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Mall of America fights to rescind $10-a-year lease for empty Sears space

The Minnesota shopping center squared off at the high court against a company that bought Sears in bankruptcy but has no intention of reopening the retailer's three-floor space.

WASHINGTON (CN) — Warning that a reversal would invalidate its $5.2 billion acquisition of Sears, the investor that gobbled up the withering retail giant in bankruptcy urged the Supreme Court on Monday to throw out a challenge by the Mall of America.

“Sears is bankrupt. Sears’ bankruptcy is over. The case has gone. The funds have been distributed. There is nothing left,” Eric Brunstad, an attorney with the firm Dechert, told the justices this morning,

Brunstad represents Transform Holdco, a subsidiary of ESL Investments, which bought Sears, and its $10-a-year lease at the Mall of America in Bloomington, Minnesota, in 2019 following the retailer's Chapter 11 bankruptcy a year before.

Mall of America noted in its petition to the high court that the generous lease it gave to Sears for a term of 100 years spoke to the luster of its now-bygone anchor tenant.

"It would, of course, be impossible to locate a tenant of any sort that boasted the precise 'financial condition and operating performance' of Sears Roebuck back in 1991," attorneys at Ropes & Gray wrote in the filing. "At that point, Sears had been in business for nearly 100 years. It virtually created 'big box' retailing, and its massive catalogues were the progenitor of Amazon’s internet omni-market. It has few equals in the history of American business."

Transform Holdco says it bought Sears in good faith, and that the generous lease was a key term off that sale, but the Mall of America calls it unfair for the lease to survive Transform Holdco's expected cannibalization of the space.

"This was MOAC’s major motivation for fighting the assignment — it did not want to see Sears’ anchor tenant space divided or occupied by whoever would pay Transform the highest price," the petition states. "MOAC wanted another big box retailer to take over the space — even if it (like Sears) paid little or no rent — both to 'preserve the character' of Mall of America (a concept discussed at length in this court’s opinion disposing of the appeal) and to ward off the possibility that MOAC might
find itself in default on co-tenancy provisions in the leases of other Mall tenants." (Parentheses in original.)

At the high court Monday, Ropes & Gray attorney Douglas Hallward-Driemeier argued that the law around bankruptcy “explicitly presupposes the exercise of appellate jurisdiction, including to reverse or modify a sale order.”

When the Second Circuit ruled against the mall in December 2021, it said the lease-transfer couldn't be appealed because it was a major factor in the bankruptcy sale.

Hallward-Driemeier argued, however, that this shouldn’t have prevented the appeal from being considered.

“It wrongly assumes the bankruptcy court's jurisdiction is solely in rem [jurisdiction], which this court has rejected,” Hallward-Driemeier said, referring to a court’s authority to determine title to objects or properties.

Justice Neil Gorsuch took issue with the attorney’s approach.

“Cards on the table, I have a hard time seeing this as jurisdiction. I just can't think that there are many circumstances in the bankruptcy laws, if there are any, where good faith purchasers might have to relinquish an asset,” Gorsuch said.

Justice Elena Kagan added to this line of inquiry.

“Along the lines that Justice Gorsuch was saying — in fact at this late date, the court is not going to be able to undo the assignment," she warned. "Does that make this constitutionally moot or is there some other form of relief that the court could provide to resolve this dispute?”

Hallward-Driemeier suggested that the court could explore possible avenues for compensation.

“The rule of the statute only precludes an invalidation of the of the sale — of course we think this is an assignment not a sale, so it doesn't apply. But if that is available, then the court has to consider whether there can be any other relief here,” Hallward-Driemeier said. “We think other relief might be, for example, further protection to ensure us that that Transform actually does comply with all of its requirements or perhaps money out of the estate to compensate Mall of America for what it has lost.”

Brunstad, arguing for Transform Holdco, focused on the three years that have elapsed since the sale closed on Oct. 4, 2019.

“There is no remedy that can be granted to them at this point,” Brunstad said.

“It was a sale, as a district court determined," he added. "It was a transfer of ownership of property."

Justice Sonia Sotomayor pondered whether the sale order itself reserves the right to an objection from the mall, questioning whether Transform Holdco should even be considered a good-faith purchaser as determined by the district court, according to Brunstad.

“Why does any of this matter?” Justice Amy Coney Barrett added. “Why can't we just answer the jurisdictional question that we granted cert on and then send it away?”

“If you were to reverse and send it back, what could the lower court do? Absolutely nothing,” Brunstad said.

“Once property leaves the estate, the jurisdiction of the bankruptcy court lapses,” he continued.

Justices Barrett and Ketanji Brown Jackson questioned Brunstad’s reasoning here, as did alongside Chief Justice John Roberts.

“You told us before that, once the property was gone, jurisdiction went away. But somehow the court, by virtue of the statutes, still has to decide this good-faith question,” she said.

Hallward-Driemeier retorted during rebuttal that it was a bad-faith purchase, further arguing that “Congress would not have subjected the party who prevails on appeal, and establishes that the transfer is to a party in bad faith, would have no viable cause of action or opportunity to recover it. It’s inherent in the authority of the court.”

“The Court of Appeals is not divested of jurisdiction,” the Mall of America’s lawyer continued. 

Assistant to the U.S. Solicitor General Colleen Sinzdak argued on behalf of the Mall of America at the hearing.

“This new argument about whether petitioner is entitled to relief under the bankruptcy statutes is not jurisdictional. And even if it were, there is no reason that this Court would have to address it before the question of subject matter jurisdiction on which this Court granted cert,” Sinzdak said.

While the Sears space at the 5.6 million square-foot shopping and entertainment center just outside Minneapolis sits vacant, the mall notes that Transform Holdco has provisionally acquired 660 Sears leases — all but one of which the court has approved for assignment to Transform.

"Transform plans to continue to operate approximately 400 of these 660 leases (i.e., Transform will continue to operate Sears
stores at those locations) and to market the remaining 260 in order to find new tenants to occupy those premises," the petition states.

"As might be inferred from its name, Transform Leaseco plans to market the Sears space to as yet unidentified subtenants who are willing to pay the highest price in order to maximize the value of the real estate."

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