Supreme Court Arguments: Can A Party Protected by § 363(m) Get Away With Trickery? (MOAC v. Transform)

A trickster? (Photo by Marilyn Swanson)

By: Donald L Swanson

The case before the U.S. Supreme Court is MOAC Mall Holdings LLC v. Transform Holdco LLC, Case No. 21-1270.

The bankruptcy question upon which the U.S. Supreme Court granted certiorari is this:

  • Whether § 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.

Oral arguments occurred on December 5. 2022—here is a link to the transcript of those arguments.

What follows are summaries of:

  1. the facts and background of the case; and
  2. questions/comments by the six most-active Supreme Court justices at oral arguments.

Facts & Background

Sears, the large retailer, files bankruptcy in October 2018.  Former Sears executives form a parent company (“Transform”) and an affiliate (“Leaseco”) to recapture and market Sears’ assets.

Transform buys all Sears’ assets under an Asset Purchase Agreement that’s approved by the Bankruptcy Court under § 363(b), which grant Transform the right to designate assignees of Sears’ retail property leases (there are hundreds of such leases), subject to each landlord’s right of objection under § 365.  

One such lease is at Mall of America in Minneapolis—Transform designates Leaseco as assignee of this lease.  Mall objects, saying Leaseco is not a qualified assignee under § 365(b)(3).  As a practical matter, Mall of America:

  • does not want Sears’ anchor tenant space subleased to Transform’s highest bidder; and
  • instead, wants another big box retailer in that space to (i) preserve the mall’s character, and (ii) avoid defaults on co-tenancy provisions with other tenants.

After an evidentiary hearing, the Bankruptcy Court overrules Mall of America’s objections.  So, Mall of America asks the Bankruptcy Court for a stay pending appeal, to preserve appeal rights under § 363(m).

The District Court describes what happens next as Transform’s “gambit.”

–The “Gambit” (Part I)

At a hearing on Mall’s stay request:

  • Bankruptcy Judge says, “I can’t imagine 363(m) . . . applying here,” because the assignment is not part of the sale; and
  • Transform says, “we couldn’t rely on 363(m) for the purposes of arguing mootness” because the assignment is not a “sale or lease” under § 363(m).

So, the Bankruptcy Court denies Mall’s stay request because:

  • “this is a 365 order” to which 363(m) does not apply;
  • Transform is “not going to rely on 363(m), which [its counsel] just reiterated for the second time”; and
  • Transform would be estopped from arguing to the contrary.

Mall appeals the assignment approval.  But it does not (i) appeal the stay denial, or (ii) request a stay on appeal.  Meanwhile, the lease assignment closes.

–The “Gambit” (Part II)

On appeal, the District Court reverses, finding that § 365(b)(3)(A) requirements are not satisfied for assignment of a shopping center lease.  The District Court is unaware of any § 363(m) issue because neither party raises it. 

The following day, having lost the appeal, Transform requests a rehearing in District Court, arguing for the first time a lack of appellate jurisdiction because of § 363(m) and the absence of a stay.

Mall responds that (i) Transform waived § 363(m) rights and is judicially estopped from relying on that statute, and (ii) the Bankruptcy Court is correct in declaring that §363(m) is inapplicable here.

“I must reject” Mall’s arguments, the District Court declares, because:

  • the Second Circuit holds that § 363(m) is “jurisdictional,” which neither waiver nor judicial estoppel can overcome; and
  • “regrettably, § 363(m) does protect” the lease assignment from appellate review, because it is a “sale” under § 363(m)—Mall’s appeal “is, and always was, statutorily moot.”

The District Court adds:

  • While this court is appalled by Transform’s behavior, I must disagree that either doctrine confers jurisdiction over an appeal where Congress has expressly removed it” (emphasis added).

Questions/Comments of Justices at Oral Arguments

Here are summaries of questions/comments by the six most-active justices at oral arguments.[Fn. 1]

CHIEF JUSTICE ROBERTS—a focus on the jurisdictional argument.

The provision on which you’re relying for no jurisdiction depends upon the fact that the property was purchased in good faith. You can’t be circular. You’ve got to have jurisdiction to decide the good faith question.  You have acknowledged that under 363(m) there is jurisdiction in the court. Now you want to say it’s simply to adjudicate good faith, but then all sorts of consequences flow from that decision.  If you’ve got jurisdiction for something, we don’t think that that statute is jurisdictional.

JUSTICE GORSUCH—a focus on protecting good faith purchasers.

It’s a little unusual to say a good faith purchaser of a bankruptcy asset might have to disgorge it some years later after perhaps the bankruptcy estate has been eliminated and the bankruptcy’s discharged. Does every good faith purchaser now take an asset subject to the possibility that it will be reverted to and a bankruptcy estate might have to re-emerge?

Is there any other instance in the bankruptcy laws where there’s this kind of reversion of an asset that a good faith purchaser has taken on?

So let’s get to the center stage, is there another example that you can think of where a good faith purchaser in the bankruptcy laws would have to disgorge an asset?

The good faith purchaser is not the one who waives it or not. It’s the debtor. I understand here it is the purchaser who waived it here, but that’s not always going to be true.

I have a hard time seeing this as jurisdictional.  But I just can’t think that there are many circumstances in the bankruptcy laws, if there are any, where good faith purchasers might have to relinquish an asset.

Normally, I think of good faith purchasers as once they purchase an asset in bankruptcy, we’re done and it’s all about finality and resolution and moving on and quickly resolving these cases. And that’s really pretty essential to the greater purposes of the bankruptcy laws, certainty and allowing people an opportunity for a new start, okay?

JUSTICE KAGAN—a focus on potential relief and jurisdiction.

Assume that, at this late date, the court is not going to be able to undo the assignment? Does that make this constitutionally moot, or is there some other form of relief that the court could provide to resolve this dispute?

If there is no unwinding to be done, what is left?

We took cert on one jurisdiction question, and there’s a split on it, and there’s usefulness to our deciding that. And then, as to anything else, send it back.  There are a bunch of other issues in this case, and one of them is whether there’s any possibility of relief remaining, and you (the lower courts) go decide that.

Jumping to context in a place where we’ve always said you need a clear statement in the text?  Where is your clear statement in 363(m)?  What we’ve always meant when we say a clear statement about jurisdiction is something that says something like the court has no jurisdiction.

JUSTICE JACKSON—a focus on the waiver issue.

Counsel, but can you address the mootness question directly? What is the most straightforward reason this case remains alive given what has been argued on the other side?

I’m interested in the fact that your recitation of the facts did not include the waiver that they continue to point to. Isn’t there a point in the procedural history of this in which your client, Transform, said we’re not going to rely on 363(m) and what do we do about that?

Why did you waive [the § 363(m) issue] so many times in this case? That’s the only reason why we’re here looking at this and trying to decide, per the question presented, whether it’s jurisdictional.  It’s because you brought it up late. And the court had already ruled against you, and you apparently waived the 363(m) question. And so, when you brought it back again, you said, but wait, wait, wait, that question is jurisdictional, so you still have to decide it. 

You said he had no jurisdiction. You said, once the sale happens and the property is gone, then we have 363(m), which at least seems to preserve as a litigatable topic the question of whether the sale happened in good faith. Your argument suggests that, too bad, so sad, there’s nothing we can do. The property is gone.

JUSTICE SOTOMAYOR—a focus on landlord’s objection rights and on waiver.

The sale order, which was selling Sears’ right to assign the lease to Transform, reserved the landlord’s right to object to any lease assignment that failed to conform to the requirements of 365. So the sale order itself reserved the right of objection. That’s what you bought. At the assignment or at the step of the assignment, the landlord objected. And the Court said no, I’m going to overrule it. But then you, Transform, came in and said, I’m not going to rely on 365(m). I’m here before the Court. I’m going to subject myself to this procedure, which you did. And you got overruled. And then you wanted to appeal that. I don’t understand.

You’re defending your own rights to the assignment, and now you’ve lost and you’re invoking 365(m). So I don’t understand how the Court has lost jurisdiction. And I’m not even sure how you’re a good faith purchaser because you purchased subject to the landlord’s objection—subject to a condition.

I’m sorry, did we have a common law rule on the good faith buyer could still challenge the sale?  § 363(m) was adding an exception, the good faith buyer exception, that didn’t exist. And I don’t see anything in the words of the statute that suggests . . . you’re still a good faith purchaser if you’ve waived this.

JUSTICE BARRETT—a focus on jurisdiction.

Why does any of this matter? Why can’t we just answer the jurisdictional question that we granted cert on and then send it away and you can make your arguments below?

Let’s imagine you lose and we say it’s not jurisdictional. All we’re saying is that this isn’t a jurisdictional bar. Any other arguments you have, you can take them up below.

But the property left. Once the property was gone, poof.  You are saying jurisdiction went away? The property is gone, but somehow the Court by virtue of the statute still has to decide this good faith question and have subject matter jurisdiction to do it.

Conclusion

It will be interesting to see what the Justices do in its opinion on this MOAC v. Transform case.

——————

Footnote 1.  I have taken the liberty in these summaries of the justice’s questions/comments to compile, edit and condense for substance and brevity.  For precise quotations and context, reference should be made to to the formal transcript of oral arguments linked above.    

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