Justices Take On Mall of America-Sears Row in Bankruptcy Case (1)

The US Supreme Court agreed to review whether Minnesota’s Mall of America, as a creditor, can challenge bankrupt Sears Holdings Co.'s lease sale to a company controlled by the retailer’s former CEO.

The high court’s decision Monday in MOAC Mall Holdings v. Transform Holdco means the mall operator can continue its quest to undo the lease sale that was completed in the midst of one of the largest and most notable retail bankruptcy cases.

The justices will zero in on whether Mall of America can appeal a bankruptcy court order approving the transfer of Sears’ lease at the mall once the 2019 asset sale to Transform Holdco LLC, a company controlled by former Sears CEO Eddie Lampert, had closed.

The Mall of America argued that Transform doesn’t intend to occupy the premise and instead was looking to sublease the location. The lease transfer allows Transform to sublet the three-story Mall of America location while paying the mall owner only $10 a year.

The bankruptcy court issued separate orders approving the sale and then the lease transfer. The Mall of America objected to the lease transfer.

Transform Holdco argued that a federal law—section 363(m) of the bankruptcy code— deprived appellate courts of jurisdiction to challenge the lease transfer.

The district court, typically the first court to hear appeals from bankruptcy court orders, eventually sided with Transform Holdco, leading to the Mall of America’s appeal to the US Court of Appeals for the Second Circuit.

In its December 2021 decision, the Second Circuit affirmed the lower court ruling.

Unless a court stayed the sale pending appeal, the district court had no authority to reverse or modify the bankruptcy court order after the deal closed, the Second Circuit said.

In its request for Supreme Court review, the Mall of America argued that the appellate court can review the sale and lease assignment because a remedy can be devised without affecting the validity of the sale.

Transform argued that no such remedy is available and that the lease transfer was integral to the asset sale. And even if the court can undo the lease transfer, the lease would merely revert to the debtor to be administered like any other asset of the estate, Transform said.

“When you’re buying assets in bankruptcy, you’re buying contracts as well as businesses,” said Andy Dietderich, co-head of restructuring at Sullivan & Cromwell LLP, siding with the Second Circuit. “Bankruptcy allows you to assume and assign contracts, but the pricing is intertwined. The purchase price isn’t allocable to the assets and the contracts on a separate basis.”

Debtors may not get the highest price in bankruptcy auctions if a creditor can challenge the transfer of contracts after the sale, Dietderich said.

Ted Gavin, managing director of Gavin/Solmonese LLC, a turnaround and restructuring firm, also cited complexities involved in bankruptcy sales.

“Bankruptcy plans and sales rely a lot on scrambled eggs,” Gavin said.

Undoing the sale after several years could be difficult, he said. “Once your eggs are scrambled, you can’t unscramble them,” he said.

The case is MOAC Mall Holdings LLC v. Transform Holdco LLC, U.S., No. 21-1270, cert. granted 6/27/22.