In Re: Sears Holdings Corporation

Background

Sears Holdings Corporation and affiliated debtors filed for bankruptcy. Transform Holdco LLC purchased substantially all of Sears’ assets under an asset purchase agreement approved by the bankruptcy court. The purchased assets included designation rights—the right to choose an assignee for certain Sears leases. Transform Holdco designated its affiliate, Transform Leaseco LLC, to receive Sears’ lease for space at the Mall of America.

MOAC Mall Holdings LLC objected, arguing that Leaseco did not satisfy the Bankruptcy Code’s requirements for assignment of a shopping-center lease, including the requirement that the assignee’s financial condition and operating performance be similar to those of the debtor when the lease began. After an evidentiary hearing, Bankruptcy Judge Drain approved the assumption and assignment and required Leaseco to make certain concessions, including placing $1.1 million in escrow and complying with the lease’s use restrictions and MOAC’s buy-back rights.

MOAC sought a stay of the assignment pending appeal. Judge Drain denied the request, and the assignment closed five business days later. MOAC appealed to the district court but did not obtain a stay from that court. The district court then ruled for MOAC, concluding that Leaseco did not meet the statutory similarity requirement, vacating the assignment order to that extent, and remanding the matter to the bankruptcy court.

Motion for Rehearing

After losing the appeal, Transform moved for rehearing under Bankruptcy Rule 8022. It argued for the first time in the district court that Section 363(m) of the Bankruptcy Code deprived the court of authority to review the appeal because the assignment had been completed without a stay. Section 363(m) protects a good-faith purchaser or lessee when a bankruptcy sale or lease is completed without a stay pending appeal.

MOAC argued that Transform had waived the protection of Section 363(m) and should be prevented from relying on it under judicial estoppel. MOAC pointed to Transform’s statements during the stay proceedings that Section 363(m) did not apply and that Transform would not rely on that provision to argue that the appeal was moot. The court stated that it was “appalled” by Transform’s conduct and found that the usual conditions for judicial estoppel appeared to be present. It nevertheless concluded that judicial estoppel could not supply appellate authority that Congress had removed and that Transform’s earlier position was a legal position rather than an inconsistent factual position.

Court’s Analysis

The court held that the Second Circuit treats Section 363(m) as jurisdictional, meaning that it limits the court’s power to decide an appeal. Because the assignment had closed without a stay, the court concluded that it could not grant effective relief by reversing or modifying the assignment. It also held that the parties could not create appellate authority through waiver or consent.

The court further held that the assignment of the Mall of America lease was a “sale” for purposes of Section 363(m). It reasoned that Sears transferred its interest in the lease in exchange for consideration because Holdco paid the cure costs that Sears became obligated to pay when it assumed the lease. The court also found that the assignment was authorized under both Sections 363 and 365 of the Bankruptcy Code and was closely connected to the earlier sale order and asset purchase agreement.

The court considered but rejected MOAC’s argument that the assignment was outside Section 363(m) because no ultimate subtenant had yet been identified. It also concluded that the case did not fall within a possible narrow exception for challenges unrelated to the purchaser’s reliance on the overall transaction. The court distinguished, but did not treat as controlling, a Sixth Circuit decision involving a two-step assignment and sublease transaction.

Disposition

Chief Judge Colleen McMahon granted Transform’s motion for rehearing. On rehearing, the court concluded that it lacked appellate jurisdiction because MOAC’s appeal was statutorily moot under Section 363(m). The court vacated its earlier decision on appeal and dismissed MOAC’s appeal. The clerk was directed to close the rehearing motion.