U.S. Supreme Court Rules that Bankruptcy Code's Protection of Unstayed Asset Sale Orders to Good-Faith Purchasers Is Not Jurisdictional

Section 363(m) of the Bankruptcy Code provides that the reversal or modification of an order approving a sale or lease of assets in bankruptcy does not affect the validity of the sale or lease to a good-faith purchaser or lessee unless the party challenging the sale or lease obtains a stay pending its appeal of the order. Bankruptcy and appellate courts, however, have long disagreed as to whether this provision is jurisdictional—meaning that it can never be waived and an appellate court lacks jurisdiction to hear any appeal of an unstayed sale or lease authorization order—or instead a defense that can be invoked by the proponents of the sale (e.g., the debtor, the bankruptcy trustee, or the purchaser) on appeal subject to waiver, forfeiture, and similar doctrines.

The U.S. Supreme Court settled this question on April 19, 2023. A unanimous Court ruled in MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927, 2023 WL 2992693 (2023) ("Transform Holdco"), that section 363(m) is not jurisdictional, and that an appeal of a 2019 bankruptcy court order approving the assignment of a lease between Sears, Roebuck & Co. ("Sears") and MOAC Mall Holdings LLC ("MOAC") as part of Sears's sale of substantially all of its assets was not moot.

Section 363(m) of the Bankruptcy Code and Statutory Mootness

In general, "mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. An appeal can be either constitutionally, equitably, or statutorily moot. Constitutional mootness is derived from Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of cases that are hypothetical or merely advisory.

The court-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis for precluding appellate review of an order confirming a chapter 11 plan that has been "substantially consummated."

As relevant here, an appeal can also be rendered moot (or otherwise foreclosed) by statute. Section 363(m) of the Bankruptcy Code provides as follows:

The reversal or modification on appeal of an authorization [of a sale or lease of property in bankruptcy] 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.

11 U.S.C. § 363(m). Section 363(m) is a powerful protection for good-faith purchasers and lessees because it limits appellate review of an approved sale or lease irrespective of the legal merits of the appeal. 

The federal circuit courts of appeals disagree over whether section 363(m) is jurisdictional, such that the failure to obtain a stay pending appeal of a sale order deprives an appellate court of jurisdiction to hear the appeal at all, except regarding the limited issue of whether the sale was made to a good-faith purchaser. Compare Su v. C Whale Corp. (In re C Whale Corp.), 2022 WL 135125, *4 (5th Cir. Jan. 13, 2022) (section 363(m) is jurisdictional and precludes an appeal of an unstayed order approving a bankruptcy sale); MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 2021 WL 5986997, *3 (2d Cir. Dec. 17, 2021) (stating that "[w]e have held in no ambiguous terms that section 363(m) is a limit on our jurisdiction and that, absent an entry of a stay of the Sale Order, we only retain authority to review challenges to the 'good faith' aspect of the sale") (internal quotation marks and citations omitted), vacated and remanded, 143 S. Ct. 927 (2023); and Sears v. U.S. Trustee (In re AFY), 734 F.3d 810, 816 (8th Cir. 2013) (mootness under section 363(m) deprives an appellate court from hearing an appeal of an unstayed sale order) with Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116, 122 (11th Cir. 2021("Statutory mootness under 363(m) … is not jurisdictional. Though it provides a defense against appeals from bankruptcy court orders, 'even an ironclad defense, does not defeat jurisdiction.'") (citation omitted); In re Energy Future Holdings Corp., 949 F.3d 806, 820 (3d Cir. 2020) ("In our Circuit, 'mootness' is a bit of a misnomer because we have construed § 363(m) as a constraint not on our jurisdiction, but on our capacity to fashion relief."); Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599, 602 (7th Cir. 2019) (section 363(m) is not jurisdictional, but instead provides the purchaser with a defense in litigation challenging the sale).

The Supreme Court addressed this question in Transform Holdco to resolve the circuit split. 

Transform Holdco

Iconic retailer Sears filed for chapter 11 protection in the Southern District of New York in October 2018. In February 2019, the bankruptcy court approved the sale of substantially all of Sears's assets for $5.2 billion to Transform Holdco LLC and an affiliate (together, "Transform"), which companies were created and are controlled by former Sears CEO Eddie Lampert and several other former Sears executives.

The sale transaction, which the bankruptcy court authorized under section 363 of the Bankruptcy Code, included the assumption and assignment of 660 Sears store leases, including a lease with MOAC for premises located in the Mall of America (the "Lease"). MOAC objected to the proposed assignment of the Lease to Transform, arguing that Sears failed to provide adequate assurance of Transform's future performance, as required by section 365(f) of the Bankruptcy Code. 

The bankruptcy court overruled MOAC's objection and entered an order approving assignment of the Lease as part of the sale transaction. MOAC appealed to the district court and sought a stay of the bankruptcy court's assignment order. The bankruptcy court denied MOAC's request for a stay pending appeal, reasoning that a lease assignment authorization did not fall within the scope of section 363(m) of the Bankruptcy Code. 

The district court agreed with MOAC on the adequate assurance issue and initially vacated the bankruptcy court's assignment order on appeal. However, in what the district court characterized as an "appall[ing]" gambit after losing on the merits of its appeal, Transform argued for the first time in its motion for a rehearing that the appeal was mooted by section 363(m). Constrained by applicable precedent, the district court ultimately ruled that the assignment of the Lease to Transform qualified as a "sale" and, because MOAC never obtained a stay pending its appeal, MOAC's appeal must be dismissed as moot on jurisdictional grounds under section 363(m).

MOAC appealed to the Second Circuit, which affirmed in a summary order. In its ruling, the Second Circuit explained that because MOAC's appeal was moot under section 363(m), the district court lacked jurisdiction to hear it.

The Supreme Court agreed to review the Second Circuit's ruling on June 27, 2022.

The Supreme Court's Ruling

The Supreme Court vacated the Second Circuit's ruling and remanded the case below.

Writing for a unanimous Court, Justice Ketanji Brown Jackson, in her first opinion since being elevated to the Court in June 2022, first rejected Transform's argument that the appeal was moot because it was not possible to undo the lease assignment, and that MOAC could not "possibly obtain any effectual relief," regardless of the Court's decision. "Our cases," Justice Jackson wrote, "disfavor these kinds of mootness arguments." Transform Holdco, 143 S. Ct. at 935.

Next, the Court concluded that section 363(m) of the Bankruptcy Code is not a jurisdictional "precondition to relief." Jurisdictional rules, Justice Jackson explained, relate to "the power of the court rather than the rights or obligations of the parties," and the Court treats a provision as jurisdictional only if Congress "clearly states" as much. Id. at 936 (citations and internal quotation marks omitted).

The Court determined that section 363(m) fails the "clear-statement rule" because the text of the provision does not refer in any way to the jurisdiction of district courts and plainly contemplates that orders authorizing a bankruptcy sale of assets may be reversed or modified on appeal, but "with a proviso"—namely, that "the reversal or modification of a covered authorization may not 'affect the validity of a sale or lease under such authorization' to a good-faith purchaser or a lessee under certain prescribed circumstances." Id. at 937.

Moreover, Justice Jackson noted, that proviso is itself caveated because "§ 363(m)'s constraints are simply inapplicable" if the sale or lease was made to a bad-faith purchaser or lessee, if the transaction is stayed pending appeal, or if the appellate court does something other than reverse or modify the sale or lease authorization. Id. According to the Court, "[t]his is not the stuff of which clear statements are made." Id. Instead, Justice Jackson wrote, section 363(m) reads more like a "statutory limitation" that can plausibly be read "as merely cloaking certain good-faith purchasers or lessees with a targeted protection of their newly-acquired property interest, applicable even when an appellate court properly exercises jurisdiction." Id.

Next, Justice Jackson explained that section 363(m)'s context in the statutory scheme also supports the conclusion that it is not jurisdictional because it is separate from, and, unlike certain other provisions of the Bankruptcy Code (e.g., section 305(c), dealing with dismissal or suspension of a bankruptcy case), does not contain any "clear tie" to, other statutory provisions that govern the jurisdiction of bankruptcy and district courts, such as 28 U.S.C §§ 157, 158, and 1334. Id. at 938 and n.6.

The Court also rejected Transform's "creative retort" that courts can only exercise in rem jurisdiction with respect to property over which they have actual or constructive control, which was not the case here because the Lease was removed from the bankruptcy estate when it was assigned to a good-faith purchaser. This argument, Justice Jackson wrote, is a "red herring" because it "teeters on a contorted framing of contested general background principles rather than § 363(m)'s text and context (which, as we have said, lack any clear jurisdictional hue)." Id. at 938.

Finally, the Court rejected Transform's argument that section 363(m) was derived and should be applied in accordance with a rule of bankruptcy procedure under the former Bankruptcy Act (Rule 805), which some pre-Bankruptcy Code courts construed to provide a jurisdictional barrier to appellate review of unstayed sale or lease authorizations involving good-faith buyers or lessees. Pre-Bankruptcy Code court decisions interpreting Rule 805, Justice Jackson explained, do not indicate that Congress intended to make section 363(m) jurisdictional and, in any event, "long predate[d] our modern efforts on jurisdictional nomenclature." Id. at 940.


Transform Holdco resolves a circuit split on an important issue that arises in many bankruptcy cases concerning whether courts have jurisdiction to hear appeals of unstayed orders authorizing the sale or lease of estate property to good-faith purchasers or lessees. Some observers likely will contend that the ruling will erode the finality of bankruptcy sale or lease authorization orders. As a matter of bankruptcy appellate practice, because the Supreme Court ruled that section 363(m) is not jurisdictional, the provision must be timely invoked by the appellee, as otherwise it may be waived.

More generally, the Court expressed skepticism of the general proposition that section 363(m) automatically moots an appeal of an unstayed bankruptcy sale order. Among other things, as noted above, the Court observed that "[o]ur cases disfavor these kinds of mootness arguments." It remains to be seen how the lower courts will apply this aspect of Transform Holdco to bankruptcy appeals involving statutory mootness and other types of mootness arguments.

Having addressed statutory mootness under section 363(m) of the Bankruptcy Code, the Court may now have an opportunity to weigh in on the doctrine of equitable mootness. In a petition for certiorari filed on March 24, 2023, the indenture trustee for unsecured noteholders of Windstream Holdings, Inc. ("Windstream") asked the Court to review an October 2022 decision by the U.S. Court of Appeals for the Second Circuit dismissing on equitable mootness grounds the indenture trustee's appeal of an order confirming Windstream's chapter 11 plan and a related settlement. See U.S. Bank. Nat'l Assoc. v. Windstream Holdings, Inc., No. 22-926 (U.S. Mar. 24, 2023). According to the indenture trustee, the doctrine is a "scourge on the proper functioning of the constitutionally mandated court system in bankruptcy cases," it "wrongfully and unevenly deprives bankruptcy litigants of their constitutional and statutory rights to Article III court review," and lacks a basis in the Bankruptcy Code or the U.S. Constitution.

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