal or modification on appeal 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 under such authorization to an entity that purchased or leased such property in good faith… unless such authorization and such sale or lease were stayed pending appeal.” Section 365 governs the assumption, assignment and rejection of executory contracts and unexpired leases.

According to MOAC’s research, there is an extensive split of authorities among the circuit courts of appeal. The Second and Fifth Circuits hold that § 363(m) is jurisdictional, while the Third, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits hold that it is not. MOAC emphasizes the split between the Second and Third Circuits, describing them as “two of the most-important bankruptcy jurisdictions….” In its opposition brief, Transform argues that there is no genuine circuit split.

MOAC and Transform agree on very little. From the start, they differ on the issues themselves. MOAC’s question presented is: “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.” By contrast, Transform identifies three issues: (1) “Did the Court of Appeals err in concluding that the transfer of the lease was integral to the sale of Sears’ assets such that an appellate court could not set aside the lease transfer without affecting the validity of the asset sale…?” (2) “When a lease transfer is integral to an asset sale under § 363 of the Bankruptcy Code, does § 363(m) bar setting aside the lease transfer to a good-faith purchaser in the absence of a stay?” (3) “May the provisions of § 363(m), which deny effective relief in appeals of this kind, be waived?” In reply, MOAC criticizes Transform’s formulation of the questions presented for dodging the issue of jurisdiction.

MOAC argues that § 363(m) is not jurisdictional and is merely a limitation upon the remedies available following an unstayed sale. MOAC’s petition derives persuasive force from Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), where the Supreme Court held that a statute is jurisdictional only if Congress has “clearly state[d]” that it is jurisdictional. Id. at 515. MOAC characterizes Arbaugh as a reaction to lower courts “loose characterization” and “overuse” of the concept of jurisdiction. Because § 363(m) does not mention jurisdiction, MOAC argues that it is not jurisdictional. Rather, MOAC argues that § 363(m) only bars relief that would undo the underlying sale and leaves room for courts to fashion other related forms of relief.

The petition expresses confidence that, if MOAC is successful in obtaining a determination that § 363(m) is not jurisdictional, the issue of available remedies will be easily resolved in its favor. MOAC’s confidence is based upon the fact that a non-jurisdictional statute may (generally) be waived, that Transform waived § 363(m), and that the district court’s initial favorable ruling was correct.

In particular, MOAC acknowledges authorities holding that § 363(m) can extend beyond the four corners of a sale order to cover transactions that are “integral” to the sale, but MOAC argues that this is not the case under the circumstances here. Specifically, MOAC highlights that the assignment order was entered under a different provision (§ 365), that it involved the assumption and assignment of leases, that it occurred after the sale closed, and that the assignment of leases did not affect the consideration that Transform paid. MOAC criticizes the Second Circuit for ignoring the substance of the transactions and focusing instead on the “stock language” of the sale order reciting that the transactions are “integral.”

AUTHOR’S COMMENTS

To summarize, MOAC argues that § 363(m) is not jurisdictional, that it is waivable, and that it permits a court to reverse the assignment order without affecting the sale order. This is similar to the Ninth Circuit’s approach as illustrated in In re Spanish Peaks Holdings II, LLC, 872 F.3d 892, 897 fn. 4 (9th Cir. 2017), and I think this is probably the correct approach. There is a good chance the Supreme Court will agree; historically, the Court reverses or vacates (at least in part) a slight majority of opinions (about 57%) for which it has granted certiorari. The Supreme Court, 1995 Term, 110 Harv. L. Rev. 367, 372 (1996). If MOAC is successful and the Supreme Court reverses, practitioners seeking to overcome (or invoke) § 363(m) will be wise to draw finer distinctions (or to more vigorously blur the lines) between asset sales, lease assignments and other transactions.

This review was written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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