Escape from Pandemonium: Reconciling § 363(f) and § 365(h) in Qualitech's Shadow and Spanish Peaks’ Wake

27 American Bankruptcy Institute Law Review 181 (2019)

83 Pages Posted: 15 Jan 2020 Last revised: 27 Jan 2020

See all articles by Amir Shachmurove

Amir Shachmurove

Harvard Law School; University of Pennsylvania, School of Arts and Sciences; Reed Smith LLP ; Developers Slack; Troutman Sanders LLP; U.S. District Court for Eastern District of New York; U.S. District Court for the Middle District of Louisiana; U.S. District Court for the Southern District of California; U.S. Bankruptcy Court for the Middle District of Florida; U.S. Bankruptcy Court for the Eastern District of New York

Date Written: 2019

Abstract

Cited by the National Conference of Bankruptcy Judges, several courts, and a handful of scholars despite its recent release, this article deals with an issue that has long divided this nation's tribunals.

Specifically, for decades, America's federal courts have struggled with how to resolve about the seeming conflict between two sections of the Bankruptcy Code (“Code”) when a once confident lessor has opted to file a bankruptcy petition pursuant to Chapter 7 or 11 and subsequently seeks to sell its property prior to any formal abandonment of that contract in the course of their liquidation or reorganization: § 363(f), which authorizes the sale of assets by a debtor’s estate, and § 365(h)(1), which bequeaths certain rights unto non-debtor parties to an executory contract. Seen as conflicting at worst and in tension at best by an overwhelming multitude of judges and scholars, these two sections have featured in the interminable battle between a potent minority, led by the United States Court of Appeals for the Seventh Circuit in Precision Industries Inc. v. Qualitech Steel SBQ, LLC (In re Qualitech Steel Corporation & Qualitech Steel Holdings Corporation) (“Qualitech”) and recently joined by United States Court of Appeals for the Ninth Circuit in Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC) (“Spanish Peaks”), and a decided majority of lower courts, the latter’s reasons aptly articulated in such opinions as In re Haskell (“Haskell”).

Beginning in 2000, the increasing use of § 363(f) to effectuate non-plan sales inevitably ran into § 365(h)(1)(A). For a distinct minority of courts, including the only two circuits to confront the difficulties raised by these sections’ interaction, because § 363(f) governs sales and § 365(h) deals with executory contracts’ rejection, the two sections amicably coexist. With text so clear, logic’s more insubstantial filaments or purpose’s likely predilection can offer no relief to the Code’s textual command. A judicial majority, however, has long seen the two sections as invariably incompatible. True, their ambits appeared clear. To allow § 363(f) to be used to circumvent the unique protections encoded in § 365(h) simply because no formal “rejection” had taken place, however, beggared belief, a result inconsistent with the statutory context and the legislative history and purpose of § 365(h). As Congress sought to protect lessee’s possessory interests in 1978, 1984, and 1994, it would be judicial malpractice to allow a sale under § 363(f) to effectively nullify the prerogatives so assiduously bestowed on a debtor’s tenants in § 365(h)(1)(A). Faced with these divergent lines of precedent, a handful have thrown up their hands in frustration and opted for a fact-intensive approach in which both sides’ arguments prominently feature. With Spanish Peaks nearing its first anniversary, stalemate reigns, and cacophony bestrides the land.

In four substantive parts, this article offers a rejoinder and a solution. As a prefatory matter, Part II details the relevant statutory framework and economic realities. Part III thereupon précises the contending sides and relates the facts of the ostensibly conflicted Haskell and Spanish Peaks. Part IV first delivers a short summary of modern law’s interpretive framework. It next applies those precepts to the apparent dispute between § 363(f) and § 365(h), showing precisely why the scorned minority wields the better argument, but concludes with an encapsulation of the problems overlooked by the minority’s most recent champion. In Part V, this article lays forth a new model for adjudicating the rights of lessees’ under § 363(f) and § 365(h)(1)(A), a model that is not only consistent with pendent principles of interpretation but also explains nearly all past results and thus can serve as a useful guide for all courts in the years ahead. Indeed, the discord so endemic has too long obscured the effective unity of these supposedly bitter enemies implicitly, albeit surely inadvertently, effectuated by the Code as passed, amended, and construed. Once untangled, then, precedent and prose point to an elegantly simple solution, one not nearly as convoluted as the jumbled dictates espoused and disparaged by Qualitech’s diverse progeny. For lessees and lessors alike, for lenders and borrowers too, all caught in bankruptcy law’s whirl, the time has come to let go of a needlessly pestilential illusion, whether or not a revision of § 365(h) ever again takes place. As this article shows, too much sound and fury has been expended over nothing, nothing at all, for far too long.

Keywords: 363, 363(f), 365, 365(h), free-and-clear sale, Qualitech, Spanish Peaks, lease, tenant, debtor, Toys-R-Us, Pinnacle, Haskell, Dishi & Sons

JEL Classification: K00, K10, K11, K12, K13, K19, K20, K22, K23, K29, K30, K35, K39, K40, K41, K42, K49

Suggested Citation

Shachmurove, Amir, Escape from Pandemonium: Reconciling § 363(f) and § 365(h) in Qualitech's Shadow and Spanish Peaks’ Wake (2019). 27 American Bankruptcy Institute Law Review 181 (2019), Available at SSRN: https://ssrn.com/abstract=3130208

Amir Shachmurove (Contact Author)

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