On June 27, 2022, the United States Supreme Court granted certiorari to possibly resolve the circuit split concerning the effect closing a bankruptcy sale under 11 U.S.C. § 363 has on appeals involving the sale order. MOAC Holdings LLC v. Transform Holdco LLC, 21-1270 (Sup. Ct.) In MOAC, Mall of America is challenging the bankruptcy court’s decision in the Sears bankruptcy to allow the buyer to assume and assign the debtor’s lease with Mall of America.
Parties unhappy with a bankruptcy court’s sale order cannot rely simply on the 14 day deadline to file an appeal. In addition to filing the appeal, the appellant often must also seek a stay of the sale order before the sale closes. But the effect of an appellant’s failure to seek a stay currently varies depending on the venue, making it hard to determine whether that step is required.
Bankruptcy Code § 363(m) provides that:
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section 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 United States Court of Appeals for the Second Circuit has held that once a sale closes, § 363(m) creates a jurisdictional bar—meaning the appellate court cannot hear the appeal except for challenges to the good faith status of the purchaser. Contrarian Funds LLC v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231 (2d Cir. 2010); In re Gucci, 105 F.3d 837 (2d Cir. 1997). The Fifth Circuit recently reached the same holding. Morimoto v. C Whale Corp (In re C Whale Corp.), No. 21-20147, 2022 WL 135125, at *4 (Jan. 13, 2022). Prior Fifth Circuit cases similarly held that failure to obtain a stay of the sale order is “fatal” to the appeal based on statutory mootness. In re Gilchrist, 891 F.2d 559, 560 (5th Cir. 1990); Matter of Walker Cnty. Hosp’l Corp., 3 F.4th 229 (5th Cir. 2021).
A number of circuits, including the Third, Sixth, Seventh, and Tenth Circuits, have held that the appeals courts still have jurisdiction to hear appeals after the sale closes and, instead, that § 363(m) only limits the relief an appellate court can provide—i.e., relief may be available only if it will not affect the validity of the sale. In re ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015); In re Brown, 851 F.3d 619, 623 (6th Cir. 2017); Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019); In re C.W. Mining Co., 641 F.3d 1235 (10th Cir. 2011). To be clear, even in these jurisdictions, appellate rights following the closing of a sale are limited, but it does not result in the automatic dismissal of an appeal on the basis of lack of jurisdiction as in the Second and Fifth Circuits.
Whether 363(m) is a jurisdictional bar, versus a limitation on relief, has a number of implications. For instance, buyers should be prepared to close the sale transaction as soon as the order is entered to preclude any appeals (other than to the good faith status of the buyer). On the other hand, parties objecting to the sale, or the assumption and assignment of executory contracts and unexpired leases as part of a sale, will have to be vigilant to appeal immediately and to seek a stay of the order pending appeal before the sale closes.
In addition, if closing a sale creates a jurisdictional bar, the appellee cannot waive lack of jurisdiction by failing to raise it. If § 363(m) only limits the relief available on appeal, a debtor or buyer can arguably waive the argument that the relief sought would unwind the sale or affect its validity. In MOAC, the buyer, Transform Holdings, expressly agreed at the Bankruptcy Court level that § 363(m) did not apply. Transform Holdings did not assert that § 363(m) applied until late in the appeals process before the District Court. Yet, the District Court and the Second Circuit held that Transform Holdings could subsequently argue lack of jurisdiction under § 363(m) because jurisdictional arguments cannot be waived.
Jackson Kelly will continue to monitor the case.