MOAC Mall Holdings LLC v. Transform Holdco LLC

Issues

Does Bankruptcy Code § 363(m) limit federal appellate courts’ jurisdiction to conduct judicial review, even when there is an opportunity for a judicial remedy that would not affect the validity of a sale in a bankruptcy proceeding?

Oral argument:

December 5, 2022

Court below:

United States Court of Appeals for the Second Circuit

This case asks the Supreme Court to determine whether a provision of federal bankruptcy law, 11 U.S.C. § 363(m), restricts the power of federal courts to review the order approving the sale of Sears’ assets. In the wake of Sears’ bankruptcy filing, Sears’ former CEO created a company, Transform HoldCo. Transform HoldCo then acquired Sears’ lease for space located in the Mall of America and subsequently assigned that lease to one of its subsidiaries with approval from the Bankruptcy Court. MOAC Mall Holdings, which owns Mall of America, challenged the assignment in federal court. Transform HoldCo contends that federal courts do not have the ability to review the decision of the Bankruptcy Court, and that regardless, the relief that MOAC seeks is unavailable because under no circumstances can MOAC retake control of the lease. MOAC contends both that the assignment decision is indeed reviewable by federal courts and also that it is entitled to relief under the relevant statutes. This case has important implications for judicial review and for the protections that mall owners and good-faith transferees have during bankruptcy proceedings.

Questions as Framed for the Court by the Parties

Whether Bankruptcy Code Section 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.

Facts

MOAC Mall Holdings LLC, or Mall of America (“MOAC”), owns and operates the nation’s largest shopping mall in Bloomington, Minnesota. Brief for Petitioner, MOAC Mall Holdings LLC (“MOAC”) at 6. MOAC entered a lease agreement (the “MOAC Lease”) with the general retail company Sears, Roebuck and Co. (“Sears”) in 1991. MOAC Mall Holdings LLC v. Transform Holdco LLC at 56. Under this agreement, MOAC leased a three-floor space in the mall to Sears for $10 per year in rent, with Sears responsible for taxes, utilities, insurance, and other maintenance costs. Id. at 55–56. In 2018, Sears Holdings Corporation, the holding company for Sears, filed for bankruptcy. Id. at 59. After this, the former Chief Executive Officer of Sears formed a new entity called Transform Holdco LLC (“Transform”) to take control of Sears’ assets through the bankruptcy process. Id. at 55, 59.

In 2019, the bankruptcy court overseeing the Sears proceedings entered a “sale order” that allowed Transform to purchase certain Sears assets, including the MOAC Lease. Id. at 59. Specifically, it gave Transform a “designation right” to assign certain leases, including the MOAC lease, to other entities with court approval. Id. MOAC had the right to object to the assignment of the MOAC lease at a hearing. Id. at 60.

About two months after the sale closed, Sears filed notice with the bankruptcy court to exercise the “designation right” for the MOAC Lease and assign it to a subsidiary of Transform, Transform LeaseCo LLC (“LeaseCo”). Brief for Petitioner at 9. MOAC objected on the grounds that LeaseCo did not meet the requirements under Bankruptcy Code § 365(b)(3) of an acceptable lease assignee because LeaseCo did not intend to occupy the leased premises. Id. MOAC asserted that LeaseCo had not operated as a retailer and aimed to sublease the space to other subtenants. Id. The bankruptcy court held a hearing and overruled MOAC’s objection, issuing an order approving the assignment (the “Assignment Order”). MOAC Mall Holdings at 60.

MOAC appealed to the District Court for the Southern District of New York and moved the bankruptcy court for a stay pending appeal. In re Sears Holdings Corp. at 4. The bankruptcy court denied the motion for the stay. Id.

On appeal, the district court initially vacated the Assignment Order, holding that the assignment of the MOAC Lease to LeaseCo violated § 365. MOAC Mall Holdings at 79. Transform moved for a rehearing and argued that the district court did not have jurisdiction over the appeal. In re Sears Holdings Corp. at 5. The district court then dismissed MOAC’s appeal based on the Second Circuit’s precedent, holding that § 363(m) is a jurisdictional statute that deprives the district court of jurisdiction over the appeal for this Assignment Order. Id. at 9–10.

MOAC appealed to the United States Court of Appeals for the Second Circuit. Id. at 2. The Second Circuit held that without a stay from the bankruptcy court, § 363(m) restricts appellate review of final sales to "challenges to the 'good faith' aspect of the sale." Id. at 5. The court noted that § 363(m) forecloses judicial review of transactions that are “integral” to sales. Id. at 6. The court held that Transform’s lease assignment to LeaseCo was integral to the Sears asset sale, therefore § 363(m) took away the court’s jurisdiction over the appeal of the lease assignment. Id. The court affirmed the decision of the district court and dismissed MOAC’s appeal. Id. at 13.

MOAC petitioned the Supreme Court for a writ of certiorari, which the Supreme Court granted on June 27, 2022. Brief for Petitioner at 2.

Analysis

THE AVAILABILITY OF JUDICIAL REVIEW UNDER SECTION § 363(m) POST-ARBAUGH

MOAC contends that based on the Supreme Court’s ruling in Arbaugh v. Y & H Corp, Congress must make a clear statement that a statute is jurisdictional, therefore imposing a jurisdictional limitation on the judicial review power of the court, in order for it to qualify as jurisdictional. Reply Brief for Petitioner, MOAC Mall Holdings LLC at 8–9. MOAC asserts § 363(m) does not contain any such clear statement. Brief for Petitioner, MOAC Mall Holdings LLC at 26. MOAC elaborates that the only limit found in § 363(m) is that remedies imposed by district and circuit courts are limited: they do not invalidate any sale if the sale was made in good faith. Id. at 28. MOAC posits that this interpretation, predicated on Arbaugh, has been supported by a recent prior court decision, Biden v. Texas, where the Supreme Court held that a statute limiting remedies does not imply a restriction on a court’s jurisdiction to hear an appeal. Id. at 28−29. MOAC contends that Arbaugh’s clear statement requirement is supported by the Seventh and Sixth Circuits, which overturned holdings that found § 363(m) to be a jurisdictional statute. Id. at 31. MOAC therefore argues that the Arbaugh rule must apply to all federal statutes. Id.

Furthermore, MOAC argues that the structure of the statute shows that § 363(m) was not intended to be a jurisdictional statute, because when Congress intended to limit judicial review in other bankruptcy provisions, it clearly stated so. Id. at 34. MOAC asserts that this is supported by the legislative history of the statute. Id. at 36–37. The United States, in support of MOAC, argues that the prior rule, Bankruptcy Rule 805, which was codified through § 363(m), was also not intended to be a limitation on jurisdiction. Brief of Amicus Curiae the United States, in Support of Petitioner at 23. The United States declares that bankruptcy courts have a greater scope of jurisdiction than Transform suggests: they are not restricted to in rem jurisdiction (power over things or property) because they often engage in an in personam process (power over people or parties) adjudicating issues between parties, which supports the contention that § 363(m) is not a bar to judicial review. Id. at 25.

Transform contends that Arbaugh does not apply in this case, as Arbaugh only covers definitional provisions of statutes, and § 363(m) is not a definitional provision, but rather a substantive one. Brief for Respondent, Transform Holdco LLC, et al. at 48. Transform further maintains that § 363(m) is a jurisdictional statute despite lacking a clear statement, because under the “traditional tools of statutory construction,” appellate courts’ authority to grant relief is limited. Id. at 37.

Additionally, Transform states that Congress intended § 363(m) to be a jurisdictional bar to judicial review. Id. at 38. Transform asserts that this is because § 363(m) codified a prior rule, Rule 805, which was intended to restrict bankruptcy courts’ power over property. Id. Transform argues that § 363(m) restricts the jurisdiction of bankruptcy courts to only property, meaning bankruptcy courts have no power over the parties themselves. Id. at 39. Transform asserts that this is true even if, as the court found in Tennessee Student Assistance Corp. v. Hood, the process used in bankruptcy court is virtually identical to the exercising of power over parties. Id. Transform further asserts that bankruptcy courts lose their power over bankruptcy property once it is transferred to a good-faith purchaser. Id. at 38. Transform states that the court cannot therefore retake property, such as the assignment of the MOAC lease, once the property has left the estate and been sold to a good-faith purchaser, like Transform, because the court’s power over the lease extinguishes. Id. at 39−41. Transform notes that the restriction on the court’s subject-matter authority is supported by the history of Rule 805, and the surrounding case law at the time, where courts found that without a stay in place, they could not review a completed good-faith sale. Id. at 43, 46. Transform maintains that § 363(m) transformed Rule 805 into a “statutory command” and therefore the federal courts cannot review the decision. Id. at 43−44.

WHETHER ACTUAL RELIEF CAN BE AWARDED TO MOAC

MOAC asserts that even if § 363(m) is a jurisdictional statute, it does not apply to the relief MOAC seeks because MOAC does not seek to invalidate the sale at issue, and § 363(m) just limits courts’ abilities to invalidate sales. Brief for Petitioner at 44. MOAC argues that voiding the Assignment Order that granted LeaseCo the Mall of America lease would not affect the validity of the Sears asset sale to Transform, based on the contract between Sears and Transform. Id. at 47–48. MOAC emphasizes that the Second Circuit incorrectly considered whether the leasehold assignment is integral to the bankruptcy deal although that is not relevant to the legal analysis. Id. MOAC argues that the Supreme Court should only consider whether reversing the Assignment Order would prevent the sale’s validity instead of considering whether the assignment of the lease was integral to the sale. Id. at 45−46. MOAC elaborates that the sale of assets to Transform was not contingent on the MOAC Lease, as Transform did not know at the time how many leases it would obtain through the sale. Id. at 48–49. Transform asserts that the sale’s validity thus would not be affected by a reversal of the Assignment Order. Id. MOAC therefore contends that it can receive the relief it seeks—a reversal of the Assignment Order allowing MOAC to reclaim control over the lease—because such relief does not implicate § 363(m)’s limits on relief. See id. at 49.

Transform contends that an attempt to reverse the Assignment Order would not void the transfer of their leasehold interest to LeaseCo, therefore MOAC cannot in fact obtain the relief it seeks. Brief for Respondent at 27. Rather, Transform argues, any attempt to reverse the transfer order would be subject to another part of the statute that makes the transfer avoidable, but not void. Id. at 28. Transform thus claims that MOAC lacks standing to be heard in front of the Supreme Court, because MOAC lacks the capacity for effective relief. Id. at 32. Transform claims that MOAC cannot bring its claims for relief because (1) Sears waived their right to bring those claims in the sales order, (2) the two-year time limit to bring such claims has passed, and (3) MOAC lacks standing because it is attempting to avoid the transfer for its own benefit, not for the benefit of the bankrupt entity, Sears. Id. at 28−29, 32−33. Transform argues that moreover, a reversal of the Assignment Order is impossible, because that would undermine Transform’s purchase of the Sears estate during the bankruptcy proceedings and revert the lease to Sears, not MOAC. Id. at 32−33. Transform asserts that their position as a good-faith purchaser means that they are protected by the statutory scheme, and that LeaseCo is entitled to the lease as part of the bankruptcy deal. Id. at 29−31. Transform thus concludes that because MOAC cannot obtain the relief it seeks, the case should be dismissed. Id. at 33.

Discussion

PRESERVING FAIRNESS AND PREVENTING WASTE IN JUDICIAL REVIEW

MOAC argues that “misbranding” a rule to strip federal courts of jurisdiction and bar judicial review undermines the adversarial system and wastes judicial resources. Brief for Petitioner, MOAC at 22. MOAC contends that interpreting § 363(m) to be jurisdictional would allow litigants to engage in “gamesmanship” or “sandbagging” tactics, because one party could then wait to raise an argument of jurisdictional error until months or even years after the case has started if the court does not hold in favor of that party. Id. at 23. MOAC asserts that this is fundamentally unfair because it would prevent a party from having its fair day in court even though it has a meritorious case. Id. The United States, in support of MOAC, also asserts that interpreting statutes to be jurisdictional can waste “adjudicatory resources” and “disturbingly disarm” parties in a dispute. Brief of Amicus Curiae the United States, in Support of Petitioner at 13. The United States thus argues that in the interest of preserving the fairness of the adversarial process, the rule from Arbaugh v. Y & H Corp. should apply: that unless Congress “clearly” establishes that a statute should be afforded jurisdictional status, the courts should presume that they can review matters on their merits. Id. at 13–14. The United States asserts that this will protect litigants’ rights to judicial review. Id.

Transform counters that allowing judicial review for a party that cannot possibly receive effective relief from the court would undermine the purpose of judicial review and be an improper use of judicial resources. Brief for Respondent, Transform Holdco LLC, et al. at 31–32. Transform asserts that under Article III, § 2, of the Constitution, only parties that bring “Cases” and “Controversies” to court have standing to receive judicial review in a federal court. Id. at 22. Accordingly, Transform contends that interpreting § 363(m) to be jurisdictional would avoid conferring rights on a party that should not actually have these rights, since the jurisdictional limit would prevent a party lacking standing, like MOAC in this case, from wrongfully availing itself of the court’s resources. Id. at 32–33. Thus, Transform argues that when a party lacks standing, the issues underlying its claims are moot, implying that a court would effectively waste its time and resources when hearing such a case. Id.

PROTECTING MALL OWNERS AND GOOD FAITH TRANSFEREES DURING BANKRUPTCY

The Honorable Judith Fitzgerald, in support of MOAC, argues that reading a limit of appellate review into §§ 363 and 365 in the current context would reduce the statutory protections that Congress specifically intended to give mall owners. Brief of Amici Curiae The Hon. Judith Fitzgerald (Bankruptcy Judge, Ret.), et al., in Support of Petitioner at 17–18. Judge Fitzgerald asserts that Congress amended the Bankruptcy Code in 1984 with Shopping Center Amendments that were designed to mitigate the harm that malls could suffer in the event of tenants going bankrupt, like in the present case. Id. at 17. Thus, Judge Fitzgerald argues that in this legislative context, upholding the Second Circuit’s interpretation of § 365(b) and § 365(m) would substantially impair the rights of mall owners by restricting their right to judicial review in a manner that Congress did not intend. Id. Moreover, Judge Fitzgerald argues that the Second Circuit’s conclusion that an “integral” assignment should result in a different outcome from an assignment executed without a sale order “designation right” enables Bankruptcy Courts to overreach and amounts to impermissible federal common law making. Id. at 16.

Transform does not assert any applicable special protections for parties like mall owners in this case and counters that the statutory scheme at issue is specially designed to guard the interests of good-faith transferees, like LeaseCo. Brief of Respondent at 29. Transform asserts that § 363(m) distinguishes between good-faith and bad-faith transfers and maintains that the statute allows appellate courts to grant relief only in cases of bad-faith transfers, thereby highlighting the importance of a protecting good-faith transferees’ interests. Id. at 31. Moreover, Transform argues that if Congress specifically prescribed a remedial structure complete with limitations and safeguards in a statute, then it would be an improper practice of federal common lawmaking for a court to come up with an unlimited common law workaround. Id. at 30. Thus, according to Transform, it would be inappropriate for courts to demand that Congress “incant magic words” to communicate that a statute restricts jurisdiction if the plain language of the statute, the statute’s operation, and the statute’s legislative history make it clear that the statute is jurisdictional. Id. at 37.