Background

• Debtor Zota Petroleums, LLC held a lease with Kelmont, LLC for property in Virginia; Debtor then leased its interest to D & MRE, LLC.
• Trustee, in a Chapter 11 case, filed a Sale and Assumption Motion to sell assets and to assume/assign leases, including the Kelmont lease.
• The Sale Order and APA contemplated the sale free and clear under § 363 and the assumption/assignment of leases under § 365, with cure amounts listed.
• D & MRE’s sublease was among the contracts to be rejected under a Rejection Motion; LAP Petroleum, LLC purchased the debtor’s assets and was to receive the assets free and clear.
• D & MRE moved to recognize its rights under § 365(h)(1)(A) as a sublessee, arguing these rights survive rejection and a § 363 sale; LAP argued § 363 free-and-clear sale extinguishes those rights.
• The court ultimately held that § 365(h) applies and D & MRE is entitled to quiet enjoyment of its rights under the rejected sublease.

Issues

Key Cases Cited

• Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003) (reconciling §§363(f) and 365(h) and holding §365(h) rights survive rejection or, in some contexts, a §363 sale with adequate protection)
• In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005) (prohibits a §363 sale of leasehold to evade §365(h) rights; favors tenant protections)
• In re MMH Automotive Group, LLC, 385 B.R. 347 (Bankr. S.D. Fla. 2008) (no conflict between §§363(f) and 365(h); supports preservation of tenant rights)
• In re Churchill Props. III, Ltd. P’ship, 197 B.R. 283 (Bankr. N.D. Ill. 1996) (tends to give priority to specific §365(h) protections over general §363 provisions)