In a unanimous decision written by Justice Ketanji Brown Jackson and decided on April 19, 2023, the Supreme Court ruled in favor of landlord MOAC Mall Holdings LLC in a dispute over a 100-year lease signed in 1991 with Sears Holding Corporation. MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U. S. ––––, 143 S. Ct. 927 (2023).
The lease allowed Sears to pay $10-per-year in rent for a three-story, 120,000-square foot location at Mall of America (MOA) in Bloomington, Minnesota. Low-rent leases for big box retailers were common because anchors like Sears brought traffic to shopping centers that benefited all tenants. Times have changed, though, and Sears filed for bankruptcy in 2018 and closed its MOA location in 2019. The space remains vacant, but during the bankruptcy proceedings, Sears transferred its lease to Transform Holdco LLC, owned by former Sears CEO Eddie Lampert. Transform is expected to sublease the space for substantially more than $10 a year.
Transform designated the lease for assignment to one of its subsidiary’s and MOAC objected to the assignment “on the ground that Sears had failed to provide the requisite adequate assurance of future performance by Transform.” MOAC contended Transform had no intention of occupying the lease space for retail purposes, but, instead, planned to sublease the space and unfairly profit from the terms of the original agreement. The Bankruptcy Court disagreed and approved Transform’s lease assignment, which order may be found at Appendix D to MOAC’s cert petition to the U.S. Supreme Court. MOAC appealed to the United States District Court for the Southern District of New York, which ruled in favor of MOAC and concluded that Transform did not satisfy the pertinent bankruptcy code adequate assurance provisions.
However, on rehearing, Transform argued for the first time that 11 U.S.C. section 363(m) deprived the District Court of jurisdiction, thereby depriving MOAC of its requested relief. Specifically, section 363(m) states 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.
Although “appalled” by Transform’s gamesmanship of waiting to raise a jurisdictional argument only after losing on appeal, the District Court interpreted section 363(m) as jurisdictional, and concluded that it lacked appellate jurisdiction over MOAC’s appeal because it was statutorily moot under section 363(m). The Second Circuit affirmed the District Court’s ruling, and MOAC petitioned the Supreme Court for certiorari to resolve whether section 363(m) was a jurisdictional provision.
The Supreme Court unanimously decided that section 363(m)’s strictures were not jurisdictional. The Court rejected Transform’s mootness argument that no legal vehicle remained to undo the lease transfer. The Court then explained that the statutory text of the bankruptcy provision did not clearly state a Congressional intent to place “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.” In particular, the Court rejected Transform’s appeal to traditional principles of in rem jurisdiction and former Federal Rule of Bankruptcy Procedure 805, which predated the Court’s modern efforts on jurisdictional nomenclature: “Nothing in Transform’s creative arguments in this case persuades us that §363(m) is jurisdictional under our clear statement precedents. Because the Second Circuit’s judgment rested on the mistaken belief that §363(m) is jurisdictional, we vacate that judgment and remand the case for further proceedings consistent with this opinion.”
In short, the MOAC decision resolves the jurisdictional debate of section 363(m) and will impact bankruptcy courts dealing with commercial leases across the country. Indeed, it clarifies that section 363(m) reads like a “statutory limitation,” and “merely cloak[s] certain good-faith purchasers or lessees with a targeted protection of their newly acquired property interest.” Id. Debtors and purchasers should still seek a stay pending an appeal and raise any section 363(m) protections promptly to avoid waiver of any rights under that code section. However, the MOAC decision permits appellate courts to exercise jurisdiction over a covered authorization, where appropriate, and will not require automatic dismissal of an appeal in the absence of a stay pending the appeal of a sale order.
