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How to Extinguish a Lessee's Possessory Interest
The ability of a trustee to sell bankruptcy estate assets free and clear of competing interests in the property has long been recognized as one of the most important advantages of a bankruptcy filing as a vehicle for restructuring a debtor's balance sheet and generating value. Still, section 363(f) of the Bankruptcy Code, which delineates the circumstances under which an asset can be sold free and clear of 'any interest in such property,' has generated a fair amount of controversy. This is so because the statute itself does not define 'interest.'
Although generally acknowledged to encompass liens and security interests, section 363(f)'s scope would appear to be much broader, based both upon the language of the statute and its underlying purpose. So much so, in fact, that it has even been interpreted to permit sales free and clear of claims (eg, successor liability) and in rem property interests (such as covenants and easements) that are generally inalienable under common law. Broadly applied, section 363(f) also arguably conflicts with certain other provisions of the Bankruptcy Code. How best to resolve this conflict in a way that preserves the integrity of Bankruptcy Code by harmonizing its provisions was the subject of a case of apparent first impression in the Circuit Courts of Appeal. In Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In re Qualitech Steel Corp.), 2003 WL 1918405 (7th Cir. Apr. 23, 2003), the Seventh Circuit ruled that a court order approving the sale of real property under section 363(f) extinguished a tenant's possessory rights in the property despite the protection afforded to non-debtor lessees under section 365(h)(1) of the Bankruptcy Code.
Sales Free and Clear
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