MONTH-IN-BRIEF (Apr 2023)
Section 363(m) of the Bankruptcy Code Is Not “Jurisdictional”
The Bankruptcy Code provides a safe harbor for good faith purchasers of assets from trustees and debtors, embodied in Section 363(m). The reversal of the sale order on an appeal does not affect the validity of the sale or lease to a buyer who purchased or leased the property in good faith, unless the sale order was stayed pending the appeal. In MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270 (April 19, 2023), the U.S. Supreme Court granted cert to address the appeal of a landlord from an order approving the assignment of its bankrupt tenant’s rights under a lease to a good faith transferee pursuant to an order of the bankruptcy court that was not stayed. The transferee asserted that the provisions of Section 363(m) are “jurisdictional,” such that on appeal they deprived the District Court of jurisdiction to grant the landlord’s requested relief. Despite the District Court’s concerns that the assignee had gone back on a promise made below that it would not assert the argument that Section 363(m) is jurisdictional on appeal (which was cited by the Bankruptcy Court in denying a stay), the District Court found that it was bound by applicable Second Circuit precedent on the issue, and the Second Circuit agreed. Justice Jackson, writing for a unanimous Supreme Court, reversed. The Court explained why the “jurisdictional” label is especially significant, because it carries with it unique and sometimes severe consequences, as it deprives courts of power to hear the case at all, requiring immediate dismissal. Doctrines of waiver and forfeiture fall by the wayside, and a court may raise “jurisdictional” issues at any time sua sponte. In light of the significance of according “jurisdictional” effect to a precondition for relief, the Court will only treat a statutory precondition to relief as jurisdictional if Congress “‘clearly states’” as much. That does not mean that Congress must use any magic words, but the intent must indeed be clear, and not just “plausible,” or even “better” than nonjurisdictional alternatives. Here, the Court saw nothing in Section 363(m)’s limits that purports to “gover[n] a court’s adjudicatory capacity.” Reviewing the specific language of Section 363(m), the Court stated that it “is not the stuff of which clear statements are made.” Proceeding with its analysis, the Court noted that “[s]imilarly, given §363(m)’s clear expectation that courts will exercise jurisdiction over a covered authorization, it is surely permissible to read its text 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.” As a result, the case was remanded for further proceedings consistent with the opinion. It is not clear what relief will be available to the landlord in what remains of the bankruptcy case. Earlier in the opinion, the Court refused to dismiss the appeal as moot, though it was argued that there is no effective relief available below. The bankruptcy court will need to work through those issues in the first instance on remand. The fact that the case involved the assignment of a lease in a Section 363 context, and the fact that the case was not considered moot on appeal, undoubtedly will leave those who represent assignees and purchasers with significant concerns about how to protect the transferee from entanglement in ongoing appeals despite a determination that they acted in good faith.