On June 27, 2022, the United States Supreme Court granted certiorari in MOAC Mall Holdings LLC vs. Transform Holdco LLC (21-1270) to resolve a divided circuit on whether Section 363(m) of the Bankruptcy Code limits appellate jurisdiction over bankruptcy sale orders or simply limits the appellant’s remedies on such calls. Given the decades-long trend of resolving Chapter 11 cases through the sale of assets, including lease and contract assignments, the Supreme Court’s decision may clarify a critically important part of modern Chapter 11 practice. 11.

The case stems from the bankruptcy of Sears. Before filing for bankruptcy in 2018, Sears had leased retail space at the Mall of America in Minneapolis, Minnesota, from MOAC Mall Holdings LLC. During its Chapter 11 case, Sears sold substantially all of its assets to Transform Holdco LLC in a Section 363 sale. As part of the sale, Transform acquired ” naming rights” on hundreds of leases where Sears was the tenant, including Sears’ $10/year lease at the Mall of America. These “designation rights” allowed Transform to designate former Sears leases that Transform wished to acquire. Two months after the closing of the sale to Transform, Sears and Transform jointly petitioned the bankruptcy court to award the lease of the Mall of America to Transform. MOAC Mall Holdings opposed the divestiture, arguing that Transform could not provide “adequate assurance of future performance” as required by Section 365(b)(1)(C). The bankruptcy court dismissed MOAC’s objection and approved the assignment of MOAC’s lease to Transform. MOAC appealed to the District Court.

Initially, the district court ruled in favor of MOAC and rejected the surrender. However, Transform requested a rehearing, arguing for the first time (and contrary to its position in bankruptcy court) that Section 363(m) deprived the district court of jurisdiction to hear MOAC’s appeal. Section 363(m) states:

Cancellation or variation on appeal of an authorization under paragraph (b) or (c) of this section of a sale or lease of goods shall not affect the validity of any sale or lease. ‘a rental under such authorization to an entity that has purchased or leased such property in good faith, whether or not such entity had knowledge of the call expectation, unless such authorization and such sale or rental have been suspended pending appeal.

Reversing course, the District Court agreed with Transform on the motion for rehearing that Section 363(m) was jurisdictional and not waiveable, and the District Court dismissed the appeal. The Second Circuit upheld the District Court, finding that Section 363(m) is a limit on appellate jurisdiction, and unless the sell order is stayed, the appellate court cannot review as the disputes of the “good faith” of the buyer. Several other circuits had previously held that section 363(m) does not limit appellate jurisdiction, but merely limits the remedies available to the appellant on appeal.

The bankruptcy community will be watching the Supreme Court’s decision carefully, as the ruling will affect how interested parties rely on sell orders and other orders integral to the sale. Resolving the case will likely require the Supreme Court to expand its already considerable body of jurisprudence on statutory interpretation. Additionally, the outcome in this case will undoubtedly affect appeals of funding orders, see 11 USC § 364(e), and appeals of sale of grain from a grain storage facility, see 11 USC § 557(g), both of which contain similar language to 363(m).