Protections for Purchasers of Bankruptcy Assets Takes a Hit – Perhaps

A decision with significance to purchasers of bankruptcy assets was handed down by the United States Supreme Court on April 19, 2023. The U.S. Supreme Court in MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. __, 143 S.Ct. 927 (2023) decided that federal courts are not prevented from hearing appeals of bankruptcy sale orders on jurisdictional grounds, and remanded a dispute between Sears and the Mall of America back to the Second Circuit. Justice Ketanji Brown Jackson delivered the unanimous opinion finding that Section 363(m) of the Bankruptcy Code, which otherwise states that reversal or modification on appeal of a sale or lease to an entity purchasing in good faith, is not jurisdictional.

The underlying dispute arose from an assignment of a lease at the Mall of America (“MOAC”) by Sears Roebuck & Co. to its purchaser Transform Holdco LLC. MOAC contested the assignment of the lease based on the purchaser’s failure to provide adequate assurances of future performance.

After the Bankruptcy Court denied a request for a stay pending appeal on the basis of Section 363(m), the assignment became effective. MOAC appealed to the District Court, which initially determined that the purchaser did not provide adequate assurances. The purchaser on rehearing raised Section 363(m), backing away from its previous decision not to invoke it. Although the District Court was displeased with the purchaser’s reversal of position, the District Court concluded that Section 363(m) was applicable and required dismissal of the appeal on jurisdictional grounds. The Second Circuit affirmed, and the U.S. Supreme Court granted certiorari.

Significantly, before addressing the jurisdictional question under Section 363(m), the Supreme Court first rejected application of equitable mootness regardless of whether effective relief remained legally available for undoing the assignment, stating that “we decline to act as a court of ‘first review,’ 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.” [citation omitted].

The Supreme Court next considered the jurisdictional issue on which it granted certiorari. In holding that, regardless of the statutory language, an appeal was not precluded on jurisdictional grounds, the Supreme Court based its ruling upon the lack of clear congressional expression in the Bankruptcy Code and statutory language to limit appellate jurisdiction, stating that “[t]he Court identifies nothing in § 363(m)’s limits that purports to ‘gover[n] a court’s adjudicatory capacity.’ [citation omitted]. The text does not address a court’s authority or refer to the jurisdiction of district courts. Instead, the provision takes as a given the exercise of judicial power over any authorization under subsection (b)’ and explicitly contemplates that appellate courts might ‘revers[e] or modif[y]’ any covered authorization, even though a reversal or modification of a covered authorization may not ‘affect the validity of a sale or lease under such authorization’ to a good-faith purchaser or lessee under certain prescribed circumstances.” The Supreme Court pointed out that unlike other Bankruptcy Code provisions such as Section 305(c), Section 363(m) contains no “clear tie” to the Bankruptcy Code’s jurisdictional provisions and that the mere language of Sections 363(m) is insufficient to make it jurisdictional, stating that the fact that Section 363(m) “issues directions does not suffice to make it jurisdictional, as the Court routinely holds statutory commends non jurisdictional notwithstanding emphatic directives.” The Court noted that language of Section 363(m) consists of a caveated constraint on the impact of reversal or modification, which it believes is not sufficiently clear to convey nonjurisdictional status.

The Court further dismissed the argument that because Section 363(m) operates to ensure that courts cannot disturb a transfer to a good-faith purchaser absent a stay, that this confirms that the court lacks a basis to exercise in rem jurisdiction. In response, the Supreme Court determined that the contention merely offers a reason to think Congress intended Section 363(m) to be jurisdictional, stating that this “without more, does not show a clear jurisdictional statement.”

Because the Second Circuit’s decision rested on the mistaken belief that Section 363(m) is jurisdictional, the Supreme Court vacated and remanded for further proceedings consistent with its opinion.

The Supreme Court decision focused on the significance of the jurisdictional determination, and not on whether effective relief remained legally available for undoing a sale or assignment, indicating that “the ‘jurisdictional’ label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives court of power to hear the case, thus requiring immediate dismissal.” As further stated by the Court, “. . . Congress has not clearly stated that the provision is a limit on judicial power, rather than a mere restriction on the effects of a valid exercise of that power when a party successfully appeals a covered authorization.” However, the practical impact of the decision is uncertain. While ostensibly not eliminating the protection afforded a good faith purchaser under the statutory language of Section 363(m), the question is whether the decision will have any impact upon a buyer’s decision (and counsel’s recommendation) to close the sale in the face of any appeal of the sale or assignment order. As with all things, time will tell.

Leech Tishman’s Business Restructuring & Insolvency Practice Group regularly assists clients in bankruptcy and bankruptcy litigation matters. If you have any questions about bankruptcy cases involving purchasers of bankruptcy assets, or what this case might mean for bankruptcy proceedings, please contact Sandford L. Frey.

Sandy is a Partner with Leech Tishman and Co-Chair of the Business Restructuring & Insolvency Practice Group, where he co-leads the Bankruptcy Chapter 11 Debtor and Bankruptcy Chapter 11 Subchapter V Debtor Groups. Sandy is based in the Los Angeles office and can be reached at 626.796.4000 or sfrey@leechtishman.com.

Leech Tishman’s Facebook Page: https://www.facebook.com/leechtishman

Leech Tishman’s Twitter: https://twitter.com/LeechTishman

Leech Tishman’s Company Page on LinkedIn: https://www.linkedin.com/company/leech-tishman

Leech Tishman Fuscaldo & Lampl, Inc. is a national, full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, construction, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, emerging cyber technologies, energy & natural resources, entertainment & sports, healthcare, hospitality, and life sciences industries. With offices in Los Angeles, Leech Tishman also has offices in Chicago, Philadelphia, Pittsburgh, Sarasota, Washington, D.C., and Wilmington, DE.