Supreme Court rules section 363(m) limitations on bankruptcy sale appeals not jurisdictional

On April 19, 2023, the U.S. Supreme Court issued its opinion in MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. (2023), reversing the Second Circuit decision and determining that the limitations on appeals of bankruptcy sale orders provided in section 363(m) of the Bankruptcy Code are not jurisdictional. Rather section 363(m) merely provides a "caveated constraint" on the appellant’s remedies on such appeals. 

The case arises out of the Sears bankruptcy. Before it filed bankruptcy in 2018, Sears leased retail space at the Mall of America in Minneapolis, Minnesota from MOAC Mall Holdings LLC. During its Chapter 11 case, Sears sold substantially all of its assets to Transform Holdco LLC in a Section 363 sale. As part of the sale, Transform acquired "designation rights" to hundreds of leases for which Sears was the lessee, including Sears’ $10/year lease at the Mall of America. These “designation rights" permitted Transform to designate which of the old Sears leases Transform wished to acquire. Two months after the sale to Transform closed, Sears and Transform jointly requested the bankruptcy court to assign the Mall of America lease to Transform. MOAC Mall Holdings objected to the assignment, arguing that Transform could not provide “adequate assurance of future performance” as required by section 365(b)(1)(C). The bankruptcy court overruled MOAC’s objection and approved the assignment of MOAC’s lease to Transform. MOAC appealed to the district court.

Initially, the district court ruled in MOAC’s favor and disallowed the assignment. However, Transform requested a rehearing, arguing for the first time that Section 363(m) deprived the district court of jurisdiction to hear MOAC's appeal. Section 363(m) provides as follows:

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.

Although the district court was "appalled" that Transform raised Section 363(m) for the first time in its rehearing request, the district court agreed with Transform and held that Section 363(m) was jurisdictional. Because it lacked jurisdiction to hear the appeal, the district court dismissed the appeal without reaching the merits. The Second Circuit affirmed the district court’s dismissal of the appeal and held Section 363(m) is a limit on appellate jurisdiction. Unless the bankruptcy court stays the sale order, the Second Circuit held that the appellate court can only review challenges to the purchaser's "good faith." The Second Circuit’s decision was contrary to decisions in several other Circuits that previously held that section 363(m) does not limit appellate jurisdiction but merely limits the remedies available to the appellant on appeal. The Supreme Court granted certiorari to determine whether section 363(m) of the Bankruptcy Code was jurisdictional.  

The Supreme Court determined that section 363(m) did not provide a “clear-statement” that Congress intended to treat the provision as jurisdictional. Instead, section 363(b) provides “important and mandatory” “statutory limitations” on remedies that can be effectuated from a decision on the appeal of an order authorizing a bankruptcy sale if (i) the appeals court reverses or modifies the sale order; (ii) the sale order is not stayed pending appeal; and (iii) the purchaser is a good-faith purchaser.  

The difference between a jurisdictional limitation and a statutory limitation is important. Parties cannot waive a jurisdictional limitation and can raise it anytime. The court can even raise a jurisdictional limitation on its own motion. If appellate jurisdiction is lacking, the appeals court must dismiss the appeal, regardless of the merits. 

The MOAC Mall Holdings decision should not change the practice in this area. Debtors and asset buyers should still include an express finding of good faith in the sale orders. Conversely, parties who wish to appeal a 363 sale order should still try to obtain a stay pending appeal. The similar statutory limitations on remedies allowed for appeals of unstayed orders of bankruptcy courts provided in sections 364(e) (appeals from financing orders) and 557(g) (appeals from grain disposition procedures for grain storage facilities) would also not be jurisdictional under the MOAC Mall Holdings decision. 

David Warfield and Brian Hockett are partners in Thompson Coburn’s Financial Restructuring and Bankruptcy practice. Katie Kraft co-chairs the Firm’s Supreme Court practice.