By David N. Crapo, Esq., Gibbons P.C.
On April 19, 2023, the Supreme Court issued its unanimous opinion in MOAC Mall Holdings LLC, v. Transform Holdco, LLC, 143 S. Ct. 927, 932-33 (2023) (“MOAC”) that the provisions of § 363(m) of the Bankruptcy Code are not jurisdictional. MOAC’s holding could significantly impact § 363 bankruptcy sales. With the enactment of § 363(m) in 1978, common wisdom was that parties appealing from orders authorizing the sale or lease of bankruptcy estate property risked the mooting of that appeal if they failed to obtain a stay of those orders pending appeal. That common wisdom grew out of the language of § 363(m) itself, which provides that the reversal of an order authorizing the sale or lease of bankruptcy estate property does not “affect the validity” of such sale or lease to a good faith purchaser or lessee unless the authorization order and the authorized sale or lease were stayed pending appeal. 11 U.S.C. § 363(m). Many courts concluded that § 363(m)’s apparent requirement of a stay pending was jurisdictional in nature and, if not met, deprived appellate courts of jurisdiction over the appeal.
Factual Background. MOAC arose out of the 2018 bankruptcy filings of Sears, Roebuck and Co. (“Sears”) and numerous affiliates. Sears “reorganized” via a sale of most of its assets to Transform Holdco, LLC (together with its subsidiaries, “Transform”). Through the sale, Transform obtained, inter alia, Sears’s right to designate the assignee of its leases. In re Sears Holding Corp., 616 B.R. 615, 619 (S.D.N.Y. 2020). Transform designated a subsidiary as the assignee of Sears’s lease (“MMH Lease”) with MOAC Mall Holdings LLC (“MMH”) at the Minnesota Mall of America. MMH objected to the assignment on the basis that Transform had failed to provide adequate assurances of future performance under the MMH Lease as required by 11 U.S.C. §§ 365(f)(2)(B) and 365(b)(3). The bankruptcy court overruled MMH’s objections and entered an order (“Assignment Order”) authorizing the transfer of the MMH Lease to Transform’s subsidiary. MMH appealed and sought a stay pending appeal. The bankruptcy court denied MMH’s request, reasoning that: (i) the Assignment Order did not constitute the appeal of an authorization as contemplated by § 363(m); and (ii) Transform had expressly waived the invocation of § 363(m) in any appeal by MMH. With no stay in effect, the Assignment Order – as well as the assignment of the MMH Lease – became effective. MMH appealed to the district court, which initially vacated the Assignment Order on the basis that Transform had not provided adequate assurance of future performance under the MMH Lease. Transform sought a rehearing and, in contravention of its earlier waiver, invoked § 363(m). The district court reluctantly dismissed MMH’s appeal concluding that § 363(m)’s requirements are jurisdictional. The Second Circuit affirmed, and the Supreme Court granted certiorari to resolve a circuit split on the § 363(m) issue.
The Supreme Court’s Opinion. Before addressing the § 363(m) issue, the Supreme Court quickly disposed of Transform’s contention that MMH’s appeal was moot, because there was no legal vehicle for bringing the MMH Lease back into Sears’s bankruptcy estate. Doing so, Transform argued, could only be accomplished by the avoidance of the assignment of the MMH Lease under 11 U.S.C. § 549. However, only Sears could bring such an action, but (i) Sears had waived its right to do so; and (ii) the time for using § 549 had expired. In response, the Supreme Court noted its disfavor of such mootness arguments. 143 S.Ct. at 934. The court also noted the concrete interests that both MMH and Transform indisputably held in the outcome of the appeal. Id. at 935. Additionally, the Court noted that MMH had simply sought typical appellate relief – the reversal of both the Assignment Order and the assignment of the MMH Lease. Id. Under the circumstances, the Court concluded, as long as MMH’s claim was not so implausible to support a court’s exercise of jurisdiction, its appeal from the Assignment Order was not moot but it was not up to an appellate court to make such a determination. Id. (citations omitted).
Turning to the question of whether the provisions of § 363(m) are jurisdictional, the Supreme Court drew a distinction between preconditions for relief (such as exhaustion of remedies or the required elements of a claim) that are jurisdictional and those that are merely important and mandatory. Congressional characterization of a precondition for relief as important and mandatory does not make it jurisdictional. Id. at 936 (citations omitted). In fact, whether a precondition for relief is jurisdictional or merely important and mandatory is, therefore, crucial to a determination as to the success of a claim. A party’s failure to meet a jurisdictional precondition deprives any court of jurisdiction over the matter and requires immediate dismissal. Id. (citations omitted). Moreover, because jurisdiction pertains to the power of the court and not the rights of parties, it cannot be waived even in the face of the sandbagging that occurred in MOAC. Id. (“judicial rules are impervious to excuses like waiver or forfeiture”).
In determining that the requirements of § 363(m) were not jurisdictional, the Supreme Court stated that “a provision is jurisdictional if Congress ‘clearly states’ as much.” Id. (citations omitted) The clear-statement rule implements Congress’s likely intent regarding whether noncompliance with a condition impacts a court’s authority to adjudicate a matter. Id. (citations omitted) There are no “magic words” that Congress must use to convey its intent that a provision is jurisdictional. Id. (citations omitted) Resort may be had to rules of statutory construction. Id. (citations omitted). However, the statement must be clear, and the conclusion that a provision is jurisdictional cannot be grounded in a reading that is plausible or better than any alternative. Id. (citations omitted).
Applying the clear-statement rule to the facts in MOAC, the Supreme Court started with the text of § 363(m), finding that the statute did not address or refer to the jurisdiction of the district courts, but presumes their ability to exercise judicial power over any authorizations under 11 U.S.C. §§363(b) and 363(c) and that they may reverse or modify any authorizations approved thereunder. Id. at 937 (citations omitted). The district courts’ exercise of jurisdiction over such authorizations is not unlimited, however. It is subject to the proviso that reversal or modification of an authorization will not affect the validity of a sale or lease to a good faith purchaser or lessee if certain conditions are met. 11 U.S.C. § 363(m). That proviso is subject to the caveat that the protections accorded good faith purchasers and lessees by § 363(m) are inapplicable to either: (i) sales or leases to bad faith purchasers or lessees; (ii) sales and leases that have been stayed pending appeal; and (iii) orders that provide any relief other than reversing or modifying the authorization of a sale or lease. Id. (citations omitted). The Supreme Court goes on to characterize § 363(m) as according certain good faith purchasers or lessees protection of their newly acquired property interests and as reading like a statutory limitation. Id. (citations omitted). In sum, § 363(m)’s undeniable presumption that a district court’s jurisdiction over sale or lease authorization, the limitations on that jurisdiction, and the proviso to those limitation do not constitute a clear statement that its provisions are jurisdictional.
The Supreme Court also looked to § 363(m)’s statutory context, finding that it does not contain any “clear tie” to the Bankruptcy Code’s expressly jurisdictional provisions. Id. (citations omitted). The Court characterized that the directions issued by § 363(m) as statutory limitations could be important but were not jurisdictional. Id. (citations omitted).
The Supreme Court also rejected Transform’s proposition that § 363(m) operates to ensure the proper application of traditional rules of in rem jurisdiction, particularly the rule that once property leaves the bankruptcy estate, the bankruptcy court may no longer exercise in rem jurisdiction over it. In doing so, the Court found that Transform’s position: (i) ignores the text and statutory context of § 363(m); (ii) has little, if any, support; and (iii) ignores § 363(m)’s express recognition that certain sales or leases can be reversed. Id. (citations omitted). Having rejected all of Transform’s arguments and concluded that the requirements of § 363(m) are not jurisdictional, the Supreme Court reversed the Second Circuit’s decision and remanded the matter for further proceedings in light of its opinion.
Conclusions and Takeaways. The actual impact of MOAC on bankruptcy sales will develop in the case law interpreting its meaning and scope. The opinion likely reflects the Supreme Court’s distaste for Transform’s sandbagging. Indeed, even the district court’s opinion could have begun with the statement, “there should be a law against Transform’s behavior.” In any event, MOAC constitutes controlling law on the effect of the provisions of § 363(m).
One clear takeaway from MOAC is that the rights and remedies available under § 363(m) can be waived if they are not timely asserted. They lack the protections of jurisdictional status. For that reason, sandbagging, as Transform did before the district court, is not an option for a purchaser or lessee seeking to defend an order authorizing a sale or lease on appeal. Moreover, with its finding that § 363(m) is not jurisdictional, MOAC does not provide a basis for an appellate court to revive, via sua sponte enforcement, rights under § 363(m) that were waived by a purchaser or lessee. The other takeaways from MOAC are not as clear, however.
The Court’s discussion of mootness could have been more fulsome. As written, the discussion provides little new guidance for deciding appeals from bankruptcy sales and lease assignments. To be sure, the Court expressly recognized that statutory preconditions to relief are important and should not be disregarded. For that reason, the provisions of § 363(m) cannot be ignored in an appeal from an order authorizing a sale or lease. Indeed, the Supreme Court has on many occasions – including in bankruptcy matters – forcefully rejected what it characterized as invitations to write a statute out of the statute books. It will be interesting to see how courts will give effect to the plain language of § 363(m), while at the same time determining whether an appellant who has not sought a stay pending an appeal still holds a plausible claim that can be addressed on appeal. Relying on the bankruptcy court’s reasoning when denying MMH’s request for a stay pending appeal, parties may propose arguments that the order being appealed is not an order concerning the authorization of a sale or lease within the contemplation of § 363(m).
Like its ruling on mootness, the Supreme Court’s ruling on jurisdiction in MOAC will require development through case law. The Supreme Court held that no “magic words” were necessary to raise an important and mandatory precondition for relief to the level of a jurisdictional statute, and endorsed the resort to the rules of statutory construction to determine whether a statute is jurisdictional. Nevertheless, the Court insisted statute must clearly state Congress’s intent that its requirements are jurisdictional. MOAC provides some guidance in that regard. Because they establish the conditions for the exercise of jurisdiction, jurisdictional statutes will not, like § 363(m), presume the existence of jurisdiction. Statutes like § 363(m) containing provisos and conditions are likely to be too complicated to express a clear statement of jurisdictional intent. Jurisdictional statutes will enjoy more than an attenuated connection with expressly jurisdictional provisions of an applicable code or act. Under MOAC, therefore, unless a statute contains language to the effect that no court shall have the authority to adjudicate a matter unless certain conditions are met, it is not likely to be deemed jurisdictional.
If you have questions concerning the topic of this article, the author can be contacted at (973) 596-4523 or dcrapo@gibbonslaw.com.