Judges take on Mall of America-Sears Row in bankruptcy case (1)

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

The decision of the high court on Monday MOAC Mall Holdings vs. Transform Holdco means the mall operator can continue its quest to undo the lease sale that was struck amid one of the largest and most notable retail bankruptcy cases.

Judges will focus on whether Mall of America can appeal a bankruptcy court order approving the transfer of sear‘ lease at the mall once the 2019 asset sale to Transform Holdco LLC, a company controlled by former Sears CEO Eddie Lampert, had been completed.

The Mall of America argued that Transform had no intention of occupying the premises and was instead seeking to sublet the location. The lease transfer allows Transform to sublet the three-story Mall of America location while paying the mall owner only $10 per year.

The bankruptcy court issued separate orders approving the sale and then the lease transfer. The Mall of America opposed 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, usually the first court to hear appeals of bankruptcy court orders, ultimately sided with Transform Holdco, leading to the Mall of America’s appeal to the US Court of Appeals. United States for the second circuit.

In its December 2021 decision, the Second Circuit upheld the lower court’s decision.

Unless a court stayed the sale pending appeal, the district court had no authority to rescind or vary the bankruptcy court’s order after the transaction closed, the court said. second circuit.

In its application 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 crafted without affecting the validity of the sale.

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

“When you buy bankrupt assets, you buy contracts as well as businesses,” said Andy Dietderich, co-head of restructuring at Sullivan & Cromwell LLP, on the side of the Second Circuit. “Bankruptcy allows you to assume and award contracts, but pricing is tied. The purchase price is not attributable to assets and contracts on a separate basis.

Debtors may not get the top 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 the complexities of bankruptcy sales.

“Bankruptcy plans and sales are very dependent on scrambled eggs,” Gavin said.

Canceling 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, USA, No. 21-1270, cert. granted on 6/27/22.

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