Decision regarding Sears’ Retail Space in Mall of America Bankruptcy: Section 363(m) Is Not a Jurisdictional Statute
Section 363(m) of the Bankruptcy Code is one of the most important and well-known statutes to bankruptcy practitioners. This section of the Bankruptcy Code protects a good faith asset purchaser who purchases assets from a debtor’s bankruptcy estate from having the sale unwound when the sale (or an aspect of the sale) is challenged by an appeal.
The justifications for the protections offered by section 363(m) are readily understandable: by ensuring that sale orders are not subject to attack after they’ve been approved in bankruptcy court, Congress could foster confidence in the bankruptcy sale process, and purchasers have comfort that sales are final, ultimately increasing the likelihood of maximizing creditor recoveries. Without the protections of section 363(m), asset purchasers would be reticent to bid for or purchase property of a bankruptcy estate (if, for example, the sale could be reversed), or purchasers would demand a steep discount to purchase estate property based on the risks associated with the sale being unwound on appeal, depressing creditor recoveries.
The Supreme Court recently examined the scope of section 363(m) as a jurisdictional provision in a recent decision, MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927 (2023). If the Court had concluded that section 363(m) were jurisdictional, it would mean that asset purchasers could use this provision of the Bankruptcy Code to even greater advantage, by precluding parties from attacking sales after the fact on the basis that a sale that has not been stayed pending an appeal operates to preclude the consideration of that appeal, without the need to reach the underlying merits of the appeal itself. However, in MOAC, the Supreme Court unanimously concluded that section 363(m) is not jurisdictional in nature, preserving the appellate rights of parties involved in bankruptcy cases in a fairly narrow holding.
History of the MOAC Case
The circumstances of the MOAC case surrounded a lease dispute over the Sears retail space at the Mall of America in Minnesota. Essentially, an asset purchaser (Transform Holdco LLC, the “Purchaser”) purchased the assets of former retail giant Sears, which had filed chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of New York. Under the terms of the sale agreement and order approving the sale between the Sears debtors and the Purchaser, the Purchaser had the ability to designate certain leases that Sears was party to, for assumption by Sears, and assignment to the Purchaser after the sale was approved by the Bankruptcy Court.
One of the leases the Purchaser designated for assignment was the Sears retail space at the Mall of America. The landlord, MOAC Mall Holdings LLC (“MOAC”), objected to the lease being assigned to the Purchaser, arguing that the Purchaser failed to provide MOAC (as landlord) “adequate assurance of future performance” under the terms of the lease, as required by section 365 of the Bankruptcy Code. The Bankruptcy Court approved the assignment of the Sears lease to the Purchaser over MOAC’s objection, holding that the Purchaser had provided MOAC with sufficient adequate assurance of future performance under the lease. MOAC appealed the decision to a U.S. District Court for the Southern District of New York, where the Bankruptcy Court’s initial decision was reversed.
The Purchaser then filed a motion for reconsideration with the District Court, arguing (for the first time) that section 363(m) is a jurisdictional provision of the Bankruptcy Code, meaning that the District Court lacked authority to review the Bankruptcy Court’s original order approving assignment of the Sears lease, primarily because MOAC had failed to obtain a stay of the Bankruptcy Court’s order while the District Court appeal was pending. On reconsideration, the District Court agreed with the Purchaser and held that section 363(m) was, in fact, jurisdictional. As such, the District Court held that it did not have the authority to review the Bankruptcy Court’s decision because the underlying order at issue had not been stayed pending appeal.
The appeals continued. The Second Circuit affirmed the District Court’s decision, creating a circuit split between the Second Circuit, on the one hand, and the Third and Eleventh Circuits, on the other. For instance, in In re Energy Future Holdings Corp., 949 F.3d 806, 820 (3d Cir. 2020), the court wrote: “[W]e have construed § 363(m) as a constraint not on our jurisdiction, but on our capacity to fashion relief.” Similarly, in In re Stanford, 17 F.4th 116, 122 (11th Cir. 2021), the Eleventh Circuit wrote, “Statutory mootness under 363(m), however, is not jurisdictional.”
The Supreme Court Weighs in: Section 363(m) is Not a Jurisdictional Provision
By the time the case reached the Supreme Court, the only issue to be decided according to MOAC was “[w]hether Bankruptcy Code Section 363(m) limits the appellate courts’ jurisdiction over any sale order or other order deemed ‘integral’ to a sale order, such that it is not subject to waiver, estoppel or forfeiture, including when a remedy could be fashioned that does not affect the validity of the sale.”
The Supreme Court ultimately held that section 363(m) of the Bankruptcy Code is not jurisdictional, holding that the plain language of the statute did not evidence Congressional intent to make the statute jurisdictional, as it did in other bankruptcy-specific statutes (28 U.S.C. § 1334, for example). Holding that “MOAC simply seeks ‘typical appellate relief,’” the Supreme Court further noted that section 363(m) of the Bankruptcy Code “merely cloak[ed] certain good-faith purchasers or lessees with a targeted protection of their newly acquired property interest, applicable even when an appellate court properly exercises jurisdiction.” MOAC Mall Holdings, 143 S. Ct. 297.
What Now? Ramifications and Practice Pointers in Light of the MOAC Decision
While holding that section 363(m) of the Bankruptcy Code is not jurisdictional, the Supreme Court did not make a determination of the underlying merits of the issues in the case or whether MOAC would ultimately prevail. Instead, the Supreme Court simply held that section 363(m) is not a jurisdictional statute and that it does not preclude appellate review of sale orders. The Supreme Court did, however, note that the provisions of section 363(m) serve as a defense to an appeal. Thus, section 363(m) is still alive and well, and it is still very important for practitioners to obtain a “good faith” finding in sale orders and to quickly consummate sales to ensure that any appeal of a sale order can be defended on appeal.
Notably, for practitioners in the Seventh Circuit, the Seventh Circuit has already addressed this issue in instructive ways. In the Seventh Circuit, section 363(m) does not preclude an appeal of relief that is ancillary to a sale itself, as the Seventh Circuit has noted that 363(m) “does not make any dispute moot or prevent a bankruptcy court from deciding what shall be done with the proceeds of a sale or lease.” The Seventh Circuit also unequivocally noted that section 363(m) provided “a defense to a request to upset the sale or lease.” (Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599, 603 (7th Cir. 2019))
In addition, while the Seventh Circuit previously used language stating that section 363(m) “mooted” an appeal of a sale, it also recently noted that section 363(m) deals with the merits of a dispute and does not technically “moot” an appeal. Compare In re River W. Plaza-Chicago, LLC, 664 F.3d 668, 671 (7th Cir. 2011), in which the court stated, “[W]e have repeatedly held that when a party challenges the bankruptcy court’s order approving the sale of estate property to a good faith purchaser, it must obtain a stay of that order pending appeal, lest the sale proceed and the appeal become moot.”) with Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599, 602 (7th Cir. 2019), in which the court held that “[c]ourts do not say, when a defendant wins on the law, that the case is moot.”
While the MOAC decision did not reach the underlying merits of the issues between the parties, it did better define the scope and nuances of Section 363(m) in an instructive manner. And while the Supreme Court has held that the scope of Section 363(m) is not as widely applicable as asset purchasers may like, the substantive protections of Section 363(m) remain preserved for the benefit of good faith asset purchasers.