MEMORANDUM OPINION
Before the court is the motion of D & MRE, LLC, fоr recognition of its subles-see rights under a sublease rejected by debtor. The motion is opposed by LAP Petroleum, LLC, which argues that it purchased the underlying lease from debtor free and clear of any interest asserted by D & MRE. Resolution of the issue requires an analysis of the interplay between §§ 363 and 365(h) of the Bankruptcy Code.
The court finds that in this case, the provisions of § 365(h), which give the sub-lessee the right to retain its rights under the lease, apply, and D & MRE is entitled to the quiet enjoyment of those rights.
Facts and Issues Presented. The facts in this case are largely undisputed. Debt- or Zota Petroleums, LLC, was the lessee under a lease agreement with Kelmont, LLC, for certain real property located in King William County, Virginia. In turn, Debtor leased its interest in that same property to D & MRE, LLC.
Debtor leased sixteen gas stations and convenience stores in central Virginia. The trustee appointed in this case, originally filed under chapter 11 of the Bankruptcy Code,
On October 24, 2011, in connection with the proposed sale and assumption and assignment of leases, the trustee filed his notice of the assumption and assignment of fifteen leases, as well as various subleases and executory contracts, and setting forth the proposed cure amounts for those contracts and leases. The Kelmont lease was included in the leases that the trustee proposed to be assumed. On November 22, 2011, the trustee also filed a motion to reject certain leases and executory contracts (“the Rejection Motion”). Among the leases sought to be rejected was the sublease between debtor and D & MRE.
In accordance with the Sale and Assumption Motion and the order granting it, an auction was subsequently held, and LAP Petroleum, LLC, was the successful bidder. The transaction was styled in the same manner as was the Sale and Assumption Motion, including both the sale of assets and the assumption and assignment of executоry contracts and leases. The asset transaction was approved by order entered by the court on November 30, 2011. The order approving the transaction provided in part that “[t]o the extent of applicable law, the sale of the Assets shall
The order approving the asset transaction further authorized the trustee to assume and assign the sixteen leases and executory contracts listed in the order, including the Kelmont lease, to LAP at the closing of the asset sale. Paragraph 8 of the order provided that:
Each of the Assumed and Assigned Contracts set forth on Schedule 1 to this Order constitute executory contracts or unexpired leases within the meaning of section 365 of the Bankruptcy Code and will be assumed without further order of the Court by the Trustee and assigned to LAP effective upon the Closing. The assumption of any liabilities under the Assumed and Assigned Contracts by LAP shall constitute a legal, valid and effective delegation of all liabilities thereunder to LAP and shall divest the Trustee and the Debtor of all liability with respect to such Assumed and Assigned Contracts.
The order also provided that LAP would pay the cure amounts due for the assumption and assignment of each lease. The order recites that “LAP is a buyer in good faith, as that term is used in the Bankruptcy Code and the decisions thereunder, and is entitled to thе protections of sections 363(m) and (n) of the Bankruptcy Code with respect to the sale, all of the Assets and the Assumed and Assigned Contracts.” [sic]
The APA contained the following relevant language:
Subject to the terms and conditions of this Agreement and the Sale Order, Seller shall sell, convey, transfer, assign and deliver to Buyer or to one or more of its Affiliates as Buyer may designate, free and clear of all Liabilities, and Buyer or one or more of its designated Affiliates shall purchase and acquire from Seller, all of Debtor’s right, title and interest in (a) all the assets set forth or referred to in Schedule 1.1(a) (thе “Assets”) and (b) all the Contracts and Leases set forth in Schedule 1.1(b) (as may otherwise be amended by agreement of the parties) (collectively, the “Assumed and Assigned Contracts”), wherever located, in all cases only to the extent of the Debtor’s interests and only to the extent transferable (collectively, the “Purchased Assets”). Schedule 1.1(b) sets forth a list of all Contracts to be assumed and the estimated Cure Amount for such Contract set forth opposite its name.
Exhibit A, attached to the APA, was titled “Assignment and Assumption of Contracts” and provided for the cоnsummation of the assumption and assignment of, among other things, twelve leases and five fuel supply agreements, including the Kel-mont lease. Exhibit A purported to be in satisfaction of the obligation of the trustee to execute the assumption and assignment, as that obligation was set out in Sections 3.3.2 and 3.4.2 of the APA.
The Rejection Motion was granted by the court by separate order on the same date that the asset sale was аpproved.
(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and—
(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such leаse as terminated by the rejection; or
(ii) if the term of such lease has commenced, the lessee may retain its rights under such lease (including rights such as those relating to the amount and timing of payment of rent and other amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law.
D & MRE further pleads that it elects to retain its rights pursuant to the provisions of § 365(h)(1)(A)(ii). LAP objects to the motion, arguing that the asset purchase agreement provides that “Buyer shall assume no liability or obligation of the debt- or” [¶ 2.2] and asserting that the sale of debtor’s assets free and clear pursuant to § 363 of the Bankruptcy Code makes § 365(h) inapplicable. LAP also argues that D & MRE’s motion is an impermissible attack on the November 30, 2012, order approving the asset transaction. Finally, it argues that the D & MRE motion is barred by the doctrines of res judicata and collateral estoppel.
Additional finding of fact may be contained in the discussion of law that follows.
Conclusions of law. The issue may be distilled to whether the assignment of the assumed Kelmont lease extinguished the § 365(h) rights of D & MRE, debtor’s sublessee, when that assignment was made as part of a transaction including both the sale of assets free and clear pursuant to the provisions of § 363 of the Bankruptcy Code and the assumption and assignment of various leases and executory contracts pursuant to § 365 of the Bankruptcy Code. LAP argues that because of the “sale free and clear” provisions of the APA, it obtained the Kelmont leаse free and clear of D & MRE’s interest.
The court, in evaluating the arguments put forth by the parties, first examines the transactions among the parties. It seems beyond dispute that the trustee and LAP, in structuring the transaction at issue, intended to transfer all of the assets of debtor and all of the interests of the debt- or in the leases and executory contracts to LAP. The Sale and Assumption Motion and the order approving it were executed to combine the sale and the assumption and assignment aspects in one document. The APA and the order approving the final sale and the assumption and assignment were structured similarly, with all elements of both sale and assumption and assignment being combined in a single document.
Regardless of the unitary nature of the documents, however, the documents are all
LAP argues that the protections of § 363(f) of the Bankruptcy Code, which provides that the trustee may sell property of the debtor “free and clear of any interest in such property of an entity other than the estate,”
In Qualitech, debtor Qualitech had granted to Precision a ground lease for $1 a year for a period of ten years. During those ten years, Precision would construct and operate a supply warehouse to provide supply services for Qualitech. At the end of the ten-year period, Qualitech had the right to purchase the warehouse for $1. The year after the execution of the lease, Qualitech filed a chapter 11 bankruptcy petition, and substantially all of its assets were sold at auction. Precision did not object to the sale, which was conducted pursuant to the “free and clear” sale authority of § 363(f) and was approved by court order. There was no separate assumption and assignment of the Precision lease in connection with the sale, and despite negotiations relative thereto, the parties never agreed upon an assumption of the lease. Thus, the lease was de facto rejected.
Precision asserted that it retained its leasehold rights after the sale pursuant to § 365(h) and that the purchaser of debtor’s assets had impermissibly taken possession of the leased property. The bankruptcy court found that the purchaser owned the property free and clear of the leasehold interest, but the district cоurt reversed, noting the conflict between §§ 363(f) and 365(h) and finding that the legislative history supported a finding that the sale was ineffective to extinguish the lessee’s § 365(h) rights after rejection. Precision Indus. Inc., v. Qualitech Steel SBQ, LLC, No. IP00-0247-C-H/G,
The Seventh Circuit reversed the district court, holding that the sale in fact had extinguished the rights of Precision. The court concluded that the provisions of § 365(h) were inapplicable if a lease were sold as part of a § 363(f) sale. It noted that the lessee was not without protection, as § 363(e) gave the lessee the right to request adequate protection of its interest in the property. It further noted that § 365(h) applies only to rejected leases,
Qualitech is the only circuit court decision to date that addresses the interplay between §§ 363(f) and 365(h). Lower court cases on the issue are split. Cases holding that, as in Qualitech, the § 365(h) rights of a tenant may be extinguished by a § 363 sale generally rеly on two canons of statutory construction. The first is that the court should afford a statute its plain meaning. In South Motor Co. v. Carter-Pritchett-Hodges, Inc. (In re MMH Automotive Group, LLC),
The second canon relied upon is that courts should interpret statutes so as to “avoid conflicts between them if such construction is possible and reasonable.” Qualitech,
Where estate property under lease is to be sold, section 363 permits the sale to occur free and clear of a lessee’s possessory interest-provided that the lessee (upon request) is granted adequate protection for its interest. Where the property is not sold, and the debtor remains in possession thereof but chooses to reject the lease, section 365(h) comes into play and the lessee retains the right to possess the property. So understood, both provisions may be given full effect without coming into conflict with one another and without disregarding the rights of lessees.
We are persuaded that it is both reasonable and correct to interpret and reconcile sections 363(f) and 365(h) in this way. It is consistent with the express terms of each provision, and it avoids the unwelcome result of reading a limitation into section 363(f) that the legislature itself did not inscribe onto the statute. Congress authorized the sale of estate property free and clear of “any interest,” not “any interest except a lessee’s possessory interest.”
Id. at 548. In MMH Automotive Group, the court also determined that there was no conflict between the statutes, as they could be read in such a way as to make each effective, although it did not reach as clear a result as did the court in Qualitech, merely stating that there was no conflict.
In re Haskell L.P.,
The rationale behind cases prohibiting the extinguishment of a sublessee’s § 365(h) rights through a § 363 sale has been based in part upon the statutory construction principle that the more speсific provision should prevail over the general. See In re Churchill Props. III, Ltd. P’ship,
Cases disapproving the § 363 sale of leases to extinguish § 365(h) rights also rely upon the legislative history of § 365(h), which is indicative of the desire of Congress to protect the rights of a debtor’s tenant. A 1978 Senate Report remarked that under the terms of § 365(h), “the tenant will not be deprived of his estate for the term for which he bargained.” S.Rep. No. 95-989, at 60 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5846. The Section-by-Section Analysis of the 1994 amendments to the Bankruptcy Code further reflect a Congressional desire to protect the rights of thosе who are lessees of debtors:
This section clarifies section 365 of the Bankruptcy Code to mandate that lessees cannot have their rights stripped away if a debtor rejects its obligation as a lessor in bankruptcy. This section expressly provides guidance in the interpretation of the term “possession” in the context of the statute. The term has been interpreted by some courts in recent cases to be only a right of possession (citations omitted). This section will enable the lessee to retain its rights*162 that appurtenant to its leasehold. These rights include the amount and timing of payment of rent or other amounts payable by the lessee, the right to use, possess, quiet enjoyment, sublet and assign.
Bankruptcy Reform Act of 1994, Section-by-Section Analysis, 140 Cong. Rec. H10752-01 (Oct. 4,1994).
Cases relied upon by LAP are factually distinguishable. In Qualitech, the lease rejection had been a de facto one, and there is no mention in the case that there had been an assumption and assignment of the leases at issue. Further, the lease in that case was an economic disadvantage for the purchaser of the debtor’s assets. In Cheslock-Bakker & Assoc., Inc. v. Kremer (In re Downtown Athletic Club of New York City, Inc.), No. M-47 (JSM),
The case of In re R.J. Dooley Realty, Inc., No. 09-36777,
The facts of In re Samaritan Alliance, LLC, No. 07-50735,
Here, LAP argues that the sale portion of the order should govern, while D & MRE argues for the protections given by § 365 in an assumption and assignment. The court, after considering the issue, has determined that the dual nature of the transaction, while perhaps intended by the buyer and seller to be a single transaction, must govern. The transaction was titled as a sale free and clear and an assumption and assignment, and all parties had notice therefore that the provisions of § 365 were thus implicated. Further, the APA itself contained an Exhibit listing the leases to be assumed and assigned and giving cure amounts, and the sublease of D & MRE was rejected pursuant to the provisions of § 365. Thus, the assumption and assignment must be considered as such and governed by the provisions of § 365, including 365(h). Therefore, the rights of D & MRE under § 365(h) survive the transaction.
However, even if the court considers the transaction at issue as solely in the nature of a § 363 sale, it would reach the same conclusion. The court has evaluated the arguments contained in the Qualitech and Haskell lines of cases and, as did the court in Samaritan Alliance, agrees with the conclusion reached by the court in Haskell. The rights of the tenant may not be extinguished by a § 363 sale; to hold to the contrary would give open license to debtors to dispossess tenants by utilizing the § 363 sale mechanism. The court cannot countenance this result, especially under the facts of this case, when, as previously noted, 1) the transaction was titled as a sale free and clear and an assumption and assignment, and 2) all parties had notice therefore that the provisions of § 365 were thus implicated, 3) the APA itself contained an Exhibit listing the lеases to be assumed and assigned and giving cure amounts, and 4) the sublease was specifically rejected pursuant to the provisions of § 365. The court also notes that there is no adequate protection proposed. This result will also be in accord with the legislative history of § 365, which indicates the desire of Congress to preserve the rights of a party to a real property lease that a lessor debtor has rejected.
The court limits its comments to the case before it, observing that it is important that D & MRE’s motion was made within ten days of thе entry of the order approving the asset transaction and promptly presented to the court for resolution.
LAP argues that D & MRE’s motion is barred by the principles of res judicata, collateral estoppel and waiver. It further argues that the motion is an impermissible collateral attack on the order approving the sale. However, the D & MRE motion does not seek to set aside the sale; rather, it requests a determination of the effect of the sale and so does not constitute an attack on the sale order. As to res judicata and collateral estoppel, the court has never рassed on the effect of the transaction upon D & MRE or any other similarly situated tenant. Res judicata is not therefore implicated, since application of that doctrine requires that the claims in each matter be based upon the same cause
A separate order will be entered granting the “Motion for Entry of Order Recognizing Sublessee’s Rights under Rejected Subleases” filed by D & MRE, LLC.
Notes
. On Jan. 20, 2012, subsequent to the events referred to in this Memorandum Opinion, debtor’s cаse was converted to one under chapter 7 of the Bankruptcy Code.
. The executed copy of the APA was attached to the trustee's opposition memorandum. [Docket 348]. No party has objected to the introduction of that document.
. D & MRE pleads that LAP, as successor to debtor's lease with Kelmont, has notified D & MRE that it intends to seeks possession of the property, thus presenting the "case or controversy” necessary for the court's jurisdiction.
. Section 363(f) prohibits sales free and clear of liens and other encumbranсes under certain conditions not at issue here.
. LAP points to the case of Micron Technology, Inc. v. Qimonda (In re Qimonda AG Bankruptcy Litigation),
. The court, in a strong holding against tenants of debtors, noted that "offering ... adequate protection to a general unsecured creditor would catapult it ahead of its position behind secured, administrative, and priority unsecured creditors, in complete contravention of the priorities of the Bankruptcy Code.” Id. at *7.