Dishi & Sons v. Bay Condos LLC
510 B.R. 696
S.D.N.Y.2014Background
- Debtor (Bay Condos LLC) owned commercial condos leased to TGM (bar) and JYA (laundromat); Creditor held a mortgage and proposed a Chapter 11 plan to sell the property “free and clear” while rejecting nonassumed commercial leases.
- TGM’s lease was rejected by the plan; a buyer (Dishi) won the § 363 sale at auction and the bankruptcy court approved sale and plan confirmation.
- After confirmation but before entry, TGM asserted rights under § 365(h) (right to retain possession/appurtenant rights despite rejection) and alternatively sought relief as adequate protection under § 363(e).
- Bankruptcy court held § 365(h) preserves TGM’s appurtenant rights and alternatively awarded continued possession as adequate protection; Dishi appealed.
- District court affirmed, holding §§ 365(h) and 363(f) can be read harmoniously: § 365(h) preserves lessee’s appurtenant rights upon rejection, while § 363(f) can extinguish such rights only if one of its five grounds is satisfied; here the sale could not be sustained free and clear under § 363(f) and continued possession was adequate protection.
Issues
| Issue | Plaintiff's Argument (Dishi / Creditor) | Defendant's Argument (TGM) | Held |
|---|---|---|---|
| Whether § 365(h) bars a § 363(f) “free and clear” sale that would extinguish a lessee’s appurtenant rights | § 363(f) authorizes free-and-clear sales of any interest if conditions met; § 363(f) controls sales and § 365(h) doesn’t apply where sale occurs | § 365(h) specifically preserves lessee’s appurtenant rights on rejection and therefore trumps § 363(f) | §§ 363(f) and 365(h) read harmoniously: § 365(h) preserves appurtenant rights on rejection, but § 363(f) can extinguish them only if one of its statutory grounds is satisfied; here sale free-and-clear was not authorized under § 363(f) |
| Scope of § 363(f)(1): whether “applicable nonbankruptcy law” includes foreclosure law that would permit extinguishment of junior leaseholds | Foreclosure law should apply; mortgage foreclosure can extinguish subordinate leases, so § 363(f)(1) permits free-and-clear sale | “Applicable nonbankruptcy law” should be read to mean owner/voluntary-sale law; a sale by owner with notice binds buyer to lease | § 363(f)(1) refers to nonbankruptcy law applicable to an owner’s voluntary sale, not foreclosure by a third-party mortgagee; because purchaser had notice, New York voluntary-transfer law would subject buyer to the lease, so (1) did not authorize extinguishment |
| Scope of § 363(f)(5): whether third-party foreclosure or other non-trustee proceedings satisfy “could be compelled ... to accept a money satisfaction” | Paragraph (5) should allow hypothetical third-party proceedings (e.g., foreclosure) that could compel money satisfaction | Paragraph (5) is limited to proceedings the trustee (estate) could itself bring to compel money satisfaction | Paragraph (5) is limited to proceedings the trustee (as owner) could bring; third-party foreclosure does not satisfy (5), so (5) did not authorize free-and-clear sale |
| Adequate protection under § 363(e): whether continued possession was permissible/equivalent protection | Bankruptcy court should have awarded money or limited-term occupancy and allocated protection burden, not grant full possession to TGM | Continued possession can be the indubitable equivalent and is appropriate adequate protection where money compensation is impracticable | Bankruptcy court did not abuse discretion: continued possession was a permissible form of adequate protection under § 363(e) given valuation difficulties and likely lack of monetary recovery |
Key Cases Cited
- Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003) (held § 363(f) permits sale free and clear of lessee’s interest when its conditions are met and § 365(h) applies principally to rejections)
- In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993) (discusses trustee’s power to assume or reject executory contracts in bankruptcy)
- NLRB v. Bildisco & Bildisco, 465 U.S. 513 (U.S. 1984) (describes treatment and consequences of assumption/rejection of collective bargaining agreements and related priority of administrative expenses)
- In re Prudential Lines Inc., 928 F.2d 565 (2d Cir. 1991) (estate succeeds to debtor’s property interests subject to applicable nonbankruptcy law)
- Matter of Minges, 602 F.2d 38 (2d Cir. 1979) (lease characterized as a conveyance creating an estate for years and reversion remaining with lessor)