In Re: Royal Street Bistro ( 2022 )

United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
___________
February 16, 2022
No. 22-30066 Lyle W. Cayce
___________ Clerk
In re Royal Street Bistro, L.L.C.; Picture Pro, L.L.C.;
Susan Hoffman,
Petitioners.
______________________________
Petition for a Writ of Mandamus
to the United States District Court
for the Eastern District of Louisiana
USDC No. 2:21-CV-2285
USDC No. 2:22-CV-144
______________________________
Before Jones, Duncan, and Engelhardt, Circuit Judges.
Per Curiam:
The motion for a writ of mandamus addressed to the district court is
DENIED. 1
A brief explanation of our conclusion is necessary because both the
bankruptcy and district courts premised their denials of relief to the lessees,
in part, on unnecessary and likely incorrect interpretations of the relationship
between Sections 363 and 365 of the Bankruptcy Code. 2 The petition for
mandamus before us seeks to compel the district court to stay pending appeal
1
The motion to file in excess of the word count limit is GRANTED.
2
We have examined the appellants’ other arguments and find them thoroughly
rebutted in the bankruptcy and district court opinions.
No. 22-30066
of an order authorizing the debtor’s Chapter 11 trustee to sell the debtor’s
real property on Bourbon Street, New Orleans free and clear of all claims,
liens, and interests under 11 U.S.C. Sec. 363(f).
Two lessees of the property, together with the sole owner of the
debtor, filed objections to the sale and an alternative request seeking either
adequate protection under Section 363(e) or rejection of the leases, all of
which the bankruptcy court denied. These lessees are insiders of the debtor
company. They executed and recorded leases (for below-market rates) junior
to the rights of the mortgagee AMAG. Had there been no bankruptcy,
AMAG could have foreclosed under state law and wiped out the junior
interests. 3 In fact, this is the first reason stated by the bankruptcy judge in
denying their requests to prevent the Chapter 11 Trustee’s sale or secure
other relief. That consequence of state law is all that the bankruptcy court
needed to decide this case, because both provisions of the Bankruptcy Code
relevant here, Sections 363(f)(1) and 365(h)(1)(A)(ii), qualify what a debtor
can do. Under the former provision, where “applicable nonbankruptcy law
permits,” the debtor may sell free and clear, 11 U.S.C. § 363(f), subject to
providing “adequate protection” to the lessee, Section 363(e). 4 Under the
latter provision, the debtor may “reject” a leasehold, but the lessee has the
right to remain in the property through its term “to the extent that such
rights are enforceable under applicable nonbankruptcy law,”
11 U.S.C. § 365(h)(1)(A)(ii). Bankruptcy law, in other words, recognizes and
defers to state law in these provisions. Cf. Butner v United States, 440 U.S.
48, 54-57, 99 S. Ct. 914, 917-19 (1979) (holding that, except where it
3
None of the leases contained nondisturbance clauses that would have protected
the lessees from situations like an AMAG foreclosure.
4
No duty to provide adequate protection arose from this sale, however, where
under the lease the lessee had zero residual value after AMAG’s prior mortgage debt is
satisfied.
2
No. 22-30066
specifically overrides state law, the Bankruptcy Code enforces applicable
property rights created by state law).
The bankruptcy judge’s first reason was well grounded on state law as
just explained. Her second reason for denying relief was that one tenant
(Portfolio LLC) had not paid any rent in many months, even at the very
modest rate, and was thus in default. This provided another nonbankruptcy
law basis for declining to allow that tenant to stop the sale free and clear. See
11 U.S.C. Sec. 363(f)(4).
However, the bankruptcy judge and the district court (on the lessees’
attempted stay pending appeal) both made the mistake of relying on Precision
Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), for the
excessively broad proposition that sales free and clear under Section 363
override, and essentially render nugatory, the critical lessee protections
against a debtor-lessor under Section 365(h). 5 The lower courts also relied
on In re. Spanish Peaks Holdings II, LLC, 872 F.3d 892, 899-900 (9th Cir.
2017), which essentially adopted Qualitech, but noted, importantly, that the
leases there (as in this case) were legally subordinated to a senior mortgagee
interest in the real property. Spanish Peaks, like the case before us, is
susceptible of a narrower reading.
Qualitech had “the potential to profoundly impact the bankruptcy
world,” as one critical commentator stated. See Michael St. Patrick Baxter,
Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in
Precision Industries v. Qualitech Steel, 59 Bus. Law. 475, 475 (2004); see
also Robert M. Zinman, Precision in Statutory Drafting: The Qualitech
Quagmire and the Sad History of § 365(h) of the Bankruptcy Code, 38 John
5
Id. at 547 (holding that the terms of Section 365(h) do not supersede those of
Section 363(f)).
3
No. 22-30066
Marshall L. Rev. 97 (2004) (acknowledging turmoil created by
Qualitech, while offering a different statutory reading from Baxter); Dishi &
Sons v. Bay Condos LLC, 510 Bankr. 696 (S.D.N.Y. 2014) (criticizing
Qualitech and adopting a third reading of the interplay between Sections 363
and 365(h)). Before Qualitech, most bankruptcy courts had rejected that
decision’s interpretation of the relevant provisions. See, e.g., In re. Samaritan
Alliance, LLC, 2007 WL 4162918, at *4 (Bankr. E.D. Ky. Nov. 21, 2007); In
re. Haskell L.P., 321 B.R. 1, 9 (Bankr. D. Mass. 2005); In re. Churchill Props.
III, Ltd. P’ship, 197 B.R. 283, 287-88 (Bankr. N.D. Ill. 1996); In re. Taylor, 198
B.R. 142, 167-68 (Bankr. D. S.C. 1996). The arguments on either side of these
issues are textually sophisticated, fact-laden, and deeply rooted in
commercial law far beyond the scope of the mandamus petition before us.
Both commentators’ articles would agree, however, that the essential state
law rights of the tenants in this case are limited by the senior mortgagee’s
prior lien on the Bourbon Street Property. From that standpoint, neither
Section 363(e) nor 365(h)(1)(A)(ii) offers protection.
None of this means that the bankruptcy and district courts’
overstatement of their reasoning created the kind of serious
misinterpretation of law or facts that may support one of the criteria for
mandamus relief. See In re JPMorgan Chase & Co., 916 F.3d 494, 500 (5th
Cir. 2019). Courts must be cautioned, however, against blithely accepting
Qualitech’s reasoning and textual exegesis.
4