In Re: Sears Holdings Corporation

Background

Sears filed for bankruptcy in 2018 and held a 100-year lease for its former anchor-store space at the Mall of America. The lease required only $10 per year in base rent, which had been prepaid through 2021, plus taxes, insurance, and common charges. It also allowed Sears to close the store and assign or sublease the space without the landlord’s consent, subject to specified limits.

Transform Holdco acquired substantial Sears assets in the bankruptcy case, including rights to designate assignees for certain leases. Transform designated an affiliate, Transform Leaseco, to receive the Mall of America lease. MOAC Mall Holdings, the landlord, objected, arguing that Leaseco did not satisfy the Bankruptcy Code’s special requirements for assuming and assigning a shopping-center lease.

The bankruptcy court approved the assumption and assignment in September 2019. MOAC appealed and sought a stay, but the stay was denied after Transform represented that it would not rely on a Bankruptcy Code provision protecting certain good-faith purchasers when a sale is not stayed during an appeal. In February 2020, this Court vacated the approval order because Transform did not satisfy the statutory requirement concerning the assignee’s financial condition. After further appeals, including a Supreme Court decision rejecting the view that the statutory protection was jurisdictional, the Second Circuit affirmed the vacatur and sent the case back for this Court to decide whether any remedy remained.

Arguments on Remand

Transform and Sears asked the Court to dismiss the appeal as moot because, they argued, the Bankruptcy Code provided MOAC no available remedy. They argued that common-law rules protected a good-faith purchaser’s title, that any unwinding had to occur through a separate avoidance action, and that MOAC was barred from challenging the transfer because it accepted a cure payment. They alternatively argued that the lease should return to Sears’s estate rather than to MOAC.

MOAC argued that the lease had to be surrendered to it under 11 U.S.C. § 365(d)(4) because the deadline for Sears to assume the lease had passed. It alternatively sought monetary damages, preferably from Transform and otherwise from Sears. MOAC also argued that Transform and Sears had waived or forfeited several arguments by not raising them earlier.

Court’s Analysis

The Court first held that Transform forfeited its argument that MOAC could not challenge the transfer because it accepted the cure payment. Transform made the payment under the bankruptcy court’s order, but it did not raise the acceptance-of-benefits argument until the case returned from the Second Circuit. The Court therefore declined to dismiss the appeal on that ground.

The Court next held that common-law protections for good-faith purchasers at judicial sales did not protect Transform. Those protections generally apply to purchasers who were strangers to the proceeding, while Transform had participated in the bankruptcy proceedings that led to the lease transfer. The Court also concluded that Transform had waived reliance on the Bankruptcy Code’s protection for certain good-faith purchasers because it had represented that it would not rely on that protection to avoid a stay pending appeal.

Because the transfer order had been vacated and Transform was not protected from the consequences, the Court held that Transform no longer owned the lease. The Court rejected Transform’s argument that MOAC could undo the transfer only through an avoidance action, reasoning that there was no remaining transfer for the bankruptcy estate to avoid: the assignment had already been undone through the appellate process.

The Court then considered whether MOAC, rather than Sears’s Liquidating Trustee, should receive the lease. It explained that § 365(d)(4) generally requires a bankruptcy trustee or debtor-in-possession to assume or reject a nonresidential real-property lease within a specified period, or the lease is deemed rejected and must be surrendered to the landlord. The Court concluded, however, that the lease was not a “true lease” for purposes of § 365(d)(4) under the Second Circuit’s decision in International Trade Administration v. Rensselaer Polytechnic Institute. The lease’s unusually long term, prepaid rent, and other economic features made it more like an ownership interest than an ordinary landlord-tenant arrangement.

The Court held that the parties’ earlier stipulations that the arrangement was a shopping-center lease for purposes of § 365(b)(3) did not concede that it was a “true lease” subject to § 365(d)(4). The Court also held that Sears and Transform had not waived or forfeited the argument because the issue became relevant only after the earlier approval and appeals were undone. Applying the Second Circuit’s reasoning, the Court rejected MOAC’s claim that the expired § 365(d)(4) deadline required forfeiture of the lease to the landlord. The lease therefore remained with the bankruptcy estate and was to return to the Sears Liquidating Trustee.

Finally, the Court rejected MOAC’s request for money damages. Transform could not be liable for damages because it had already lost the lease, which the Court viewed as the relief available against a disqualified assignee. The Court also concluded that Sears and the Liquidating Trustee were protected by the bankruptcy plan’s releases, exculpation provisions, and injunctions. MOAC had not objected to those provisions or sought an exception for claims concerning the lease assignment, and a damages award would interfere with the plan’s distribution of estate assets.

Disposition

Judge McMahon directed that the order vacating the assumption and assignment be reinstated, ordered the Mall of America lease returned to the Sears Liquidating Trustee, and dismissed MOAC’s appeal as moot for lack of any further remedy. The opinion does not state that the dismissal was with or without prejudice.