On December 17, 2021, the U.S. Court of Appeals for the Second Circuit affirmed U.S. District Judge Colleen McMahon’s dismissal of an appeal challenging Sears’ assignment of its lease (the “Lease”) in the Minnesota Mall of America to an affiliate of the buyer of certain assets (the “Purchaser”) in the Sears chapter 11 cases.1 The legal relevance of the decision is the doctrine of mootness. In sum, the lessor’s failure to obtain a stay pending appeal doomed its chances of succeeding on the merits of its challenge.
Pursuant to a February 2019 order approving the 363(b) sale in the Sears bankruptcy (the “Sale Order”), the Purchaser obtained the right to designate which assignee would assume the Lease. U.S. Bankruptcy Judge Robert D. Drain subsequently entered an assignment order (the “Assignment Order”), which authorized the Purchaser to assign the Lease to its wholly-owned subsidiary and permitted that subsidiary to assume the Lease. After its initial motion to stay the Assignment Order was denied, the lessor appealed the Assignment Order to the District Court. The lessor, however, pursued the appeal without obtaining a stay of the Assignment Order pending appeal. This was notable because the Second Circuit has found that section 363(m) of the Bankruptcy Code “‘creates a rule of statutory mootness . . . which bars appellate review of any sale authorized by 11 U.S.C. § 363(b) . . . so long as the sale was made to a good-faith purchaser and was not stayed pending appeal.’”2 As relevant here, section 363(m) also limits appellate review of “any transaction that is integral to a sale authorized under § 363(b).”3 Because the Second Circuit has found that these provisions deprive a court of subject matter jurisdiction, they cannot be waived by a party’s failure to raise them at an earlier stage of litigation. Relying on these provisions, in May 2020, U.S. District Judge McMahon denied the lessor’s appeal as statutorily moot.
The Second Circuit agreed, finding that Judge McMahon lacked jurisdiction to review the Assignment Order in the absence of a stay. In reaching its determination, the Second Circuit relied heavily on language in the Sale Order and Assignment Order that expressly stated that the assignment of the Lease was “integral” to Sears’ sale to the Purchaser.4 The Second Circuit also affirmed Judge McMahon’s June 2020 decision denying the lessor’s motion for a rehearing. The lessor had raised an alternative good-faith purchaser argument for the first time in its motion for a rehearing. The District Court ruled that this argument was untimely. In affirming, the Second Circuit stated that the District Court “neither overlooked nor misapprehended a point of law or fact previously raised, as is required to grant a motion for a rehearing.”5
The Second Circuit’s decision seemingly puts an end to the controversy surrounding the Lease and marks another bookmark in the Sears bankruptcy saga.
1 MOAC Mall Holdings LLC v. Transform Holdco LLC, Case No. 20-1846, Dkt. No. 130, Attach. 1 (2d Cir. Dec. 17, 2021).
2 Id. at 6 (quoting Contrarian Funds LLC v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231, 247 (2d Cir. 2010)).
3 Id. at 7.
4 Id. at 8.
5 Id. at 13.