Adequate protection is a ‘powerful check’ on selling real estate free of leases, circuit says.

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Case Type:
Case Status:
15-35572 (9th Circuit, Sep 12,2017) Published
The Ninth Circuit Court of Appeals affirmed the order of the district court affirming the bankruptcy court’s decision that a bankruptcy trustee’s sale of a debtor’s property was free and clear of unexpired leases. Section 363 confers a right to sell property free and clear of any interest; it does not except leases. Further, selling property free and clear does not amount to rejecting a lease under section 365. When there is a sale, but no rejection, there is no conflict and the trustee may sell property free and clear of such leases.
Procedural context:
Two lessees appealed the order of the district court (D. Mont.) affirming the bankruptcy court’s order holding that the sale of the debtor’s property was free and clear of their leases.
Several related resort entities in Big Sky, Montana filed chapter 7 bankruptcy. The trustee and the debtor’s largest creditor agreed to liquidate substantially all of the debtor’s property under section 363, which authorizes the trustee to sell property of the estate and provides that sales may be free and clear of any interest in such property if certain conditions are met. Two leases (relating to a restaurant space and parcel of commercial real estate) were not mentioned in the list of encumbrances that would survive the sale, and both lessees objected. They argued that they were entitled to retain possession of the leased premises under section 365, which gives lessees certain protections when a trustee rejects a lease. The lessees did not ask for adequate protection under section 363(e). The bankruptcy court approved the sale. Both sides moved for clarification of the sale order; the lessees argued that the order preserved their rights under the leases, and the purchaser argued that the sale was free and clear of those interests. The bankruptcy court directed the parties to file an appropriate motion. The trustee then sought to reject the two leases on the ground that they were no longer property of the estate, and the purchaser moved for a determination that the property was free and clear of the leases. After a two-day hearing, the bankruptcy court made specific findings regarding the leases and concluded that the sale was free and clear of the leases. The lessees appealed, and the district court affirmed.
Kozinski, Fletcher, Block

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