§ 363 Sales And Mootness On Appeal (U.S. Supreme Court)

By: Donald L Swanson

Everyone knows by now that the U.S. Supreme Court recently declared the provisions of 11 U.S.C. § 363(m) to be NOT jurisdictional.[Fn. 1] 

Instead, § 363(m) is merely an important statutory directive.[Fn. 2]

Mootness Issue

What’s received less attention is a preliminary issue the U.S. Supreme Court decided in that recent opinion before reaching the jurisdiction issue. 

That preliminary issue is “Transform’s mootness claim.”

The mootness claim is this:

• when a § 363 sale is concluded, nothing can undo the transfer; and
• therefore, it makes no difference whether § 363(m) is jurisdictional or not.

The U.S. Supreme Court, as a preliminary ruling, rejects Transform’s mootness claim.  What follows is a summary of how that rejection occurs.

Mootness Facts

Sears, Roebuck and Co. files Chapter 11 bankruptcy.

In that bankruptcy, Sears sells assets under § 363 to Transform Holdco LLC. 

Among the assets sold to Transform is the right to designate the persons to whom leases between Sears and various landlords are to be assigned.

One of such leases is at Mall of America in Minnesota.  Transform designates that such lease is to be assigned to Transform’s wholly owned subsidiary. 

Mall of America objects to that designation because of a failure by the assignee to provide adequate assurance of future performance, as required by § 365(f)(2)(B), including a failure of the assignee to meet these requirements of § 365(b)(3)(A)&(D):

• to have a similar financial condition and operating performance as Sears; and
• to assure that the assignment will not disrupt any tenant mix or balance in the shopping center.

The Bankruptcy Court overrules Mall of America’s objection and approves Transform’s designation of its wholly owned subsidiary as the assignee.

• Then, Sears duly assigns the Mall of America lease to Transform’s subsidiary.

Mootness Standards and Argument

Transform contends, at the U.S. Supreme Court, that the entire case is moot, because of the completed assignment of the Mall of America lease to Transform’s subsidiary—therefore, the § 363(m) jurisdiction issue cannot be reached. 

In addressing this contention, the U.S. Supreme Court makes these points on mootness standards:

• A case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party; and
• The case remains live as long as the parties have a concrete interest, however small, in the outcome of the litigation.

Transform makes these mootness arguments:

• Mall of America’s ultimate relief hinges on the Bankruptcy Court’s ability to reconstitute the leasehold as property of the estate;
• A reconstitution of the Mall of America lease as property of the estate is impossible unless the leasehold transfer is avoided under 11 U. S. C. §549; but 
• Only Sears can use §549—and § 549 is unavailing for Sears because:
  • Sears waived all such avoidance claims, and
  • the time for using §549 has expired;
• Accordingly, no legal vehicle remains available for undoing the lease transfer; and
• Therefore, Mall of America cannot possibly obtain any effectual relief, no matter what happens on the jurisdiction issue.

Mootness Ruling

The U.S. Supreme Court rejects Transform’s mootness argument with this declaration:

• “Our cases disfavor these kinds of mootness arguments.”

–Analogy / Illustration

The Supreme Court then embarks upon an analogy / illustration from the case of Chafin v. Chafin [fn. 3].

Here’s how the Supreme Court describes the Chafin v. Chafin circumstances:

• a mother invoking the Hague Convention on the Civil Aspects of International Child Abduction sought, and received, an order from a Federal District Court that her child be returned to Scotland from the United States, where the child was residing with her father;
• the father appeals, seeking reversal and a concomitant re-return order;
• in the interim the mother had removed the child to Scotland;
• so the appellate court dismisses the father’s appeal as moot; and
• at the U.S. Supreme Court, the mother defends the mootness holding on the grounds that the District Court on remand would lack the authority to issue a re-return order either under the Convention or pursuant to its inherent equitable powers.  

The U.S. Supreme Court disagrees with the mother’s argument, in Chafin v. Chafin, because:

• her argument goes to the meaning of the Convention and the legal availability of a certain kind of relief—and thus confuses mootness with the merits; and
• where the father’s contrary re-return argument is sufficiently plausible to preserve jurisdiction, his prospects of success were therefore not pertinent to the mootness inquiry. 

–Applying Chafin v. Chafin

The U.S. Supreme Court applies Chafin v. Chafin to Transform’s mootness argument like this:

• Like the father in Chafin, Mall of America simply seeks typical appellate relief—that the District Court’s ruling be reversed and that the District Court undo what it has done. 

Regarding Mall of America’s circumstances, the U.S. Supreme Court declares:

• the parties have a concrete interest in whether Mall of America obtains the relief it seeks;
• Transform’s only retort—which Mall of America vigorously disputes—is simply that any ultimate vacatur of the lease assignment order will not matter;
• Chafin forecloses this kind of argument; and
• we 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.

Conclusion

The U.S. Supreme Court, in addition to declaring that § 363(m) is NOT jurisdictional, has also declared:

• Appellate review of a § 363 transfer is not rendered moot by the conclusion of the transfer itself.

—————-

Footnote 1.  The U.S. Supreme Court opinion is MOAC Mall Holdings LLC v. Transform Holdco LLC, Case No. 21-1270 (issued April 19, 2023).

Footnote 2.  11 U.S.C. § 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, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.”

Footnote 3.  The case citation is Chafin v. Chafin, 568 U.S. 165 (2013).

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