FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF SPANISH PEAKS

HOLDINGS II, LLC,

Debtor.

PINNACLE RESTAURANT AT BIG SKY,

LLC; MONTANA OPTICOM, LLC,

Plaintiffs-Appellants,

v.

CH SP ACQUISITIONS, LLC; ROSS P.

RICHARDSON, Ch. 7 Trustee,

Defendants-Appellees.

No. 15-35572

D.C. No.

2:14-cv-00040-

SEH

AMENDED

OPINION

Appeal from the United States District Court

for the District of Montana

Sam E. Haddon, Senior District Judge, Presiding

Argued and Submitted April 6, 2017

Seattle, Washington

Filed July 13, 2017

Amended September 12, 2017
2 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

Before: Alex Kozinski and William A. Fletcher, Circuit

Judges, and Frederic Block, District Judge.*

Opinion by Judge Block

SUMMARY**

Bankruptcy

The panel affirmed the district court’s judgment affirming

the bankruptcy court’s decision that a bankruptcy trustee’s

sale of a debtor’s property was free and clear of unexpired

leases.

Agreeing with the Seventh Circuit, the panel held that

11 U.S.C. § 363(f), authorizing a trustee to sell a debtor’s

assets free and clear of third-party interests, applied, and did

not conflict with § 365(h), which protects the rights of

lessees, because the trustee did not “reject” the leases.

* The Honorable Frederic Block, Senior United States District Judge

for the Eastern District of New York, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 3

COUNSEL

Mark A. Lindsay (argued) and David W. Ross, Babst Calland

Clements and Zomnir P.C., Pittsburgh, Pennsylvania, for

Plaintiffs-Appellants.

James F. Wallack (argued) and Peter D. Bilowz, Goulston &

Storrs PC, Boston, Massachusetts; Steven M. Johnson,

Church Harris Johnson & Williams P.C., Great Falls,

Montana; for Defendants-Appellees.

OPINION

BLOCK, Senior District Judge:

The primary function of the BankruptcyCode is to set out

the rules for dividing up assets that are insufficient to pay a

debtor’s creditors in full. One such rule, contained in

11 U.S.C. § 363(f), authorizes a trustee in bankruptcy to

sell—with some exceptions and limitations—a debtor’s assets

free and clear of third-party interests. Another, contained in

11 U.S.C. § 365(h), empowers the trustee to “reject”—that is,

in effect, to breach—an unexpired lease of the debtor’s

property, but allows the lessee to retain any existing rights,

including possession of the property.

In this case, we are called upon to decide what happens

when property that the trustee proposes to sell is subject to

unexpired leases. We hold that, on the facts of this case,

section 363 applies and section 365 does not. We therefore

affirm the bankruptcy court’s conclusion that the sale was

free and clear of the leases.
4 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

I

A. Pre-Bankruptcy Background

Spanish Peaks was a 5,700-acre resort in Big Sky,

Montana, the brainchild of James J. Dolan, Jr., and Timothy

L. Blixseth. The project was financed by a $130 million loan,

which was secured by a mortgage and assignment of rents,

from Citigroup Global Markets Realty Corp. (“Citigroup”). 

Citigroup later assigned the note and mortgage to Spanish

Peaks Acquisition Partners, LLC (“SPAP”).

A collection of interrelated entities owned the resort and

managed its amenities, including a ski club, a golf course, and

residential and commercial real-estate sales and rentals. At

issue here are two leases of commercial property at the resort.

In 2006, Spanish Peaks Holdings, LLC (“SPH”), leased

restaurant space to Spanish Peaks Development, LLC

(“SPD”), for $1,000 per month. Dolan was an officer of both

companies, and signed the lease for both lessor and lessee. A

year later, SPH and SPD replaced the 2006 lease with a lease

under which SPD received a 99-year leasehold in the

restaurant property in exchange for $1,000 per year in rent. 

In 2008, SPD assigned its interest to The Pinnacle Restaurant

at Big Sky, LLC (“Pinnacle”), a company specially created

for that purpose.

In 2009, SPH leased a separate parcel of commercial real

estate at the resort to Montana Opticom, LLC (“Opticom”),

of which Dolan was the sole member. The lease had a term

of sixty years and an annual rent of $1,285.
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 5

B. Bankruptcy Proceedings

Facing a shrinking real-estate market and mounting

operational losses, SPH began to default on its loan

payments. On October 14, 2011, SPH and two related

entities—The Club at Spanish Peaks, LLC, which managed

the resort’s ski and golf facilities, and Spanish Peaks Lodge,

LLC, which managed its real-estate sales—petitioned for

bankruptcy protection under Chapter 7 of the Code.

1 The

petitions were filed in Delaware, but the proceedings were

transferred to the Bankruptcy Court for the District of

Montana, where they were consolidated for joint

administration.

SPH’s largest creditor was, by far, SPAP, which had a

valid claim of more than $122 million secured by the

mortgage on the property. SPAP subsequently assigned its

interest to CH SP Acquisitions, LLC (“CH SP”).

The trustee and SPAP agreed to a plan for liquidating

“substantially” all of the debtors’ real and personal property. 

Their stipulation contemplated an auction with a minimum

bid of $20 million. It further stated that the sale would be

“free and clear of all liens.”

1 By the time of the bankruptcy, the resort was operated by Spanish

Peaks Holdings II, LLC, a successor to SPH. We refer to both the original

and successor entities as “SPH.”
6 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

The trustee then moved the bankruptcy court for an order

authorizing and approving the sale.2 The trustee represented

that the proposed sale would be “free and clear of any and all

liens, claims, encumbrances and interests,” except for certain

specified encumbrances, and that other specified liens would

be paid out of the proceeds of the sale or otherwise protected.

The Pinnacle and Opticom leases were not mentioned in

either the list of encumbrances that would survive the sale or

the list of liens for which protection would be provided. 

Noting the omission, both companies objected to “any effort

to sell the Debtors[’] assets free and clear of [their] leasehold

interests.” They argued that the Code gave them the right to

retain possession of the property notwithstanding the sale.

After a hearing, the bankruptcy court authorized the sale. 

It did not rule on Pinnacle’s and Opticom’s objection. 

Instead, further discussion of the claimed right to possession

was deferred to the hearing on the motion to approve the sale.

Both the auction and the approval hearing took place on

June 3, 2013. CH SP won the auction with a bid of $26.1

million. At the approval hearing, Pinnacle and Opticom

renewed their claim that they were entitled to retain

possession pursuant to their leases, and argued that language

in the proposed approval order providing that the sale would

be free and clear of those interests was inconsistent with their

claimed right. In response, CH SP’s principal testified that its

2 Bankruptcy procedure is nothing if not Byzantine. The trustee’s

motion sought two distinct orders: first, an order authorizing the trustee

to conduct the sale in accordance with specified procedures, and second,

an order approving the sale—that is, confirming that the sale conformed

to those procedures.
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 7

bid was contingent on the property being free and clear of the

leases, while the trustee testified that he did not “t[ake] a

position” on that issue.

On June 13, 2013, the bankruptcy court entered an order

approving the sale. Paragraph I of the order held that the sale

was free and clear of any “Interests,” a term defined to

include any leases “(except any right a lessee may have under

11 U.S.C. § 365(h), with respect to a valid and enforceable

lease, all as determined through a motion brought before the

Court by proper procedure).”

Both sides moved for clarification of the approval order. 

Pinnacle and Opticom sought clarification that the order

preserved their rights under the leases, while CH SP sought

clarification that the order approved a sale free and clear of

those interests. The bankruptcy court denied having ruled

one way or the other, explaining that it would not consider the

issue until the parties had “file[d] an appropriate motion,

notice[d] the matter for hearing, and present[ed] their

evidence.”

The trustee then offered his version of an “appropriate

motion,” seeking leave to reject the Pinnacle and Opticom

leases on the ground that the subject property was no longer

property of the estate. CH SP, meanwhile, formally moved

for a determination that the property was free and clear of the

leases. Pinnacle and Opticom did not object to the trustee’s

motion, which was granted. They did, however, renew their

previous arguments as objections to CH SP’s motion.

After a two-day evidentiary hearing on that motion, the

bankruptcy court made the following findings of fact:
8 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

• Pinnacle had not operated a restaurant on the property

since 2011;

• Pinnacle’s rent was far below the property’s fair

market rental value of $40,000 to $100,000 per year;

• Opticom’s lease was not recorded;

• the leases were executed “at a time when all parties

involved were controlled by James J. Dolan”;

• the leases were the subject of bona fide disputes;

• Citigroup’s mortgage was senior to the leases; and

• the leases were not protected from foreclosure of the

underlying mortgage by subordination or nondisturbance agreements.

It further observed that Pinnacle and Opticom had not

requested adequate protection for their leasehold interests

prior to sale, and had at no time provided any evidence that

they would “suffer any economic harm if their possessory

interests [we]re terminated.”

Based on those findings, the bankruptcy court—applying

what it called a “case-by-case, fact-intensive, totality of the

circumstances, approach”—held that the sale was free and

clear of the Pinnacle and Opticom leases. Pinnacle and

Opticom appealed to the district court, which affirmed.3In a

3

In addition, Pinnacle and Opticom moved the bankruptcy court for

an order awarding them monetary compensation as “adequate protection”
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 9

brief opinion, the district court held that the sale extinguished

the leases because the foreclosure of a mortgage would, under

Montana law, terminate any leasehold interests junior to the

mortgage. This appeal followed.

II

The principal issue is whether the Pinnacle and Opticom

leases survived the sale of the property to CH SP.4 Because

that issue is ultimately one of statutory interpretation, we

review the bankruptcy court’s decision de novo. See Simpson

v. Burkart (In re Simpson), 557 F.3d 1010, 1014 (9th Cir.

2009); Robertson v. Peters (In re Weisman), 5 F.3d 417, 419

(9th Cir. 1993) (“We independently review the bankruptcy

court’s decision and do not give deference to the district

court’s determinations.”).

As we noted at the outset, the issue brings two sections of

the Code into apparent conflict. Section 363 authorizes the

trustee to sell property of the estate, both within the ordinary

for their “divested interests” in the property. The bankruptcy court never

ruled on that motion.

4

 In reaching the merits, we reject CH SP’s argument that the case is

moot because the sale was approved and consummated. “The reversal or

modification on appeal of an authorization . . . of a sale or lease of

property does not affect the validity of a sale or lease under such

authorization to an entity that purchased or leased such property in good

faith, whether or not such entity knew of the pendency of the appeal,

unless such authorization and such sale or lease were stayed pending

appeal.” 11 U.S.C. § 363(m). By its terms, section 363(m) preserves the

validity of a sale challenged on appeal. Although Pinnacle and Opticom

seek a determination that their leaseholds survived the sale to CH SP, they

have not asked us to undo the sale. Therefore, the outcome of the appeal

will not affect the sale’s validity.
10 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

course of business, see 11 U.S.C. § 363(c), and outside it, see

id. § 363(b).5 Sales may be “free and clear of any interest in

such property of an entity other than the estate,” id. § 363(f),

but only if

(1) applicable nonbankruptcylaw permitssale

of such property free and clear of such

interest;

(2) such entity consents;

(3) such interest is a lien and the price at

which such property is to be sold is

greater than the aggregate value of all

liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal

or equitable proceeding, to accept a

money satisfaction of such interest.

Id. Upon the request of a party with an interest in the

property, the bankruptcy court “shall prohibit or condition

such . . . sale . . . as is necessary to provide adequate

protection of such interest.” Id. § 363(e).

Meanwhile, section 365 of the Code authorizes the

trustee, “subject to the court’s approval,” to “assume or reject

5 Sales in the ordinary course of business do not require prior notice

and court approval, while sales outside the ordinary course of business do. 

Compare 11 U.S.C. § 363(c) with id. § 363(b). The sale of SPH’s

property was outside the ordinary course of business.
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 11

any executory contract or unexpired lease of the debtor.”

11 U.S.C. § 365(a). Subsection (h) makes special provision

for rejected leases under which the debtor is the lessor:

(i) if the rejection by the trustee amounts to

such a breach as would entitle the lessee

to treat such lease as terminated by virtue

of its terms, applicable nonbankruptcy

law, or any agreement made by the lessee,

then the lessee under such lease may treat

such lease as terminated by the rejection;

or

(ii) if the term of such lease has commenced,

the lessee may retain its rights under such

lease (including rights such as those

relating to the amount and timing of

payment of rent and other amounts

payable by the lessee and any right of use,

possession, quiet enjoyment, subletting,

assignment, or hypothecation) that are in

or appurtenant to the real property for the

balance of the term of such lease and for

any renewal or extension of such rights to

the extent that such rights are enforceable

under applicable nonbankruptcy law.

The crux of this dense statutory language is that the rejection

of an unexpired lease leaves a lessee in possession with two

options: treat the lease as terminated (and make a claim

against the estate for any breach), or retain any

rights—including a right of continued possession—to the

extent those rights are enforceable outside of bankruptcy.
12 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

The statutes frequently operate in isolation. Many

bankruptcies will involve a sale of property unencumbered by

a lease, and many will involve the rejection of a lease on

property that the trustee does not intend to sell. But when

both provisions come into play—that is, when the trustee

proposes to sell property free and clear of encumbrances, and

one of the encumbrances is an unexpired lease—federal

courts have addressed the resulting dilemma in different

ways.

A. The “Majority” Approach

Several bankruptcy courts have held that sections 363 and

365 conflict when they overlap because “each provision

seems to provide an exclusive right that when invoked would

override the interest of the other.” In re Churchill Props.,

197 B.R. 283, 286 (Bankr. N.D. Ill. 1996); see also In re

Haskell, L.P., 321 B.R. 1, 8–9 (Bankr. D. Mass. 2005); In re

Taylor, 198 B.R. 142, 164–66 (Bankr. D.S.C. 1996); cf. In re

LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982). 

Those courts—which constitute a majority of the courts to

have addressed the issue—hold that section 365 trumps

section 363 under the canon of statutory construction that

“the specific prevails over the general.” In re Churchill

Props., 197 B.R. at 288. They further reason that “the

legislative history regarding § 365 evinces a clear intent on

the part of Congress to protect a tenant’s estate when the

landlord files bankruptcy,” In re Taylor, 198 B.R. at 165

(citing S. Rep. No. 95-989, at 60 (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5846), and that the protection

“would be nugatory,” In re Churchill Props., 197 B.R. at 288,

if the property could be sold free and clear of the leasehold

under section 363.
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 13

B. The “Minority” Approach

The only circuit court to have addressed the issue reached

a different conclusion based exclusively on the statutory text. 

In Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In

re Qualitech Steel Corp. & Qualitech Steel Holdings Corp.),

327 F.3d 537 (7th Cir. 2003), the Seventh Circuit observed

that “the statutory provisions themselves do not suggest that

one supersedes or limits the other.” Id. at 547.

The court then examined the scope of each statute. 

Section 363, it reasoned, confers a right to sell property free

and clear of “any interest,” without excepting from that

authority leases entitled to the protections of section 365. See

id. Section 365, by contrast, has a more “limited scope”:

Section 365(h) . . . focuses on a specific type

of event—the rejection of an executory

contract by the trustee or debtor-inpossession—and spells out the rights of

parties affected by that event. It says nothing

at all about sales of estate property, which are

the province of section 363.

Id.

Again focusing on the statutory text, the court noted that

lessees are entitled to seek “adequate protection” under

section 363(e). “Lessees . . . are therefore not without

recourse in the event of a sale free and clear of their interests.

They have the right to seek protection under section 363(e),

and upon request, the bankruptcy court is obligated to ensure

that their interests are adequately protected.” 327 F.3d at

548.
14 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

Based on the statutes’ different scopes, the court

concluded that they did not conflict:

Where estate property under lease is to be

sold, section 363 permits the sale to occur free

and clear of a lessee’s possessory

interest—provided that the lessee (upon

request) is granted adequate protection for its

interest. Where the property is not sold, and

the [estate] remains in possession thereof but

chooses to reject the lease, section 365(h)

comes into play and the lessee retains the

right to possess the property. So understood,

both provisions may be given full effect

without coming into conflict with one another

and without disregarding the rights of lessees.

Id.

C. Our Approach

We must “read the statutes to give effect to each if we can

do so while preserving their sense and purpose.” Watt v.

Alaska, 451 U.S. 259, 267 (1981). We can easily do so here. 

Based on our reading—and, in particular, a proper

understanding of the concept of “rejection”—we agree with

the Seventh Circuit that sections 363 and 365 do not conflict.

Although undefined in the Code, a “rejection” is

universally understood as an affirmative declaration by the

trustee that the estate will not take on the obligations of a

lease or contract made by the debtor. See, e.g., Eastover

Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.),

19 F.3d 1077, 1082 (5th Cir. 1994). A sale of property free
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 15

and clear of a lease may be an effective rejection of the lease

in some everyday sense, but it is not the same thing as the

“rejection” contemplated by section 365.

In sum, section 363 governs the sale of estate property,

while section 365 governs the formal rejection of a lease. 

Where there is a sale, but no rejection (or a rejection, but no

sale), there is no conflict.

In some circumstances, a trustee’s failure to act is deemed

a rejection. See 11 U.S.C. §§ 365(d)(1) (failure to assume or

reject residential lease within sixty days in liquidation

bankruptcy deemed a rejection), 365(d)(4)(A) (failure to

assume or reject nonresidential lease within 120 days deemed

a rejection if the debtor is the lessee). But those

circumstances are not present here, and the parties agree that

the Pinnacle and Opticom leases were not “rejected” prior to

the sale. Under our interpretation, then, section 365 was not

triggered.6

We base our interpretation principally on the reasons

given by the Seventh Circuit. To that court’s sound textual

analysis, we add the following observations to mitigate the

concern that an attempt to harmonize the two statutes

“arguably results in the effective repeal of § 365(h).” Dishi

& Sons, 510 B.R. at 704.

6

 It is, of course, possible for a trustee to formally reject a lease and

then propose to sell the property subject to the (rejected) lease. See Dishi

& Sons v. Bay Condos, LLC, 510 B.R. 696, 704 (S.D.N.Y. 2014) (noting

that Qualitech “conveniently” dealt with a situation “where a free and

clear sale occurred without any formal assumption or rejection taking

place”). That is not what happened here, and so we have no occasion to

address the interplay between sections 363 and 365 in such circumstances.
16 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

First, we note the mandatory language of section 363(e). 

A bankruptcy court must provide adequate protection for an

interest that will be terminated by a sale if the holder of the

interest requests it. Moreover, “adequate protection” includes

any relief—other than compensation as an administrative

expense—that will “result in the realization by such entity of

the indubitable equivalent” of the terminated interest. 

11 U.S.C. § 361(3). In Dishi & Sons, the district court

concluded that adequate protection could take the form of

continued possession. See 510 B.R. at 711–12. Since

Pinnacle and Opticom did not ask for adequate protection

until after the sale had taken place—not, indeed, until they

had appealed to the district court, see supra note 2—the

question of what protection the bankruptcy court could have

or should have awarded is not before us. Still, we think it

worth mentioning that the broad definition of adequate

protection makes it a powerful check on potential abuses of

free-and-clear sales.

Second, we emphasize that section 363(f) authorizes freeand-clear sales only in certain circumstances. The

bankruptcycourt did not specifywhich circumstance justified

the sale in this case, stating only that Pinnacle and Opticom

“d[id] not dispute that at least one provision of § 363(f) was

satisfied.” We, on the other hand, focus on 11 U.S.C.

§ 363(f)(1), which authorizes a sale if “applicable

nonbankruptcy law permits sale of such property free and

clear of such interest.” 11 U.S.C. § 363(f)(1).

Under Montana law, a foreclosure sale to satisfy a

mortgage terminates a subsequent lease on the mortgaged

property. See Ruby Valley Nat’l Bank v. Wells Fargo

Delaware Trust Co., 317 P.3d 174, 178 (Mont. 2014);
IN THE MATTER OF SPANISH PEAKS HOLDINGS II 17

Williard v. Campbell, 11 P.2d 782, 787 (Mont. 1932).7 SPH’s

bankruptcyproceeded, practicallyspeaking, like a foreclosure

sale—hardly surprising since its largest creditor was the

holder of the note and mortgage on the property. Indeed, had

SPH not declared bankruptcy, we can confidently say that

there would have been an actual foreclosure sale. Such a sale

would have terminated the Pinnacle and Opticom leases. 

Section 363(f)(1) does not require an actual or anticipated

foreclosure sale. It is satisfied if such a sale would be legally

permissible.

In Dishi & Sons, the district court held that section

363(f)(1) “refers not to foreclosure sales, but rather only to

situations where the owner of the asset may, under

nonbankruptcy law, sell an asset free and clear of an interest

in such asset.” 510 B.R. at 710 (citation and internal

quotations omitted). While we acknowledge that bankruptcy

protection is often sought “for the very purpose of avoiding

the less favorable consequences of foreclosure,” id. at 709,

the protection is generally for the debtor’s benefit. We find

it significant that section 365 recognizes appurtenant rights

conferred by a lease “to the extent that such rights are

enforceable under applicable nonbankruptcy law,” 11 U.S.C.

§ 365(h)(1)(A)(ii), and discern from that language a clear

intent to protect lessees’ rights outside of bankruptcy, not an

intent to enhance them. We see no reason to exclude the law

governing foreclosure sales from the analogous language in

section 363(f)(1).

7 Montana law embodies the general rule of property law, except that

Montana law allows the tenant to remain in possession during any period

of redemption, while under the general rule the lease terminates

immediately upon the sale. See Williard, 11 P.2d at 787. The distinction

is immaterial for our purposes.
18 IN THE MATTER OF SPANISH PEAKS HOLDINGS II

Our analysis highlights a limitation inherent in the

“majority” approach. We agree that section 365 embodies a

congressional intent to protect lessees. But that intent is not

absolute; it exists alongside other purposes and sometimes

conflicts with them. To some extent, protecting lessees

reduces the value of the estate—property presumably fetches

a lower price if it is subject to a lease—and is therefore

contrary to the goal of “maximizing creditor recovery,” 

Qualitech, 327 F.3d at 548, another core purpose of the Code. 

The statutory text is the best assurance we have that we are

balancing competing purposes in the wayCongress intended.

III

Section 363(f)(1) authorized the sale of SHP’s property

free and clear of the Pinnacle and Opticom leases. Since the

trustee did not reject the leases, section 365 was not

implicated. Accordingly, the judgment of the district court is

AFFIRMED.