U.S. Supreme Court's Gorsuch calls for clearer rules on bankruptcy sale appeals

U.S. Supreme Court Associate Justice Neil M. Gorsuch poses during a group portrait at the Supreme Court in Washington. REUTERS/Evelyn Hockstein

(Reuters) - U.S. Supreme Court Justice Neil Gorsuch on Monday signaled a desire for clearer rules on when appeals courts can hear disputes stemming from bankruptcy sales, in a case involving a cheap lease Sears had at the Mall of America that was transferred following its bankruptcy.

Douglas Hallward-Driemeier, a lawyer for the Minneapolis-based mall's parent company, MOAC Mall Holdings LLC, sought to convince the justices to reverse a lower court ruling finding it had to honor an extremely tenant-friendly lease it made with Sears Holdings Corp in 1991 that offered Sears rent of just $10 a year for 100 years.

After Sears went bankrupt in 2018, it sold its assets for $5.2 billion to former chairman Eddie Lampert and his hedge fund ESL Investments Inc, and the lease was transferred months later to Transform Holdco LLC, a company formed by Sears' new owners.

Transform's lawyer Eric Brunstad argued that under bankruptcy law no court has the jurisdiction to hear Mall of America's appeal and that finality in bankruptcy sales protects both debtors and buyers.

"Sears' bankruptcy is over," Brunstad said. "The ship has sailed, and the statute says you cannot possibly bring it back to port."

Federal courts are split on the extent to which the sale of assets in bankruptcy can be appealed. Gorsuch said he "had a hard time" agreeing that appeals courts have no jurisdiction to review disputes over bankruptcy sales, but he also said he wanted to preserve the presumption that bankruptcy sales are final.

"I can't think that there are many circumstances in bankruptcy law, if there are any, where a good faith purchaser might have to relinquish an asset years later," Gorsuch said. "We're going to be scrambling to come up with some sort of rule to deal with that."

While bankruptcy law limits the ability of courts to unwind a sale after appeal, it doesn't prevent appeals entirely, Hallward-Driemeier said. Since the two sides agreed not to develop the property while litigating the dispute, Transform would not be harmed if Mall of America is allowed to reclaim the lease, he said.

"This property remains dark, it has never been developed," Hallward-Driemeier said. "If there was ever a situation in which assignment of a lease could be undone, it is this one."

Moreover, no court had ever determined that the lease was transferred in "good faith," he said.

But, Brunstad argued that under bankruptcy law Mall of America's appeal was precluded because the bankruptcy court that approved Sears' sale had ruled that the sale was a "good faith" transaction. The lease transfer was "integral" to that court-approved transaction, even if it occurred later, Brunstad said.

"You cannot affect the validity of the sale — the statute says so bluntly," Brunstad said.

Justice Ketanji Brown Jackson and Chief Justice John Roberts pushed back on Brunstad's argument that no appeals court has jurisdiction to consider challenges to a good faith sale, saying that the reasoning could lead to a Catch-22 for potential appellants.

"You can't be circular," Roberts said. "You have got to have jurisdiction to decide the good faith question."

The case is MOAC Mall Holdings LLC v. Transform Holdco LLC, U.S. Supreme Court, No. 21-1270

For petitioner: Douglas Hallward-Driemeier, Gregg Galardi, Andrew Devore and Daniel Egan of Ropes & Gray; and Gregory Otsuka of Larkin Hoffman Daly & Lindgren

For Transform Holdco: Eric Brunstad of Dechert; Amy Wolf of Wachtell, Lipton, Rosen & Katz; and Craig Martin of DLA Piper

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