May 24, 2023
Section 363 of the Bankruptcy Code permits debtors-in-possession and trustees to sell or lease property of the bankruptcy estate to someone else, subject to fulfilling certain requirements, including to obtain bankruptcy court authorization. It also includes a provision – section 363(m) – that can protect good faith purchasers and lessees if the effectiveness of the bankruptcy court order authorizing a sale or lease is not “stayed” pending an appeal and if an appellate court later reverses or modifies that order. On April 19, 2023, the U.S. Supreme Court resolved a split among the federal courts of appeal by deciding that section 363(m) is not “jurisdictional” and thus does not invariably prevent an appeal – even if the authorization order is not stayed during the appeal.
Why the Decision Matters
The Court’s decision has important implications for bankruptcy sales. The Court explained that “[t]he ‘jurisdictional’ label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal.” In other words, if section 363(m) were “jurisdictional,” a purchaser or lessee could raise it at any time to dismiss an appeal from the bankruptcy court order authorizing the sale or lease if that order has not been stayed pending the outcome of that appeal. Because section 363(m) is not jurisdictional, however, a purchaser or lessee cannot necessarily wait and see whether it “wins” the appeal before invoking section 363(m). Section 363(m)’s requirements can be waived, forfeited, or barred if not raised properly or timely.
Background and Rationale for the Decision
Section 363(m) provides that:
[t]he reversal or modification on appeal of an authorization under [sections 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.The issue concerning section 363(m) arose during the bankruptcy case of Sears, Roebuck and Co. In Sears’s case, the bankruptcy court entered an order approving a sale of its assets. In connection with that sale, the purchaser (Transform Holdco LLC) acquired the right to later “designate” leases that Sears then would have to assume and assign to Transform. One of the leases eligible for assignment to Transform was Sears’s lease with MOAC Mall Holding LLC, which leases space to tenants at the Minnesota Mall of America. Transform designated the Mall of America lease for assignment to its wholly owned subsidiary. MOAC objected. The bankruptcy court overruled the objection and approved the assignment to Transform.
MOAC was fearful Transform might argue that section 363(m)’s restrictions limited or barred MOAC’s appeal from the order approving the lease assignment. Therefore, MOAC asked the bankruptcy court for a stay of the order’s effectiveness (to take advantage of the “safe harbor” in section 363(m) for appeals from orders that are “stayed pending appeal”). The bankruptcy court denied MOAC’s request. Because no stay was granted, the order assigning the lease became effective and Sears assigned that lease to Transform.
MOAC appealed to the district court, which initially sided with MOAC and vacated the order authorizing the lease assignment “to the extent it approved” Sears’s assignment of the Mall of America lease to Transform. Transform asked for rehearing and then did an “about-face” to argue for the first time that section 363(m) was jurisdictional and deprived the district court of the adjudicatory power to grant MOAC’s requested relief – despite Transform’s earlier representations to the bankruptcy court that it would not invoke section 363(m) against MOAC’s appeal. The district court “was ‘appalled’ by Transform’s gambit of waiting to invoke [section] 363(m) until after losing the merits of the appeal . . .” and explained that “if ever there were an appropriate situation for the application of judicial estoppel, this would be it.” As the Supreme Court noted in its opinion, however, “. . . not even such egregious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule.”
And so it was in the district court appeal. The district court determined that Second Circuit precedent bound it to treat section 363(m) as jurisdictional, and that section 363(m) therefore was not subject to waiver or judicial estoppel. It dismissed MOAC’s appeal, leaving the order assigning the lease in place.
On further appeal, the Second Circuit agreed with the district court that section 363(m) is jurisdictional. By do doing, the Second Circuit reinforced a split among the federal circuit courts on this issue. The Supreme Court agreed to hear the case to resolve that split.
In a unanimous opinion, the Supreme Court disagreed with the Second Circuit.
The Court explained that Congressional statutes are laden with instructions to litigants that are preconditions to relief or to suit. But jurisdictional preconditions pertain to the court’s power to adjudicate cases, rather than to the rights or obligations of the parties. According to the Court, a provision will be treated as jurisdictional only if Congress “clearly states” as much. Section 363(m) does not meet this “clear statement” test.
The Court saw nothing in section 363(m) that purported to govern a federal court’s adjudicatory power. First, the text of section 363(m) does not say it does. It does not address a federal court’s authority or refer to such courts’ jurisdiction. Instead, the text assumes that a court can exercise jurisdictional power over authorizations of bankruptcy sale or lease transactions, and plainly contemplates that appellate courts might “reverse or modify” such authorizations, subject to limitations that sometimes can protect good faith purchasers or lessees under certain prescribed circumstances. Section 363(m) therefore reads like a “statutory limitation” that is “tied in some instances to the need for a party to take ‘certain procedural steps at certain specified times.’”
Second, statutory context also indicates that section 363(m) is not a constraint on federal courts’ jurisdictional power. Congress set forth federal courts’ jurisdiction over bankruptcy matters in title 28, while section 363(m) is in title 11. The Court found no “clear tie” between section 363(m) and those title 28 provisions.
The arguments Transform mounted did not convince the Court otherwise. The Justices opined that the Second Circuit judgment “rested on the mistaken belief that [section] 363(m) is jurisdictional.” The Supreme Court therefore vacated that judgment and remanded the case for further proceedings below.
The Takeaway for Purchasers and Lessees
The takeaway for purchasers or lessees is clear: If an appellant fails to obtain a stay pending appeal, that failure does not mean that the appeal must be dismissed under section 363(m). If an appellate court reverses or modifies an authorization order, however, section 363(m) nonetheless can prevent the purchase or lease transaction from being upended – at least where the purchaser or lessee acts in good faith and invokes section 363(m)’s protections properly and timely.
The decision is MOAC Mall Holdings LLC v. Transform Holdco LLC, Sup. Ct. No. 21-1270.
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