872 F.3d 892
9th Cir.2017Background
- Spanish Peaks Holdings (SPH) owned a Montana resort encumbered by a $130M mortgage now held by CH SP; SPH filed Chapter 7 and the trustee sought to liquidate substantially all assets by auction.
- Two low-rent, long-term commercial leases at issue: Pinnacle (99-year restaurant lease, nominal rent) and Opticom (60-year lease); both were junior to the mortgage and not protected by subordination/non-disturbance agreements.
- Trustee negotiated and conducted an auction; CH SP’s winning bid was contingent on acquiring the property free and clear of the leases.
- Bankruptcy court approved the sale; Pinnacle and Opticom objected, asserting rights under 11 U.S.C. § 365(h) to retain possession after any rejection.
- Bankruptcy court held the sale free and clear of the leases under 11 U.S.C. § 363(f); district court affirmed. The Ninth Circuit affirmed, holding § 363 governs sales and § 365 governs formal rejection, and § 363(f)(1) was satisfied under Montana law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a § 363 sale free and clear can extinguish junior unexpired leases | Pinnacle/Opticom: § 365(h) protects lessee possession after trustee rejection; sale should not extinguish leasehold rights | Trustee/CH SP: § 363 authorizes sale free and clear under § 363(f); Montana law permits such a sale to terminate junior leases, and sale was contingent on clear title | The sale was free and clear; § 363 governs sales and can extinguish leases when § 363(f)(1) is satisfied; § 365 was not triggered because leases were not formally rejected |
Key Cases Cited
- Simpson v. Burkart, 557 F.3d 1010 (9th Cir. 2009) (standard of de novo review for statutory bankruptcy questions)
- Robertson v. Peters (In re Weisman), 5 F.3d 417 (9th Cir. 1993) (appellate review of bankruptcy court decisions)
- Precision Indus., Inc. v. Qualitech Steel, SBQ, LLC (In re Qualitech Steel Corp.), 327 F.3d 537 (7th Cir. 2003) (statutory harmonization: § 363 sales free and clear can coexist with § 365 lease-rejection protections; adequate protection under § 363(e) available)
- Ruby Valley Nat’l Bank v. Wells Fargo Del. Trust Co., 317 P.3d 174 (Mont. 2014) (Montana law: foreclosure sale terminates junior leases)
- Williard v. Campbell, 11 P.2d 782 (Mont. 1932) (early Montana precedent on lease termination by foreclosure)