July 5, 2022
The U.S. Supreme Court has agreed to decide an important issue affecting asset sales and lease assignments in bankruptcy cases – namely, whether a disgruntled party’s failure to obtain an order staying the effectiveness of a sale approval order or an order “integral” to a bankruptcy sale creates a jurisdictional bar against appealing such orders. More specifically, according to the petitioner, the question presented to the Supreme Court is: “Whether Bankruptcy Code Section 363(m) limits the appellate courts’ jurisdiction over any sale order or order deemed ‘integral’ to a sale order, such that it is not subject to waiver, and even when a remedy could be fashioned that does not affect the validity of the sale.”
This question has divided the federal courts of appeals. The Second and Fifth Circuits have ruled that failure to stay a sale approval order is jurisdictional and, according to the Second Circuit, precludes an appeal of any order that is “integral” to the sale approval order, regardless of whether the relief sought on appeal would affect the sale’s validity. The Third, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits have rejected the notion that section 363(m) limits appellate courts’ jurisdiction to review unstayed sale approval orders. Instead, those Circuits have concluded that section 363(m) merely limits the remedies available in such an appeal.
The answer to this question has significant practical implications for sales and lease assignments in bankruptcy cases. For example, if a party’s failure to obtain a stay of a sale approval order is jurisdictional, then an appeal of the sale order may be dismissed without the appellate court ever considering whether any remedies exist on appeal that would not affect the sale’s validity. Likewise, if section 363(m) is jurisdictional, a party cannot waive, forfeit, or be estopped from asserting it to challenge an appeal. In other words, if section 363(m) is jurisdictional, then a party can challenge an appeal from an unstayed sale approval order at any time in the appellate process.
The genesis of this issue is section 363(m), which provides that “[t]he reversal or modification on appeal of [a bankruptcy sale approval order] does not affect the validity of a sale . . . to an entity that purchased . . . such property in good faith, whether or not such entity knew of the pendency of the appeal, unless [the bankruptcy sale approval order] and such sale . . . were stayed pending appeal.” The Supreme Court will evaluate section 363(m) in a case from the Second Circuit in which Sears was the chapter 11 debtor and tenant under a lease. In Sears’ case, the bankruptcy court entered an order approving a sale of its assets. In connection with that sale, the purchaser acquired the right to later “designate” leases that Sears would assume and assign to it, subject to notice, opportunity for a hearing, and entry of another bankruptcy court order approving the lease assignment. More than two months after the sale closed, the purchaser and Sears designated Sears’ lease at the Mall of America for assignment, and sought an order authorizing Sears to assume and assign that lease to the asset purchaser. The landlord objected. The bankruptcy court nonetheless entered an order approving the lease assignment. The landlord appealed that assignment order to the district court. It also asked the bankruptcy court for a stay of the order pending appeal, as contemplated in section 363(m). The bankruptcy court denied the stay request, because it agreed with the purchaser that section 363(m) did not apply to a lease assignment (only to a sale), because the purchaser had represented that it was not relying on section 363(m), and because the purchaser “would be judicially estopped” from arguing otherwise on appeal.
Initially, the district court reversed the lease assignment order (but did not undo the earlier asset sale order). In response, the purchaser moved for a rehearing and argued, for the first time on appeal, that section 363(m) applied to the lease assignment and deprived the district court of appellate jurisdiction because the assignment order had not been stayed. The district court vacated its order and dismissed the landlord’s appeal. The district court opined that section 363(m) did apply, stating that the lease assignment was a sale because the purchaser was required to pay “cure costs” for the lease. The court also concluded, based upon its interpretation of Second Circuit precedent, that section 363(m) was jurisdictional, could not be waived, and that the purchaser could not be estopped from asserting it, despite what the purchaser had told the bankruptcy court and what the bankruptcy court had ruled when it denied the landlord’s motion for a stay pending appeal.
The landlord next appealed to the Second Circuit, but it lost again. Based upon its earlier decisions, the Circuit concluded that section 363(m) deprived the district court of appellate jurisdiction. First, it decided that section 363(m) applies not just to sale orders, but also to other orders that are “integral” to a sale that is authorized under section 363. It opined that the lease assignment order was “integral” to this sale. Next, the Circuit ruled that, in view of its precedents, section 363(m) was jurisdictional and therefore not subject to waiver or judicial estoppel.
The Circuit’s conclusion that section 363(m) is jurisdictional was fatal to the landlord’s appeal. If the Circuit had ruled that section 363(m) is not jurisdictional, then the purchaser presumably would have lost because it either waived the right to argue otherwise on appeal, or because (as the bankruptcy court concluded when it denied the landlord’s motion for a stay pending appeal) the purchaser would be “judicially estopped” from changing its position on appeal and arguing that the district court lacked appellate jurisdiction.
The landlord convinced the Second Circuit to stay the issuance of its mandate to the lower courts, and petitioned the Supreme Court to hear the case. The Supreme Court granted certiorari on June 27. Assuming the parties complete their briefs expeditiously, the case may be argued later this year and decided next Spring.
We will continue to follow this case and report once the Supreme Court renders its decision.
We aggressively pursue the best possible results for our clients, while providing valuable and cost-effective services. You can feel comfortable knowing that your bottom line is our top priority. Please contact us with any questions or to speak with one of our expert bankruptcy attorneys.