The long, slow, inevitable demise of one of the great dinosaurs of retail took a new turn this week, as the Mall of America, the nation’s largest, took its argument against Sears to the U.S. Supreme Court.
At issue is the continuation of a $10 per-year rent deal the Bloomington, Minn. mall agreed to with the legendary department store on a 100-year lease at the shopping complex’s opening in 1991, back when the Internet was still in its infancy and Sears and its famous catalogue were king.
Fast-forward to 2018 and Sears found itself in bankruptcy, its controlling assets assumed by Transform Holdco LLC, which negotiated terms among its debtors. The sweet rent at Mall of America was considered among Sears’ choicest assets.
Mall of America, concerned Transform Holdco would take its large anchor store space in the 5.6-million-square-foot mall and sub-lease it to other stores at a market rate, while only paying $10 per year itself until 2091, took Eddie Lampert’s firm to the bankruptcy court. The Sears store at the Mall of America location closed in 2019.
Arguing that the lease arrangement should be voided because the Sears of today bears no resemblance to the Sears of 1991, or in the wording of its complaint, could not prove “adequate assurance of performance,” the mall lost.
Mall of America then appealed to the 2nd Circuit, which didn’t see itself fit to take the appeal against a bankruptcy court agreement that had been decided and implemented. So then it was off to the U.S. Supreme Court, which in June agreed to hear the case, which it did on Monday.
Justices were skeptical as Mall of America presented its case.
“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,” Justice Neil Gorsuch said.
Justices on Monday seemed to harbor doubts about finding any element of ‘bad faith’ in the bankruptcy arrangement that would give them authority to intervene.
“… at this late date, the court is not going to be able to undo the assignment,” Justice Elena Kagan said. “Does that make this constitutionally moot or is there some other form of relief that the court could provide to resolve this dispute?”
Attorneys for Mall of America contended that the lease being included in the bankruptcy settlement was in bad faith and it was incumbent on the courts to act.
Transform Holding owns all 660 leases and, according to its court petition, plans to continue to operate about 400 of them and to market the remaining, saying, “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.”
Presumably, the Mall of America anchor location will be among the 260 ‘marketed’ at a rent significantly higher than $10 per year.
Beyond the impact for the Mall of America, which draws 42 million visitors annually and didn’t rely much on Sears for traffic in the years leading up to its closing, is the precedent that could be set for the courts retroactively dismantling existing bankruptcy settlements.
Drew Parobek and Thomas Loeb of the Ohio-based law firm Vorys, Sater, Seymour and Pease blogged that this case will have reverberations on all businesses and leases.
“Any person or business that is considering purchasing bankruptcy estate property should take note. Section 363 sales or leases may become more vulnerable to unraveling by appellate courts if the Supreme Court provides a carveout allowing for such appellate authority,” they wrote. “Why? Because the Second Circuit’s jurisdictional bar on appellate review of Section 363 sales—regardless of its wisdom—provides an ironclad assurance to bankruptcy sale and lease purchasers that sale terms will not be functionally altered by an appellate court after the sale has closed.”
The High Court’s ruling is expected to be handed down before the end of June when the session ends.