In MOAC Mall Holdings LLC v. Transform Holdco LLC, 134 S.Ct. 927, 937 (2023), the U.S. Supreme Court recently resolved a debate that has long divided Circuit Courts throughout the U.S:  whether section 363(m) of the Bankruptcy Code, a provision that is intended to protect good-faith purchasers of bankruptcy assets, imposes a jurisdictional barrier to a party-in-interest’s ability to challenge a bankruptcy sale on appeal.  The Supreme Court held it did not.  The Court further held that the appeal at issue–involving a contested sale in the Sears bankruptcy case–was not moot (i.e., another jurisdictional restriction), because, notwithstanding the hurdles imposed by section 363(m), the Court could not find that no relief remained available to the appellant on remand.

Let’s see what the facts reveal and analysis reveal.

Facts

The case involves the 2018 bankruptcy of Sear, Roebuck & Company (“Sears“).  After the retailer’s filing, Sears sought permission to sell most of its assets outside the ordinary course of business, pursuant to section 363(b)(1) of the Bankruptcy Code, to Transform Holdco LLC (“Transform“).

Among the assets sold to Transform was the right to designate to whom certain leases between Sears and various  landlords would be assigned.  The sale agreement did not actually designate any assignees; it simply provided that, if Transform duly designated an assignee of a lease, Sears was required to assign the requested lease to the designated assignee.

Eventually, Transform designated a lease in the Minnesota Mall of the America to one of its wholly-owned subsidiaries, but the landlord, MOAC Mall Holdings LLC (“MOAC“), objected to the assignment on grounds that Sears had failed to provide the requisite adequate assurance of future performance, as required by sections 365(f)(2) and (b)(3) of the Bankruptcy Code.

Section 365(f)(2) provides that a debtor may only assign a lease if (a) it assumes the lease (which usually requires curing any prior defaults) and (b) provides adequate assurance of future performance by the assignee of such lease.  Section 363(b)(3) further modifies section 365(f)(2) in cases of assigned shopping center leases, like the Mall of the Americas’ lease, by requiring special protections to mall landlords.

According to MOAC, Sears did not provide MOAC all of the adequate protection to which it was entitled to under section 363.  The Bankruptcy Court disagreed with MOAC and approved the sale and assignment.  The Bankruptcy Court also denied MOAC’s request to stay the approved sale pending appeal, finding that since Transform was a good-faith purchaser under section 363(m), no appeal could reverse the sale.

On MOAC’s appeal, the District Court ultimately dismissed the appeal, holding that, while it did not appear that Sears did provide the requisite adequate assurance of future performance to MOAC, section 363(m) of the Code was a jurisdictional provision that restricted appeals to cases where the purchaser was found to be in bad faith.  The Second Circuit affirmed the District Court’s decision, upholding the dismissal of the appeal.

Analysis

The relevant provision of the Bankruptcy Code is section 363(m), which provides that:

“[the 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.

Based on this Bankruptcy Code provision, SCOTUS addressed two jurisdictional issues on appeal, mootness and whether section 363(m) was a per se jurisdictional bar to an appeal.

Mootness

The Supreme Court first addressed the issue of mootness.  “Mootness” is a doctrine that precludes an appellate court from reaching the underlying merits of a controversy. An appeal can be either constitutionally, equitably, or statutorily moot.

Constitutional mootness is derived from Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of cases that are hypothetical or merely advisory.

The judicial remedy of “equitable mootness” bars adjudication of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis for precluding appellate review of an order confirming a chapter 11 plan that has been substantially consummated.

An appeal can also be rendered moot by statute, for example, in certain cases involving section 363(m) of the Bankruptcy Code, which has been interpreted “to render statutorily moot any appellate challenge to a sale that is both to a good faith purchaser, and not stayed.”  Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d 376, 383 (1st Cir. 2018).

Circuit Courts are split regarding whether section 363(m) automatically statutorily moots an appeal of an order approving a sale to a good-faith purchaser.  Some circuits, including the First, Fifth, Eleventh, and D.C. Circuits, have held that, in the absence of a stay of the sale order, the court must dismiss a pending appeal as moot unless the purchaser did not act in good faith. See, e.g., Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d 376, 383 (1st Cir. 2018); In re Sneed Shipbuilding, Inc., 916 F.3d 405 (5th Cir. 2019); In re Steffen, 552 F. App’x 946 (11th Cir. 2014); In re Magwood, 785 F.2d 1077 (D.C. Cir. 1986).  Before Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019), the Seventh Circuit similarly interpreted section 363(m) as automatically mooting an appeal of a sale to a good-faith purchaser.  See In re River West Plaza-Chicago, LLC, 664 F.3d 668, 671-72 (7thCir. 2011).

Other Circuits, including the Third, Sixth, and Tenth Circuits, have rejected the view that section 363(m) automatically moots an appeal, finding that an appeal is not moot so long as it is possible to grant effective relief without impacting the validity of the sale. See In re ICL Holding Co., Inc., 802 F.3d 547, 554 (3d Cir. 2015); Brown v. Ellmann (In re Brown), 851 F.3d619 (6th Cir. 2017); In re C.W. Min. Co., 740 F.3d 548, 555 (10th Cir. 2014) (section 363(m) will moot appeals in cases where the only remedies available are those that affect the validity of the sale)

Based on prior precedent, the Supreme Court agreed with the latter Circuits that “[a] ‘case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.'” Chafin v. Chafin, 568 U.S. 165, 172 (2013).  In the MOAC Mall Holding case, SCOTUS held that it could not say whether “a vacatur of the [Sale] Order will not matter” and it declined to be the court of first instance to “plumb” though the Bankruptcy Code’s complex depths, in the first instance, to determine whether any relief remained available for MOAC.  MOAC Mall Holdings, 143 S.Ct. at 935.  Thus, the appeal in the MOAC Mall Holdings was found not to be moot.

Per Se Jurisdictional Ban

The next issue that SCOTUS addressed, whether section 363(m) was a jurisdictional provision, provided a more equivocal answer.  In short, the Supreme Court held that section 363(m) is not a jurisdictional provision that per se bans an appeal of an unstayed bankruptcy sale to a good-faith purchaser.

The jurisdictional label is significant because it carries with it unique and sometimes sever consequences, in that unmet jurisdictional preconditions deprive an appellate court of authority to hear a case, thus requiring immediate dismissal of an appeal.  MOAC Mall Holdings, 143 S.Ct. at 936.  “And jurisdictional rules are impervious to excuses like waiver or forfeiture, and courts must raise and enforce them sua sponte. Id.  Missing a filing deadline is a classic example of a jurisdictional provision.  Id.at 935.

The Supreme Court reasoned that, given the severe consequences of failing to meet a jurisdictional provision, it would only treat a statutory provision as jurisdictional if Congress clearly indicated in its statutory language that it was such a provision.  Id. at 936.  The Court characterized this as a “clear statement rule,” which is intended to implement what Congress intended with respect to preconditions governing a court’s adjudicatory authority.  Id. 

Ultimately, the Supreme Court held that “[w]e see nothing in section 363(m)’s limits that purports to ‘gover[n] a court’s adjudicatory capacity.'” Id. at 936.  While the Court recognized that section 363(m) does place constraints on the challenger of a sale to a good-faith purchaser, the constraints go to the weight of the appeal, not the merits. In other words, section 363(m) served as merely a statutory limitation on the relief available on appeal, but not a limit on the capacity of an appellate court to adjudicate the appeal.

Indeed, the Court acknowledged that section 363(m) plainly leaves appellate jurisdiction, among other things, in cases where (a) there is a bad faith purchaser, (b) there is a stay pending appeal or (c) if the appellate court does something other than simply reverse or modify the sale to a good faith purchaser.  Id.  at 937.

Thus, SCOTUS reversed the Second Circuit’s opinion that section 363(m) served as a per se jurisdictional block to MOAC’s appeal of the assignment of the Mall of Americas lease to Transform.

Takeaway

While SCOTUS did resolve the Circuit split over the issue of whether section 363(m) is a jurisdictional provision, it did not equivocally do away with arguments that section 363(m) may moot an appeal, which is another jurisdictional barrier.  To be clear, the MOAC Mall Holdings opinion does seem to favor challengers of bankruptcy sales, but it does not eliminate other arguments that appellants can make as to an appellate court’s jurisdiction.  Thus, the Supreme Court’s opinion may not have removed all controversary surrounding section 363(m)’s protections for good-faith purchasers of bankruptcy assets.  Time will tell how Circuit Courts will react.