Source: http://californiafinance.mwbllp.com/2017/07/
Timestamp: 2019-04-23 02:42:00+00:00

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By allowing the bankruptcy trustee to sell the property free and clear of the unexpired leases, in the Ninth Circuit’s view, the estate was able to fetch higher price for the property and maximized recovery for all creditors.
The developer (“Developer”) of a 5,700-acre resort in Montana obtained a $130 million loan secured by a mortgage and assignment of rents from a lender, who later assigned the note and mortgage to a limited liability company. A collection of interrelated entities owned the resort and managed its amenities, including a ski club, golf course, and residential and commercial real-estate sales and rentals. At issue are two leases of commercial property at the resort.
The two leases at issue were not mentioned in either the list of encumbrances that would survive the sale, or the list of liens which protection would be provided. The lessees (“Lessees”) objected and argued that 11 U.S.C. § 365 gave them the right to retain possession of the property notwithstanding the trustee’s sale.
The trustee then requested leave to reject the two leases because the subject property was no longer property of the estate. Meanwhile, Creditor moved for a determination that the property was free and clear of the leases. Lessees renewed their prior arguments as objections to Creditor’s motion.
At the evidentiary hearing, the bankruptcy court determined, among other things, that one of the leases was below fair market rental value, that the leases were junior to Creditor’s mortgage, and were not protected from foreclosure of Creditor’s mortgage by subordination or non-disturbance agreements. Based on these findings, the bankruptcy court held that the sale was free and clear of the two commercial leases. Lessees appealed to the district court, which affirmed, and this appeal followed.
The principal issue on appeal is whether the two leases survived the trustee’s sale of the property to Creditor.
Meanwhile, 11 U.S.C. § 365 of the Code authorizes the trustee, “subject to the court’s approval,” to “assume or reject any executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a). 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. 11 U.S.C. § 365(h).
The majority of bankruptcy courts that have addressed this issue 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). These courts held that section 365 trumps section 363 under the canon of statutory construction that the specific prevails over the general, and the legislative history regarding section 365 evinced a clear intent by Congress to protect a tenant’s estate when the landlord files bankruptcy.
However, in Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), the U.S. Court of Appeals for the Seventh Circuit held that sections 363 and 365 may be given full effect without coming into conflict with one another, because lessees are entitled to seek “adequate protection” under 11 U.S.C. § 363(e), and were not without recourse in the event of a sale free and clear of their interests.
Accordingly, the Ninth Circuit affirmed the lower courts’ ruling that the bankruptcy trustee’s sale of Debtor’s property was free and clear of unexpired leases.

References: § 365
 § 365
 § 365
 § 365
 v. 
 § 363