MOAC Trial: Supreme Court Enhances Appellate Jurisdiction over Appeals from Bankruptcy Sale Orders

The Supreme Court has again entered the insolvency arena, handing down a decision regarding the jurisdiction of courts hearing appeals of bankruptcy sale orders. The decision, MOAC Mall Holdings LLC v. Transform Holdco LLC, clarifies the circumstances under which Bankruptcy Code section 363(m) can statutorily moot an appeal of a sale order in a way that may disincentivize potential purchasers of bankruptcy assets. It also contained cryptic comments regarding the controversial issue of non-statutory equitable mootness in bankruptcy appeals from confirmed plans of reorganization that could be important because they could affect many current major cases.

Section 363(m)

Section 363(m) provides that the reversal or modification on appeal of an order approving the sale of property does not affect the validity of the sale to a good faith purchaser unless the sale was stayed pending appeal. There was a circuit split regarding whether section 363(m) strips appellate courts of jurisdiction over appeals to which it applies or instead simply provides direction to appellate courts considering appeals of bankruptcy sale orders.

Sears asset sale

The dispute arose from the Sears, Roebuck bankruptcy. As part of the 363 sale of substantially all of Sears’ assets, the purchaser (Transform) was given an option to select which of the Sears leases it would acquire. After the sale order had been approved, Transform designated a lease for space in the Mall of America. The lessor (MOAC) objected on the ground that the assignment did not satisfy the requirements for assignment of a shopping center lease in section 365(b)(3). The bankruptcy court overruled the objection and approved the assignment (the Assignment Order). MOAC’s request for a stay pending appeal was denied because Transform had explicitly represented that it would not invoke section 363(m) against MOAC’s appeal. The transfer of the lease was then effectuated.

On appeal the district court sided with MOAC and vacated the Assignment Order to the extent it approved the assignment of the Mall of America lease. Transform sought rehearing, reversing its earlier stipulation that it would not invoke section 363(m), and arguing that section 363(m) deprived the district court of jurisdiction to provide relief to MOAC. The district court, while “appalled” by Transform’s change of course, held that section 363(m) was jurisdictional and thus unwaivable and dismissed the appeal. The Second Circuit affirmed.

Court decision

The Court unanimously concluded that section 363(m) is not jurisdictional. It based this conclusion mostly on the lack of clear indications in the statutory text that it was intended to restrict the jurisdiction of an appeals court. Instead, section 363(m) is considered to be a congressional directive to appeals courts that are otherwise properly exercising jurisdiction.

Analysis

One undercurrent of the case is that several of the courts to have considered the case have been repelled by what could be termed gamesmanship by Transform in its late invocation of the section 363(m) argument. However, this issue did not play a formal role in the Court’s decision.

While the Court’s disposition of the issues may seem dry and theoretical, there could be significant practical consequences. For one, as in the MOAC case itself, because section 363(m) is not jurisdictional it can be waived. Accordingly, a waiver of section 363(m) by a purchaser can be enforced.

The unusual procedural posture of the case obscures that it is not clear that section 363(m) should have applied to the appeal at all. Indeed, the bankruptcy court concluded that section 363(m) was inapplicable because the dispute arose not in connection with the bankruptcy court’s original approval of the sale under section 363 but in connection with a subsequent dispute regarding Transform’s decision to include the MOAC lease in the package of leases it would acquire under the by-then-final sale order.

More generally, the decision could lead to appellate courts being more willing to consider a greater variety of challenges to bankruptcy sales or a greater variety of potential remedies than they might have before. The decision may therefore marginally diminish the desirability of assets sold through the section 363 process, although the extent to which this may occur is difficult to predict.

Equitable mootness

The Court also addressed and rejected Transform’s argument that the appeal should be dismissed on equitable mootness grounds because the assignment of the lease had closed and that therefore there is no legal vehicle to undo the lease transfer. The Court observed that “[O]ur cases disfavor these kinds of mootness arguments.” It noted that MOAC had raised non-frivolous arguments opposing equitable mootness, and concluded that equitable mootness should therefore not bar a consideration of the merits of the dispute.

The Court’s rejection of equitable mootness arguments was surprisingly curt. It did not refer to or discuss the many bankruptcy cases invoking equitable mootness, and instead confined its analysis to Chafin v. Chafin, a Supreme Court case involving the Hague Convention on the Civil Aspects of International Child Abduction.

The doctrine of equitable mootness has long been controversial in bankruptcy circles as a tool for debtors to squelch appeals from confirmed plans of reorganization. Recent cases in which it has been threatened or invoked include Purdue Pharma, Voyager Digital Holdings, and Boy Scouts of America. Just last term the Court declined to grant certiorari to consider the doctrine in KK-PB Financial LLC v. 160 Royal Palm LLC. Just a few weeks ago, several law professors filed an amicus brief with the Court urging it to grant certiorari in the Windstream Holdings Inc. case, arguing that equitable mootness facilitates “bankruptcy hardball in which distressed firms routinely engage in aggressive tactics that then elude appellate review.”

It appears that equitable mootness was raised late in the MOAC appellate process – this was not the issue for which certiorari was granted – and that this may have influenced the Court’s treatment.  The Court’s statement that it “declines to act as a court of first view” suggests that equitable mootness might still be raised by Transform on remand.

It remains to be seen whether the Court’s general statement that equitable mootness is disfavored will cause lower courts to reconsider the extent to which the doctrine has been employed in bankruptcy cases. Alternatively, the statement might presage an interest in the doctrine that might lead to certiorari being granted in Windstream or another case.