Limitation on Jurisdiction Versus Limitation of Remedy?
Supreme Court Resolves Circuit Split in MOAC Holdings, LLC v. Transform Holdco, LLC
A particularly critical aspect of bankruptcy practice in commercial contexts is the debtor’s ability to use, sell or lease property of the bankruptcy estate pursuant to 11 United State Code 363. The so-called “363 sale” is a common tool used to maximize value to creditors owing not only to a buyer’s ability to take property of the estate free and clear of interests but also because of statutory limitations on an appellate court’s ability to unwind a sale transaction approved by the bankruptcy court if it later turns out that the bankruptcy court erred in its decision to approve the sale.
Section 363(m) of the Bankruptcy Code provides that the reversal or modification on appeal of an authorization of the sale or lease of property of the estate does not affect the validity of the sale or lease to an entity that purchased or leased the property in good faith, whether or not such entity knew of the pendency of the appeal, unless the authorization and sale or lease were stayed pending an appeal. In other words, good faith purchasers and lessors generally need not fear that the transaction will be unwound due to a court’s error unless the sale is stayed pending an appeal.
Until recently, though, federal circuits were split on whether Section 363(m) precluded a court’s authority to hear appeals relating to any issue other than good faith or the entry of a stay as a jurisdictional matter. If Section 363(m) is a jurisdictional bar, then not only would it restrict the bases on which a party could appeal a sale order, it could also be raised at any point in the proceeding regardless of the conduct of the parties.
These issues were front and center in MOAC Holdings, LLC v. Transform Holdco, LLC. MOAC arose out of the long running Sears bankruptcy and centered on a long term, below market lease between Sears and the Mall of America. Sears sold most of its assets to Holdco pursuant to Section 363, including the right to designate to whom a lease between Sears and a landlord should be assigned. Holdco sought to assign the lease to its subsidiary. MOAC objected on grounds pertaining to the adequacy of assurance of future performance. The bankruptcy court overruled the objection. MOAC sought to stay the order pending appeal. The bankruptcy court denied the motion to stay in no small part upon Holdco’s representation that it did not intend to interpose Section 363(m) as a defense to MOAC’s appeal. Holdco lost on appeal, requested rehearing and despite its earlier representation, interposed Section 363(m) as a jurisdictional defense. The district court chastised Holdco, finding that the principals of judicial estoppel and waiver should bar such arguments raised well after the fact but, reluctantly, agreed that because Section 363(m) was jurisdictional in nature, it was not subject to equitable defenses such as waiver or estoppel. The circuit court affirmed.
The U.S. Supreme Court, however, saw the matter differently and concluded that Section 363(m) is not a jurisdictional statute. Statutes are treated as jurisdictional only if Congress “clearly states” as much. Neither the text of Section 363(m) nor its statutory context justified conclusion that Section 363(m) is jurisdictional. While Section 363(m) indisputably limits the form of remedy available to an appellant in some circumstances, it does not preclude them from seeking appellate relief in the first instance nor does it preclude the use of equitable doctrines (like estoppel and waiver) to ameliorate harsh litigation outcomes where a litigant’s conduct justifies their application. In so doing, the Supreme Court may have expanded the class of aggrieved creditors or other contract counterparties who seek appellate relief in connection with the sale or lease of assets of the bankruptcy estate. Only time will tell.
Should you have any questions regarding the court ruling, please contact Mr. Sandretto.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.