On April 19, 2023 the Supreme Court issued its unanimous ruling in MOAC Mall Holdings LLC v. Transform Holdco LLC, 528 U.S ____ (2023), holding that the limitations contained in section 363(m) of the United States Bankruptcy Code are not jurisdictional.  The Supreme Court’s ruling not only resolved a split amongst the circuits, but it also cleared up a foggy corner of arguably one of the most consequential sections of the Bankruptcy Code. 

Section 363(m)’s Safe Harbor

At issue in MOAC Mall Holdings was the interplay between sections 363(b)(1) and 363(m) of the Bankruptcy Code.  Section 363(b)(1) allows a trustee or debtor-in-possession to, among other things, sell or lease assets outside of the ordinary course of business.  Section 363(m) in turn provides a safe harbor for good-faith purchasers or lessees of those assets—providing that reversal of an authorization under section 363(b) “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,” unless the authorization and the sale or lease were stayed pending appeal.  In MOAC Mall Holdings, the Supreme Court was asked to answer the question of whether section 363(m) is jurisdictional and barred an appeal of an order integral to a sale under section 363(b) which was not stayed pending appeal.

Factual History and Section 363(m)’s Safe Harbor

MOAC Mall Holdings arose out of the bankruptcy cases of Sears Holding Company and its affiliated debtors (collectively, “Sears”).  During the case, Sears sold substantially all of its assets pursuant to section 363(b) to Transform Holdco LLC (“Transform”), a holding company formed by former Sears executives.  The assets included Sears’ sweetheart-deal lease with MOAC Mall Holdings LLC (“MOAC”) for the use of a three-floor space in the Mall of America, which was signed in 1991 and which required lease payment of only $10 a year for 100 years.   

While the sale anticipated that Transform would designate an assignee to whom Sears could assign the lease, Transform had made no such designation as of the sale date.  When Transform ultimately designated a wholly owned subsidiary as assignee, MOAC objected to the assignment, arguing that it was not provided the adequate assurance of performance of the lease as mandated by sections 365(b) and (f) of the Bankruptcy Code.  The bankruptcy court rejected MOAC’s arguments and issued an order authorizing the Debtors to make the assignment (the “Assignment Order”).  MOAC appealed—and that’s where section 363(m), and its unclear implications on jurisdiction, threw a wrench into the adjudicative process.

When MOAC appealed the decision on the Assignment Order to the district court, it simultaneously filed a motion in the bankruptcy court for a stay pending appeal, arguing that a stay was needed since without a stay in place Transform might argue that section 363(m) limited or barred the appeal of the Assignment Order.  The bankruptcy court, relying on the representations of Transform that it would not invoke section 363(m) against MOAC’s appeal, denied the motion to stay.  MOAC proceeded in its appeal without a stay in place, and the district court vacated the Assignment Order, holding that MOAC had not been given the required adequate protection. 

Transform, understandably unhappy with the district court’s decision, filed a motion for rehearing.  In its motion, Transform argued, for the first time, and in spite of its prior representations to the bankruptcy court, that section 363(m)’s protections for good faith purchasers meant that the district court never had jurisdiction to hear the appeal to begin with. 

Following Second Circuit precedent, the district court held that Transform cannot be judicially estopped from raising its section 363(m) jurisdictional defense.[1]  Ultimately, the district court, “with deep regret,” granted Transform’s motion for rehearing.[2]   This resulted in the district court, despite having previously issued a ruling on MOAC’s appeal of the Assignment Order, dismissing the appeal for lack of appellate jurisdiction, which “necessitated the vacatur” of the district court’s earlier decision in favor of MOAC.[3]  Accordingly, the bankruptcy court’s Assignment Order remained wholly intact.

In its order that dismissed the appeal for lack of jurisdiction, the district court bemoaned the fact that the issue of jurisdiction had not previously been raised, stating that:

As a result, this court – which does not pretend to be an expert in bankruptcy law – was unaware of the possibility that the appeal might be moot because of [the bankruptcy court’s] refusal to enter a stay pending appeal.  I read the briefs and the record; I heard the oral argument; and I worked for over a month on what turned out to be a very complicated appeal.[4]

The Second Circuit affirmed, and the Supreme Court granted MOAC’s writ of certiorari.

The Supreme Court’s Ruling

In its ruling, the Supreme Court laid out its jurisprudence on when a statute deprives a court of jurisdiction.  The Court’s analysis revolved around the “clear-statement rule,”[5] where the Court will require the legislature to clearly state when some limitation in a statute is jurisdictional.[6] This rule assists the Court in its attempt to “bring some discipline” to rulings on jurisdiction, which, as can be seen by MOAC’s sudden reversals in fortune, can severely impact a case and the rights of the parties involved.[7] Part of the Court’s desire to be more careful about invoking jurisdiction where it is not clearly stated in the statute’s text is based on jurisdiction’s “unique and sometimes severe consequences,” which include mandating “immediate dismissal,” being “impervious to excuses like waiver or forfeiture,” and requiring a court to “raise and enforce [jurisdiction] sua sponte.”[8]

In applying the “clear-statement rule” to section 363(m), the Court started with the plain text, highlighting that nothing in the text of section 363(m) refers to the jurisdiction of the appellate courts.  The Court likened section 363(m) to a claim-processing rule that promotes the “orderly progress of litigation by requiring that the parties take certain procedural steps at certain times,” and the Court had previously held that such rules “should not be described as jurisdictional.”[9]  Further, the Court highlighted that section 363(m) does not refer to the jurisdictional statutes governing bankruptcy cases.  To that end, the Court pointed to section 305(c) of the Bankruptcy Code, which provides that certain orders are not reviewable on appeal, to showcase that Congress could include specific language in the statute text if it wanted to divest an appellate court of jurisdiction.[10]

Based on the above, the Court ultimately held that section 363(m) does not implicate the jurisdiction of appellate courts reviewing sale or lease orders entered under section 363(b).  The Court remanded the case back to the Second Circuit for a decision consistent with the Court’s opinion.

Takeaways

The MOAC Mall Holdings case demonstrates the problems that can arise when a party belatedly raises the question of jurisdiction. As the Supreme Court previously hypothesized, jurisdictional issues can waste judicial resources and unfairly prejudice litigants, where a party, after losing, “may move to dismiss the case because the [court] lacked subject-matter jurisdiction . . . . even if the party had previously acknowledged the [court’s] jurisdiction,” potentially wasting “many months of work on the part of the attorneys and the court.”[11] Even in this case, where the Supreme Court ultimately ruled that the district court had jurisdiction to hear the appeal, it took years to place the parties in the same place they started when Transform first raised the section 363(m) jurisdictional argument in February of 2020.

MOAC Mall Holdings teaches us some important lessons.  First, jurisdictional arguments will always trump arguments based on the merits.  Second, the Bankruptcy Code is endlessly complex, and to practice in bankruptcy courts requires caution and diligence.  The outcome of disputes that could be worth millions of dollars (or more) can hinge upon provisions whose application can blindside even federal judges.   And third, if a party fears that a jurisdictional issue might be raised in the future, it would be well-advised to promptly bring that issue to the attention of the court, even if the adversarial party promises not to raise a jurisdictional defense.  As MOAC Mall Holdings makes clear, a party’s promise not to raise a jurisdictional defense may not be enforceable against that party and may not be amenable to estoppel arguments.

[1] In re Sears Holding Corp., 616 B.R. 615, 624 (S.D.N.Y. 2020) (“Because the Second Circuit takes the position that § 363(m) is ‘jurisdictional,’ neither waiver nor judicial estoppel can be relied on to overcome it.”).

[2] Id. at 634.

[3] Id.

[4] Id. at 623.

[5] MOAC Mall Holdings LLC, 598 U.S. ___ (slip op., at 8).

[6] Arbaugh v. Y&H Corp., 546 U.S. 500, 515 n.11 (2006).

[7] See Henderson ex rel. Henderson v. Shinseki, 562 U.S. 428, 435 (2011).

[8] MOAC Mall Holdings LLC, 598 U.S. ____ (slip op., at 7-8).

[9] Id.

[10] MOAC Mall Holdings, LLC, 598 U.S. ___ (slip op., at 10-11).  However, the Court clarified that it was not ruling that section 305(c) was jurisdictional, only that section 305(c) provides a clearer case of a jurisdictional cross-reference, much clearer than what is found in section 363(m).  Id. (slip op., at 11 n.6).

[11] Henderson, 562 U.S. at 434-35.