On April 19, 2023, Justice Ketanji Brown Jackson, writing for a unanimous Court in MOAC Mall Holdings LLC v. Transform Holdco LLC et.al., 598 U.S. ___ 143 S. Ct. 927 (2023), held that Bankruptcy Code section 363(m) is not jurisdictional. That section of the Bankruptcy Code states:
[t]he 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.
Why is this opinion a big deal?
The jurisdictional label would deprive appellate courts of power to hear any appeal from a lower court order approving a sale or lease of the debtor’s property, thus requiring immediate dismissal of an appeal. The jurisdictional label makes the underlying sale order impervious to excuses like waiver or forfeiture. It also makes final the bankruptcy court’s decision to approve a sale unless a stay is obtained by the appellant.
Stays of bankruptcy sales are rarely granted and, when they are granted, they are usually coupled with a requirement to post bonds, frequently in amounts that are prohibitive.
The Circuit split
The Second and Fifth Circuits had held that § 363(m) was jurisdictional. The Third, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits had held that it was not.
Hence, the Supreme court
The underlying case
Bankruptcy Code § 365(f)(2) authorizes a debtor to assign an unexpired lease if the debtor assumes the lease and adequate assurance of future performance by the assignee of such lease is provided. If the lease is of real property in a shopping center, adequate assurance is defined in § 365(b)(3) which has more onerous requirements than other assignments. The proposed assignee’s financial condition and operating performance must “be similar to the financial condition and operating performance of the debtor. . . as of the time the debtor became the leasee under the lease.”
Sears was a chapter 11 debtor in the Southern District of New York. As part of a sale of most of its assets to Transform, it assigned to Transform the right to designate to whom a lease between Sears and MOAC Mall Holdings LLC could be assigned. MOAC leases spaces to tenants at the Mall of America. Transform designated its subsidiary as the assignee of the Mall of America lease.
MOAC objected on the ground that Transform had failed to provide the requisite assurance of adequate performance of its new subsidiary. The bankruptcy court disagreed and approved the assignment. MOAC appealed.
MOAC requested a stay because it feared that Transform might argue that §363(m) barred the appeal. The bankruptcy court reasoned that the assignment order did not qualify as an authorization described in §363(m) and emphasized that Transform had explicitly represented that it would not invoke § 363(m) against MOAC’s appeal. No stay was granted. Without a stay, the order became effective, and the lease was assigned.
On appeal, Transform argued that its assignee had the financial ability to pay the rent. MOAC and the district court said financial ability to pay was not the test. Section §365(b)(3) was the correct test and the assignee did not meet it. The district court vacated the assignment order approving the assignment of the lease until it was informed, belatedly, that§ 363(m) did not permit it to do so.
On rehearing Transform argued for the first time that § 363(m) deprived the district court of jurisdiction to grant relief to MOAC. The district court agreed that Second circuit precedent bound it to treat §363(m) as jurisdictional and dismissed the appeal. MOAC Mall Holdings LLC, v. Transform Holdco LLC and Sears Holdings Corporation, et al., 616 B.R. 615, 624 (S.D.N.Y. 2020). Second circuit affirmed. MOAC requested certiorari which was granted.
Judge Jackson’s reasoning
Transform claimed the case was moot since there was no legal vehicle to undo the lease transfer. Justice Jackson responded that “our cases disfavor mootness arguments.” The Supreme Court said
[W]e decline to act as a court of “first view,” plumbing the Code’s complex depths in “the first instance” to assure ourselves that Transform is correct about its contention that no relief remains legally available.
Section 363(m) is not jurisdictional
The Court stated “we only treat a provision as jurisdictional if Congress ‘clearly states’ as much.” The Court first looked at the text of §363(m). It concluded,
[G]iven §363(m)’s clear expectation that courts will exercise jurisdiction over a covered authorization, it is surely permissible to read its text as merely cloaking 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.
Looking at the statutory context of §363(m) next, it observed that the section does not contain any “clear tie” to the Code’s plainly jurisdictional provisions.
In rejecting Transforms’ retort that traditional in rem jurisdiction prevents further court action, the Court stated that Transform’s contentions about §363(m) relationship to traditional in rem jurisdiction merely offered a possible reason to think that Congress intended §363(m) to be jurisdictional. That, without more, is not enough.
The Court concluded its opinion
Nothing in Transform’s creative arguments in this case persuades us that §363(m) is jurisdictional under our clear-statement precedents. Because the Second Circuit’s judgment rested on the mistaken belief that §363(m) is jurisdictional, we vacate the judgment and remand the case for further proceedings consistent with this opinion.
What happens next
First, the case returns to the district court, which ended its first opinion by stating, “the court vacated the order of the Bankruptcy Court, concluding that the assignment of the Mall of America Lease to Leaseco violated § 365(b)(3)(A) of the Bankruptcy Code.” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 616 B.R. 615, 618 (S.D.N.Y. 2020).
Parties purchasing assets pursuant to 363(m) sale orders desire certainty as to those sales. This case clarifies how 363(m) can be used and makes clear that it is not a bar to appeal the sale order. We may see more appeals of 363 sales going forward – although time will tell.