MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.)

• Decision Date: 11 May 2020
• Docket Number: No. 19 Civ. 09140 (CM),19 Civ. 09140 (CM)
• Citation: 616 B.R. 615
• Parties: IN RE: SEARS HOLDINGS CORPORATION, et al., Debtors. MOAC Mall Holdings LLC, Appellant, v. Transform Holdco LLC and Sears Holdings Corporation, et al., Appellees.
• Court: U.S. District Court — Southern District of New York

616 B.R. 615

IN RE: SEARS HOLDINGS CORPORATION, et al., Debtors.

MOAC Mall Holdings LLC, Appellant,

v.Transform Holdco LLC and Sears Holdings Corporation, et al., Appellees.

No. 19 Civ. 09140 (CM)

United States District Court, S.D. New York.

Signed May 11, 2020

Daniel Abraham Lowenthal, III, David Wayne Dykhouse, Patterson, Belknap, Webb & Tyler LLP, New York, NY, Tom Flynn, Alexander J. Beeby, Larkin, Hoffman, Daly & Lindgren, Ltd., Minneapolis, MN, for Appellant.

Garrett Avery Fail, Jacqueline Marcus, Sunny Singh, Ray C. Schrock, Weil, Gotshal & Manges LLP, New York, NY, for Appellee Sears Holdings Corporation.

Rachel Ehrlich Albanese, Alana M. Friedberg, DLA Piper US LLP, New York, NY, Richard A. Chesley, DLA Piper LLP, Chicago, IL, Robert Craig Martin, DLA Piper LLP, Wilmington, DE, for Appellee Transform Holdco LLC.

ORDER GRANTING TRANSFORM HOLDCO LLC'S MOTION FOR REHEARING, AND ON REHEARING VACATING THE COURT'S ORIGINAL DECISION ON APPEAL

McMahon, C.J.:

Appellant MOAC Mall Holdings LLC ("MOAC") took an appeal to this court from an order of the United States Bankruptcy Court for the Southern District of New York (Drain, B.J.), which approved the assignment and assumption of the certain lease (the "Lease") of the Sears store at the Mall of America in Minneapolis, Minnesota to an entity known as Transform Leaseco LLC.¹ The parties filed lengthy briefs discussing the complicated issue raised by the appeal; they held an oral argument at which the court questioned them closely on contested points of law.

At no point in this entire process – through briefing and oral argument – did either side suggest that the court might lack jurisdiction over the appeal. MOAC did not seek a stay pending appeal in this court, and Transform did not move to dismiss MOAC's appeal for want of jurisdiction. Everyone behaved as though that were a foregone conclusion.

It took several weeks of concentrated work to write the forty-three-page decision disposing of the appeal. In the end, the court vacated the order of the Bankruptcy Court, concluding that the assignment of the Mall of America Lease to Leaseco violated § 365(b)(3)(A) of the Bankruptcy Code.

Transform has not appealed that decision to the United States Court of Appeals for the Second Circuit. Instead, Transform filed the instant motion, in which is asserts for the first time – albeit on the basis of facts known to it throughout the pendency of the appeal, but never revealed to this court – that this court lacked jurisdiction over the appeal all along, because the order appealed from was not stayed pending appeal.

Ordinarily, the failure to raise a known argument while a case is under adjudication precludes the granting of a motion for rehearing/reargument. In re Soundview Elite Ltd. , No. 14-cv-7666, 2015 WL 1642986, at *1 (S.D.N.Y. Apr. 13, 2015), aff'd , 646 F. App'x 1 (2d Cir. 2016). As Transform did not raise the appellate implications of Judge Drain's denial of MOAC's motion for a stay pending appeal under § 363(m) of the Bankruptcy Code, under the traditional rules applicable to such motions, its motion for rehearing would be summarily denied.

Transform insists, however, that the court must entertain the motion, because the issue it raises is both "jurisdictional" – that is, it goes to the court's power to hear the appeal in the first instance – and nonwaivable. Transform also argues that it cannot be estopped to raise the issue of the court's jurisdiction belatedly, even though – as I now know – its counsel flatly stated to the bankruptcy judge that § 363(m) had no applicability to the assignment of the Mall of America Lease to Leaseco, and that Transform did not intend to argue otherwise , in order to induce him to deny MOAC's motion for a stay.

Transform's motion for rehearing is granted. The court has examined its appellate jurisdiction for the first time. Having done so, I conclude, with great regret, that this court lacked the power to hear and decide MOAC's appeal.

The decision on appeal is vacated, and MOAC's appeal is dismissed as statutorily moot.

BACKGROUND

The Original Sale Order and the Asset Purchase Agreement

Though I have no wish to rehash details discussed in the opinion I am now vacating, Transform's latest gambit needs to be contextualized.

Sears, Roebuck and Co. ("Sears"), Sears Holdings Corporation and its affiliated debtors (collectively, the "Debtors") filed for bankruptcy in October 2018. Former Sears executives formed Transform – a group of entities including, for our purposes, a parent company known as Holdco and an affiliate called Leaseco – to try to recapture and market Sears' assets. Transform, through the vehicle Holdco, submitted the best bid to purchase substantially all of Sears' assets.

The Debtors and Holdco entered into an Asset Purchase Agreement (the "APA") to memorialize Holdco's purchase. Pursuant to the APA, Holdco paid Sears over $1.4 billion to purchase all of Sears' assets, properties and rights related to its business,² which included all of the following:

• Assigned Agreements and the Designation Rights

• Lease Rights

• Owned real property

• Inventory, receivables, equipment and improvements

• Intellectual Property

• Goodwill

• Data

• Books and records

• Marketing materials (including Sears iconic catalogs, its original marketing innovation)

• Claims

• Actions

• Contracts related to the business

• Store cash

In February 2019, the Bankruptcy Court approved the APA in a § 363(b) sale order (the "Sale Order"). (Bankr. Dkt. No. 2507, APX87.)³ In the Sale Order, the Bankruptcy Court held that Holdco had purchased Sears' assets for "fair consideration." (Id. at 7, ¶ J.)

Among the bundle of assets purchased by Transform pursuant to the APA were (1) certain specifically Assigned Agreements, and (2) Designation Rights for contracts identified as "Designatable Leases." (Id. at 3.) "Designation Rights" are the right to designate to whom a lease between Sears (or an affiliate, such as Kmart) and some landlord should be assigned. Because Holdco had purchased Designation Rights, once it identified an assignee, Sears was required, per the terms of the APA, to assign the lease to Holdco's chosen assignee, as long as Holdco satisfied certain conditions that were specified in the APA. ("APA," Ex. B. to the Sale Order, APX184, as amended by Ex. F to Bankr. Dkt. No. 2599, APX3593, at § 2.6).

All told, there were hundreds of "Designatable Leases," one of which was Sears' lease at the Mall of America in Minneapolis. As this court noted in the decision on appeal, Transform intended to continue to operate about 425 of those properties as Sears or Kmart stores. It planned to use its Designation Rights to bring about the assignment of the rest of the Designatable Leases to itself (through an affiliate, such as Transform Leaseco), and then to sublease the spaces covered by those leases to new tenants at what it hoped would be a handsome profit.

Pursuant to § 2.6 of the APA, Transform Holdco purchased the Designation Rights for all Designatable Leases on the closing date. (Id. ) Its right to designate assignees under the leases vested at the closing of the APA. (Id. at §§ 2.6, 5.2(a).) But the APA made clear, "For the avoidance of doubt, the sale ... of the Designation Rights provided for herein on the Closing Date shall not effectuate a sale, transfer, assignment or conveyance of any Designatable Lease to Buyer [Holdco] or any other Assignee ...." (Id. at § 2.6 (emphasis added).) Any such "sale, transfer, assignment or conveyance" would only occur on something called the "Designation Assignment Date" – defined in the APA as the date of the "sale, transfer, assignment, conveyance and delivery" of the designated lease by Sears to Holdco's designee. (See id. at §§ 2.6, 5.2(d).) The APA also set out precisely when and how Sears' interest in any individual Sears would pass to Holdco's designee:

On each Assumption Effective Date,⁴ pursuant to section 365 of the Bankruptcy Code and the Approval Order, Sellers shall assume and assign to the applicable Assignee any Designatable Lease so designated by Buyer for assumption and assignment in accordance with the terms of this Agreement, and Buyer shall pay all or be responsible for Cure Costs with respect to such Designatable Leases.

(Id. § 2.7(c).)

Certain leases were assigned to Holdco as designee simultaneously with the closing of the APA and Holdco's acquisition of Designation Rights. (See id. § 2.7(b).) Those leases are listed in Exhibit A to the Sale Order. (APX170.) The Mall of America-Sears Lease that was the subject of the appeal to this court is not one of those leases.

The Subsequent Designation of the Mall of America Lease, The Objection, and The Appeal

On April 2, 2019, Judge Drain entered an order establishing a procedure for Holdco to designate additional contracts for assumption and assignment to its desired assignees. (Bankr. Dkt. No. 3008, APX1290.) Once Holdco identified an additional lease to be designated for assumption and assignment, the Debtors were to file a notice with the court. Any party objecting to such an assignment had to serve and file a written objection with the Bankruptcy Court eight days after the filing of (i) the notice, or (ii) evidence of adequate assurance of future performance pursuant to 11 U.S.C. § 365(b)(3) – whichever was later. (Id. )

Two weeks later, on April 19, 2019, Holdco filed a notice of "additional designatable leases" for assignment to itself or an affiliated entity (the "Notice"). (Bankr. Dkt. No. 3298, APX1331.) Among the additional designated leases was the Mall of America Lease. Holdco designated its affiliate, Leaseco, as the assignee of that particular lease.

MOAC objected to the Notice on the ground, among others, that the Debtors had not demonstrated that Leaseco met the qualifications for assignment of a shopping center lease as set forth in § 365(b)(3). (Bankr. Dkt. No. 3501, APX1344.) Over the course of the next few months, MOAC filed supplemental objections to the...