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Does a Tenant's Right of Possession Trump a Sale Under Section 363?
The interplay between sections 363(f) and 365(h) of the Bankruptcy Code continues to plague various courts. This article explores several recent decisions evaluating whether a tenant's rights under section 365(h) survive a sale of the debtor's assets free and clear of all liens, claims, and encumbrances pursuant to section 363(f). In many cases, the issue boils down to the language of section 363(f), which permits a sale “free and clear of any interest in such property of an entity other than the estate ' ” (emphasis added). Courts have grappled with the question of whether the phrase “ any interest” in the context of a real property sale includes not only fee interests, security interests and other ownership interests, but also a tenant's possessory right under section 365(h). Some courts have construed the broad language of “any interest” to encompass leasehold interests and thus have determined that section 363(f) trumps section 365(h), permitting debtors and trustees to sell real property free and clear of leasehold interests. Other courts have reached different conclusions.
In the Courts
In the lone circuit court decision that has dealt with the issue, Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), the U.S. Court of Appeals for the Seventh Circuit determined that there was no conflict, holding that sections 365(h) and 363(f) “apply to distinct sets of circumstances.” Id. at 547. The Qualitech court reconciled the alleged conflict by stating that the terms of section 363(f) apply when a trustee or a debtor-in-possession seeks to sell property of which it is a lessor, whereas section 365(h) only deals with the assumption or rejection of unexpired leases of real property. By contrast, the district court in Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y. 2014), recently reconciled these apparently conflicting Bankruptcy Code sections differently. The district court affirmed the bankruptcy court's order, which authorized a sale of real property pursuant to section 363(f), but also permitted the existing tenant to remain in possession of the premises under section 365(h) after the purchase (i.e., the sale was not free and clear of the lease), concluding that:
Although ' 365(h) is applicable to ' 363(f) sales, it does not give the lessee absolute rights that take precedence over the trustee's right to sell free and clear of interest. Rather, it clarifies that the lessee may retain its appurtenant rights notwithstanding the trustee's rejection of the lease. Section 363(f), in turn, authorizes the trustee to extinguish lessee's appurtenant rights ' like any other interest in property ' but only if one of the five conditions is satisfied with respect thereto. The two sections thus work in harmony to establish that the lessee's appurtenant rights may not be terminated by rejection and must be taken into account in any proposed free and clear sale. If ' 363(f) authorizes the trustee to sell property free and clear of such rights, nothing in ' 365(h) mandates a contrary result. As this case demonstrates, however, ' 363(f) will rarely permit such a sale, and consequently, the lessee's rights will generally be enforceable against the transferee of the property. In any event, the bankruptcy court did not abuse its discretion in holding that the lessee was entitled to continue possession as adequate protection of its interest.
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