Supreme Court Rules Section 363(m) Limits Remedies But Is Not Jurisdictional and Sale Order Appeal Was Not Moot
On April 19, 2023, the United States Supreme Court issued a unanimous decision, holding that section 363(m) of the Bankruptcy Code is not jurisdictional in terms of appellate review of an asset sale order, but, rather, that section 363(m) only contains limitations on the relief that may be afforded on appeal.
MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 598 U.S. -----, 143 S. Ct. 927 (2023), arises out of the Sears chapter 11 bankruptcy, in which Sears agreed to sell most of its assets to purchaser Transform Holdco LLC (“Transform”) pursuant to Bankruptcy Code section 363(b)(1). In 2019, the Southern District of New York Bankruptcy Court issued an order approving the sale. Among the assets was the right for Transform to “designate to whom a lease between Sears . . . and some landlord should be assigned.” Sears previously had sold most of its pre-bankruptcy assets to respondent Transform, including the right to designate an assignee to a lease between Sears and MOAC Mall Holdings LLC, which leases retail spaces to tenants in Minnesota’s Mall of America.
After Transform designated the MOAC Lease for assignment, MOAC objected to that assignment on the grounds that Sears had failed to provide “adequate assurance of future performance by the assignee” pursuant to 11 U.S.C. § 365(f)(2)(B). The Bankruptcy Court approved the assignment to Transform over MOAC’s objection and thereafter denied MOAC’s request for a stay pending appeal. MOAC appealed the Bankruptcy Court’s approval of the transfer. On appeal, the District Court reversed the Bankruptcy Court, holding that Sears had not satisfied the requirements of Bankruptcy Code section 365, which concerns a showing of adequate assurance of future performance by Transform. On rehearing of that decision, Transform argued that Bankruptcy Code section 363(m) deprived the District Court of jurisdiction to grant MOAC’s requested relief as to the MOAC Lease transfer. Section 363(m) provides:
[t]he reversal or modification on appeal of an authorization under [§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 District Court determined that “Second Circuit precedent bound it to treat section 363(m) as jurisdictional, and thus not subject to “waiver [or] judicial estoppel.” The United States Court of Appeals for the Second Circuit affirmed, also on the basis that section 363(m) is jurisdictional (thereby precluding appellate review) under controlling Second Circuit precedent.
The Supreme Court unanimously vacated the decision below, holding that Section 363(m) is not jurisdictional because it does not satisfy the Court’s “clear-statement rule,” which evaluates whether Congress likely intended for “noncompliance with a precondition [to] govern a court’s adjudicatory capacity.” Bankruptcy Code section 363(m) limits the efficacy of the appeal of a sale order issued by a bankruptcy court pursuant to Bankruptcy Code section 363(b), subject to certain conditions. As Justice Ketanji Brown Jackson noted in her opinion, a successful appeal of a section 363 order may not necessarily “impugn the validity of a sale or lease made under [Bankruptcy Code section 363(b) or 363(c)].” Determining whether section 363(m) is jurisdictional, as Transform argued, is significant because jurisdictional statutes “pertain to the power of the court rather than to the rights or obligations of the parties.” Given that significance, the Supreme Court stated that a statute would only be treated as jurisdictional “if Congress ‘clearly states’ as much.” Thus, while traditional tools of statutory construction can illuminate a clear statement and “magic words” are not necessary, the statement that a provision is jurisdictional must indeed be clear and not merely “‘plausible’ or ‘better’ than nonjurisdictional alternatives.” Further, the Supreme Court observed that section 363(m) lacks any “clear tie” to the Bankruptcy Code’s other, “plainly jurisdictional” provisions and is not contained among the remaining federal jurisdictional provisions, e.g., 28 U.S.C. §§ 1334 (a)–(b), (e).
Justice Jackson explained that “Congress has not clearly stated that the provision is a limit on judicial power, rather than a mere restriction on the effects of a valid exercise of that power when a party successfully appeals a covered authorization.” That is crucial, because if section 363(m) is jurisdictional, “a party may invoke [it] at any time—without fear of waiver, forfeiture, or similar doctrines interposing.” Thus, the Supreme Court vacated the Second Circuit’s judgment and remanded the case for further proceedings consistent with the opinion.
Notably, the MOAC ruling resolves a split among circuit courts regarding whether the language in section 363(m) controls jurisdiction and, thus, appellate review. It does not.
Generally, parties seeking to sustain sale orders have argued that section 363(m) precludes effective appellate review by eliminating the appellate court’s jurisdiction. That argument is now unavailable, but the decision should not result in any change in the best practices of debtors, buyers, and challengers of a proposed sale. Challengers should continue to act fast to seek a stay pending appeal; and proposed sale orders should continue to contain specific findings that the buyer is purchasing the assets in good faith.
The finding that subsection 363(m) is not jurisdictional should not change how parties conduct their transactions. While there is now the possibility that an appeal will reach “the merits,” nothing in MOAC implies that the buyer will be divested of title to the assets it has acquired in good faith. Of course, the fact that now an appeal could reach “the merits” may alter the expectations of the transaction parties in those Circuits where 363(m) had been deemed jurisdictional. And, since the Supreme Court decision focused on the significance of the jurisdictional determination, it will be left to the courts below to determine what type of relief (if any) could be granted if the substantive basis of the appeal is deemed to have merit.
The practical impact of MOAC is uncertain. While not eliminating the protection afforded a good faith purchaser under Section 363(m), an open question exists whether the decision will have any impact upon a buyer’s decision to close the sale in the face of any appeal of the sale or assignment order.
 MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 598 U.S. -----, 143 S. Ct. 927, 2023 WL 2992693 at *3 (2023)
 In re Sears Holdings Corp., 616 B. R. 615, 619 (S.D.N.Y. 2020) (“Sears II”).
 MOAC, 2023 WL 2992693 at *4.
 Id. at *3.
 Id. at *4.
 Sears II, 616 B.R. at 624-25.
 MOAC, 2023 WL 2992693 at *4.
 Id. at *6 (quoting Reed Elsevier, Inc. v. Muchnick, 559 U. S. 154, 161 (2010)).
 Id. at *2 (quoting Boechler v. Comm’r, 142 S.Ct. 1493, 1494 (2022)).
 Id. (quoting Boechler, 142 S.Ct. at 1497).
 Compare, e.g., In re WestPoint Stevens, Inc., 600 F.3d 231, 247 (2d Cir. 2010), and In re Walker Cnty. Hosp. Corp., 3 F.4th 229, 234 (5th Cir. 2021) (failure to obtain a stay of an order approving a sale or lease is a jurisdictional bar to appellate review), with In re Energy Future Holdings Corp., 949 F.3d 806, 820 (3d Cir. 2020) (section 363(m) is not jurisdictional and only limits the remedy that an appellate court may fashion that “does not affect the validity of a sale”), Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599, 603 (7th Cir. 2019), In re Spanish Peaks Holdings II, LLC, 872 F.3d 892, 896 n.4 (9th Cir. 2017), and In re Stanford, 17 F.4th 116, 122 (11th Cir. 2021).