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FeaturesBankruptcyLJN NewslettersThe Bankruptcy Strategist

Ninth Circuit Reignites Debate over the Interplay of Sections 363, 365

BY Alan R. Lepene, Andrew L. Turscak, Jr.
October 02, 2017

In 2003, the U.S. Court of Appeals for the Seventh Circuit surprised many observers when it held that a sale of real property under section 363 of title 11 of the United States Code (the Bankruptcy Code) could be approved free and clear of a lessee's leasehold interest in the property. Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In re Qualitech Steel Corp. & Qualitech Steel Holdings Corp.), 327 F.3d 537 (7th Cir. 2003).

Until that time, courts consistently had held that the rights of a non-debtor lessee in commercial property it leased from a debtor in bankruptcy were preserved by special protections afforded such lessees under section 365 of the Bankruptcy Code. The Qualitech case set off alarm bells, particularly among commercial tenants and lenders that utilized leasehold interests as collateral. In the ensuing years, however, most courts declined to follow Qualitech, and the case generally became to be viewed as an anomaly.

That changed in July, when the U.S. Court of Appeals for the Ninth Circuit joined the minority position espoused in Qualitech and held that the rights of a lessee in a debtor's real property may be extinguished in connection with a 363 asset sale. Pinnacle Restaurant at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings, II, LLC), 2017 U.S. App. LEXIS 12526 (9th Cir. July 13, 2017).

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