Non-profits are just like for-profit companies in that they can be faced with significant financial challenges for which bankruptcy provides an opportunity for restructuring or liquidation for the benefit of their creditors and other stakeholders. Many times, particularly in the areas of healthcare and religious institutions, non-profit bankruptcies raise complex and novel insolvency issues. This blog post discusses four of the unique aspects of non-profit bankruptcies.

1. Non-profits are not subject to involuntary bankruptcy.

It’s a defense v. offense distinction:

• Defense—An objection and counterclaim designed to diminish or zero-out a proof of claim in bankruptcy is not subject to arbitration; but
• Offense—An objection or counterclaim designed to do anything more . . . can be compelled to arbitrate.

That’s the essence of a recent opinion in Johnson v. S.A.I.L. LLC (In re Johnson), Adv. No. 22 -172, Northern Illinois Bankruptcy Court (issued March 28, 2023; Doc. 18). What follows is a summary of that opinion.

Facts

On April 19, 2023, the United States Supreme Court issued its decision in MOAC Mall Holdings LLC v. Transform Holdco LLC, in which the Court considered whether 11 U.S.C. § 363(m) is jurisdictional. A unanimous Court held that § 363(m) is not jurisdictional, determining that the language of the statute “takes as a given the exercise of judicial power over any authorization under § 363(b) or § 363(c).” This determination is based upon the requirement that for a statutory precondition to be jurisdictional, Congress must clearly state the intent.

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Purchasers often relish the prospect of buying distressed assets in a bankruptcy proceeding. Under section 363 of the Bankruptcy Code, a buyer may obtain ownership of bankruptcy estate assets “free and clear of any interest” (assuming certain conditions are met), and also be reasonably confident that the sale will not be reversed on appeal. But the U.S. Supreme Court may have now tempered that confidence. In its recent, unanimous opinion, MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270 (Apr.

The U.S. Supreme Court recently issued its latest bankruptcy opinion in MOAC Mall Holdings LLC v. Transform Holdco LLC, holding that the Bankruptcy Code’s rule against invalidating 363 sales after appeal is not an iron-clad jurisdictional bar, but rather a mere statutory limitation.[1]

In Short

The Situation: The U.S. Supreme Court considered whether § 363(m) of the Bankruptcy Code, which limits a party's ability to undo an asset transfer made to a good-faith purchaser in a bankruptcy case, is jurisdictional.

In a recent decision, the Second Circuit held that only parties with the right to pursue a breach of contract claim under an executory contract or unexpired lease have the right to demand a cure payment in the event the executory contract or lease is assumed by a debtor in bankruptcy, affirming previous decisions by the bankruptcy and district courts, and limiting the scope of Bankruptcy Code § 365(b)(1)(A).

On April 19, 2023, the U.S. Supreme Court unanimously held in MOAC Mall Holdings LLC v. Transform Holdco LLC that Section 363(m) of the Bankruptcy Code is not jurisdictional. The decision requires parties timely to invoke that provision, or else risk forfeiting its protections. The decision also continues the Supreme Court’s trend of interpreting statutes to be non-jurisdictional (and thus waivable or forfeitable) in the absence of a clear congressional statement to the contrary.

Background

On April 19, 2023 the Supreme Court issued its unanimous ruling in MOAC Mall Holdings LLC v. Transform Holdco LLC, 528 U.S ____ (2023), holding that the limitations contained in section 363(m) of the United States Bankruptcy Code are not jurisdictional. The Supreme Court’s ruling not only resolved a split amongst the circuits, but it also cleared up a foggy corner of arguably one of the most consequential sections of the Bankruptcy Code.