Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In Re Qualitech Steel Corp.)

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-2753
PRECISION INDUSTRIES, INC., and
CIRCO LEASING CO., LLC,
Appellees,
v.
QUALITECH STEEL SBQ, LLC,
Appellant.
I N R E:
QUALITECH STEEL CORPORATION and
QUALITECH STEEL HOLDINGS CORPORATION,
Debtors-in-Possession.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 00 C 247—David F. Hamilton, Judge.
____________
ARGUED FEBRUARY 15, 2002—DECIDED APRIL 23, 2003
____________
Before ROVNER, DIANE P. WOOD, and EVANS, Circuit
Judges.
ROVNER, Circuit Judge. In this case of first impression
at the circuit level, we are asked to reconcile two distinct
provisions of the Bankruptcy Code: 11 U.S.C. § 363(f),
which authorizes the sale of a debtor’s property free of
2 No. 01-2753
any “interest” other than the estate’s, and 11 U.S.C.
§ 365(h), which protects the rights of the lessee when the
debtor rejects a lease of estate property. The bankruptcy
court in this case construed a sale order issued pursuant
to section 363(f) to extinguish the possessory rights be-
stowed by a lease of the estate’s land. The district court
disagreed, reasoning that sections 363(f) and 365(h) con-
flict and that the more specific terms of the latter provi-
sion concerning leaseholds trump those of the former, in
this way preserving the lessee’s possessory interest even
after a section 363(f) sale. Precision Indus., Inc. v. Qualitech
Steel SBQ, LLC, 2001 WL 699881 (S.D. Ind. April 24, 2001).
We reverse, concluding that under the plain terms of
section 363(f), the sale order extinguished the lessee’s
possessory interest.
I.
The debtors in the underlying bankruptcy proceed-
ings—Qualitech Steel Corporation and Qualitech Steel
Holdings Corporation (collectively, “Qualitech”)—owned
and operated a steel mill on a 138-acre tract of land in
Pittsboro, Indiana. Before it entered bankruptcy, Qualitech
had entered into two related agreements with appellees
Precision Industries, Inc. and Circo Leasing Co., LLC
(collectively, “Precision”). A detailed supply agreement
executed on June 29, 1998, provided that Precision would
construct a supply warehouse at Qualitech’s Pittsboro
facility and operate it for a period of ten years so as to
provide on-site, integrated supply services for Qualitech.
The second agreement, a land lease executed on February
25, 1999, specified that Qualitech would lease to Precision
the property underlying the warehouse for a period of ten
years. In exchange for nominal rent of $1 per year, the lease
granted Precision exclusive possession of the warehouse
and any other improvements or fixtures it installed on
No. 01-2753 3
the land for the term of the lease; and in the event of an
early termination or default under either the lease or the
supply agreement, Precision had the right to remove
all improvements and fixtures from the property. Assuming
no default, Qualitech had the right at the end of the lease
term to purchase the warehouse, its fixtures, and other
improvements for $1. In accordance with the two agree-
ments, Precision built and stocked a warehouse on the
leased property and Qualitech began purchasing goods
from Precision. The lease was never recorded.
Heavily in debt,1 Qualitech filed a Chapter 11 bankrupt-
cy petition on March 22, 1999. On June 30, 1999, substan-
tially all of Qualitech’s assets were sold at auction for a
credit bid of $180 million to a group of senior pre-petition
lenders that held the primary mortgage on the Pittsboro
property.2 On August 13, 1999, at the conclusion of a
noticed hearing, the bankruptcy court entered an order
approving the sale (hereinafter, the “Sale Order”). Preci-
sion, which had notice of the hearing, did not object to the
Sale Order. That order directed Qualitech to convey its
assets to the pre-petition lenders—referred to in the Sale
Order collectively as the “purchaser”—“free and clear of
all liens, claims, encumbrances, and interests,” except for
specifically enumerated liens, pursuant to section 363(f),
among other provisions of the Code. R. 492 at 6-7 ¶ 2
(emphasis supplied). All persons and entities holding inter-
ests other than those expressly preserved in the Sale Or-
der were barred from asserting those interests against
1
By the time Qualitech’s assets were sold at auction, there were
more than $380 million in secured claims against Qualitech’s
estate.
2
The original amount of the mortgage held by these pre-petition
lenders was $170 million. By the time the sale occurred, the
outstanding balance on that mortgage was more than $263
million.
4 No. 01-2753
the purchaser. Id. at 8 ¶ 6. The pre-petition senior lenders
subsequently transferred their interest in the purchased
assets to newly-formed Qualitech Steel SBQ, LLC (“New
Qualitech”), which assumed the rights of the purchaser
under the Sale Order and took title to the Pittsboro prop-
erty. The Sale Order also reserved for the purchaser the
debtor’s right to assume and assign executory contracts
pursuant to 11 U.S.C. § 365. R.492 at 9 ¶ 9. Although
the sale closed on or about August 26, 1999 without as-
sumption of either the lease or the supply agreement
with Precision, negotiations toward that end continued
and the parties extended the deadline for assumption on
four occasions. Those negotiations did not prove successful,
however, with the result that Precision’s lease and supply
agreement were de facto rejected. See 2001 WL 699881,
at *9 & n.8.
By December 3, 1999, Precision had completely vacated
and padlocked the warehouse. Shortly thereafter, New
Qualitech, without Precision’s knowledge or consent, hired
a locksmith and changed the locks on the building. New
Qualitech’s takeover of the warehouse led to a dispute
over whether Precision’s possessory interest in the leased
property, pursuant to section 365(h), survived the bank-
ruptcy sale. Finding itself locked out of the warehouse,
Precision filed a diversity suit in the district court con-
tending that New Qualitech was guilty of trespass, conver-
sion, wrongful eviction, breach of an implied contract, and
estoppel. New Qualitech in turn asked the district court
to refer Precision’s complaint—which was premised on the
notion that Precision retained a possessory interest in the
warehouse under the lease—to the bankruptcy court, and
New Qualitech also filed a request with the bankruptcy
court asking it to clarify that the Sale Order had extin-
guished Precision’s possessory interest. The district court
obliged New Qualitech by referring Precision’s complaint
to the bankruptcy court, and that court in turn resolved
No. 01-2753 5
the matter of Precision’s possessory interest in New Quali-
tech’s favor.
Based on the terms of both section 363(f) and the Sale
Order itself, the bankruptcy court determined that New
Qualitech had obtained title to Qualitech’s property free
and clear of any possessory rights that Precision otherwise
might have enjoyed under its lease. In relevant part, the
court held that Precision’s possessory interest was among
those interests extinguished by the Sale Order:
The interest[ ] of Precision as a lessee under the Lease
is an “interest” within the meaning of the Sale Order.
The sale of the Indiana Facilities pursuant to 11 U.S.C.
§ 363(b), (f), and (k) was free and clear of all liens,
claims, encumbrances and interests [and therefore]
acted to convey the Indiana Facilities free and clear
of the interests of Precision as lessee under an unre-
corded lease.
R. 601 at 5 ¶ 6. The court emphasized that “[t]he Sale Or-
der was unequivocal and not left open to interpretation.” Id.at 7 ¶ 11. Implicitly, the bankruptcy court rejected the
notion that the provisions of section 365(h) acted to pre-
serve Precision’s rights as a lessee in the face of the Sale
Order.
[T]he Court is forced to conclude that under the
circumstances and the plain language of the Sale Order
[New Qualitech] holds the assets acquired from
[Qualitech] free and clear of the Lease and all interest
of Precision in the . . . real estate acquired by the
Purchaser from the Debtor. The Lease has been extin-
guished by the Sale Order and the Sale Order is no
longer subject to attack by Precision.
Precision is barred from asserting any interest in
the real estate acquired by the Purchaser from
[Qualitech]. . . . Precision may take no further action to
6 No. 01-2753
enforce the Lease against [New Qualitech] or the
Indiana Facilities.
Id. at 9-10 ¶¶ 16, 17.
Precision appealed the bankruptcy court’s decision, and
the district court reversed. The court determined at the
outset that the provisions of sections 363(f) and 365(h) were
in apparent conflict: “Section 365(h) appears to grant
the tenant the right to retain the benefits of the lease,
while Section 363(f) appears to allow the [debtor] to divest
the tenant of its leasehold.” 2001 WL 699881, at *11.
Accordingly, the court looked beyond the text of the two
statutes. After surveying the legislative history of both
provisions along with the divided case law on the subject,
the court concluded that the terms of section 365(h) pre-
vail over those of section 363(f) as applied to the rights
of lessees.
The focus of Section 365(h)(1)(A)(ii) is very specific—it
defines a lessee’s post-rejection rights. The statute
expressly states that, after rejection of an unexpired
lease, a non-debtor lessee may elect to retain posses-
sion of the property for the balance of the term and for
any enforceable extensions of the term. The available
legislative history . . . also indicates that Congress
intended to preserve the lessee’s estate in the event
of rejection by a bankrupt landlord. Finally, the statute
does not expressly cross-reference any other provision
of the Bankruptcy Code by way of limitation. For
these reasons, this court holds that the more specific
Section 365(h) overrides Section 363(f) in this case. . . .
There is no statutory basis for allowing the debtor-
lessor to terminate the lessee’s possession by selling
the property out from under the lessee, and thus
limiting a lessee’s post-rejection rights solely to cases
where the debtor-lessor remains in possession of its
property.
No. 01-2753 7
2001 WL 699881, at *14 (emphasis in original). Finally, the
district court rejected the notion that Precision’s appeal
was untimely because it had never objected to or ap-
pealed from the Sale Order itself. For several reasons, the
district court found the Sale Order to be ambiguous: (1)
The Order stated that the sale of Qualitech’s assets was
“pursuant to” section 365 as well as 363, and given the
difficulty reconciling those two statutory provisions, it
perpetuated the uncertainty as to which of them con-
trolled vis à vis Precision’s rights under the lease; (2) the
Order did not plainly extinguish Precision’s possessory
interest; and (3) to the contrary, by preserving for New
Qualitech the debtor’s right to assume or reject executory
contracts, the Order suggested that Precision’s rights un-
der the lease were not extinguished by the sale. 2001 WL
699881, at *19-21.
New Qualitech filed a timely notice of appeal from the
district court’s decision. We have jurisdiction pursuant to
28 U.S.C. § 158(d). See, e.g., In re Golant, 239 F.3d 931,
934 (7th Cir. 2001).
II.
Our task in this appeal is straightforward. We must
decide whether a sale order issued under section 363(f),
which purports to authorize the transfer of a debtor’s
property “free and clear of all liens, claims, encumbrances,
and interests,” operates to extinguish a lessee’s possessory
interest in the property, or whether the terms of section
365(h) operate to preserve that interest. This is, of course,
a question of law, making our review of the district court’s
decision de novo. See, e.g., APS Sports Collectibles, Inc.
v. Sports Time, Inc., 299 F.3d 624, 628 (7th Cir. 2002).
Before turning to the merits, however, we must consider
whether, as New Qualitech asserts (and as the bankrupt-
cy court agreed), res judicata bars Precision from challeng-
8 No. 01-2753
ing the Sale Order. As we have noted, Precision never
voiced any objection to the bankruptcy court about the
proposed sale, nor did it take an appeal from the Sale Or-
der itself. Not until months later, when New Qualitech
changed the locks on the warehouse, did Precision take
issue with the Sale Order, which it did by filing a diversity
action in the district court. Sale orders are final, appealable
orders, e.g., In re Kids Creek Partners, L.P., 200 F.3d 1070,
1074-75 (7th Cir. 2000), and our opinion in In re Met-L-
Wood Corp., 861 F.2d 1012, 1016 (7th Cir. 1988), cert.
denied, 490 U.S. 1006, 109 S. Ct. 1642 (1989), states that
once the time for appeal from a bankruptcy court’s sale
order has expired, res judicata precludes a party to the
sale proceeding from attacking the sale order by way of
a new lawsuit. See also FutureSource LLC v. Reuters Ltd.,
312 F.3d 281, 286 (7th Cir. 2002), cert. denied, 2003 WL
1220239 (U.S. Apr. 7, 2003). That is, in effect, what Preci-
sion attempted to do here through its diversity suit. But
with the referral of Precision’s complaint to the bankruptcy
court, and with New Qualitech’s own request that the
bankruptcy court clarify and enforce its Sale Order, the
entire issue was put before the very judge who issued the
Sale Order and in the same bankruptcy proceeding. This
turn of events renders res judicata inapposite. See generally
Bethesda Lutheran Homes & Servs., Inc. v. Born, 238 F.3d
853, 858 (7th Cir. 2001). Res judicata is not, in any case, a
doctrine that affects our jurisdiction to determine whether
the bankruptcy court was authorized to permit the sale of
Qualitech’s land free and clear of Precision’s possessory
interest as a lessee. See White v. Elrod, 816 F.2d 1172, 1175
(7th Cir.), cert. denied, 484 U.S. 924, 108 S. Ct. 286 (1987).
Moreover, although the bankruptcy judge found that Pre-
cision had waited too long to challenge the Sale Order, he
did take the opportunity to confirm that the Sale Order had,
indeed, extinguished Precision’s possessory interest. R.601
at 5 ¶ 6; id. at 7 ¶ 11; id. at 9 ¶ 16. As the district judge
recognized, that construction of the Sale Order rests on an
No. 01-2753 9
understanding, albeit unstated, that section 363(f) permits
the extinguishment of a lease notwithstanding the terms of
section 365(h). 2001 WL 699881, at *20. The district judge
found that understanding to be mistaken; as we have noted,
he concluded that the provisions of section 365(h) trump
those of section 363(f) where leases are concerned. In short,
what the Sale Order accomplished vis à vis Precision’s lease
is a question that turns, in large measure, on what the
Bankruptcy Code permitted. The statutory question is
therefore squarely presented to us, and we proceed to
address it.
As in all statutory interpretation cases, we begin with
the statutory language. E.g., Hughes Aircraft Co. v. Jacob-
son, 525 U.S. 432, 438, 119 S. Ct. 755, 760 (1999). Statutory
terms or words will be construed according to their or-
dinary, common meaning unless they are specifically
defined by the statute or the statutory context requires
a different definition. E.g., Walters v. Metropolitan Educ.
Enters., Inc., 519 U.S. 202, 207, 117 S. Ct. 660, 664 (1997).
The Supreme Court has repeatedly instructed “that
courts must presume that a legislature says in a statute
what it means and means in a statute what it says there.
[Citations omitted.] When the words of a statute are
unambiguous, then, this first canon is also the last: ‘judicial
inquiry is complete.’ ” Connecticut Nat’l Bank v. Germain,
503 U.S. 249, 253-54, 112 S. Ct. 1146, 1149 (1992) (quoting
Rubin v. United States, 449 U.S. 424, 430, 101 S. Ct. 698,
701 (1981)).
We must also have in mind our obligation to construe
the two statutory provisions at issue in this case in such
a way as to avoid conflicts between them, if such a construc-
tion is possible and reasonable. As the Supreme Court
has observed:
[W]e “are not at liberty to pick and choose among
congressional enactments, and when two statutes are
10 No. 01-2753
capable of co-existence, it is the duty of the courts,
absent a clearly expressed congressional intention
to the contrary, to regard each as effective.” Morton
v. Mancari, 417 U.S. 535, 551, 94 S. Ct. 2474, 2483, 41
L.Ed.2d 290 (1974). We should read federal statutes “to
give effect to each if we can do so while preserving
their sense and purpose.” Watt v. Alaska, 451 U.S. 259,
267, 101 S. Ct. 1673, 1678, 68 L.Ed.2d 80 (1981); see
also United States v. Fausto, 484 U.S. 439, 453, 108 S.
Ct. 668, 676-77, 98 L.Ed.2d 830 (1988).
Pittsburgh & Lake Erie R.R. Co. v. Railway Labor Execu-
tives’ Ass’n, 491 U.S. 490, 510, 109 S. Ct. 2584, 2596 (1989);
see also Securities Indus. Ass’n v. Board of Governors
of Federal Reserve Sys., 468 U.S. 137, 176, 104 S. Ct.
2979, 3000 (1984) (O’Connor, J., dissenting) (construing
one portion of federal law to implicitly repeal or override
another “is a last resort, . . . and must be avoided where
an interpretation of the statutory language is available
that is consistent with legislative intent and that shows
the conflict to be merely apparent and not real”). With
these principles in mind, we turn to the language of the
statutory provisions at issue here.
Section 363 generally provides for the use, sale, or lease
of property belonging to the bankruptcy estate. As rele-
vant here, subsections (b) and (c) permit the trustee of a
bankruptcy estate to sell estate property either within the
normal course of a debtor’s business (in which case the
sale may take place without prior notice and a hearing)
or outside the normal course of business (in which case,
as here, notice and hearing are mandatory). Subsection (f)
makes clear that the property, under specified conditions,
may be sold unencumbered of interests held by others:
The trustee may sell property under subsection (b) or
(c) of this section free and clear of any interest in
such property of an entity other than the estate, only
if—
No. 01-2753 11
(1) applicable nonbankruptcy law permits sale of
such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which
such property is to be sold is greater than the
aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or
equitable proceeding, to accept a money satis-
faction of such interest.
(Emphasis ours.) Finally, subsection (e) provides that “on
request of an entity that has an interest in property . . .
proposed to be . . . sold . . . by the trustee, the court, with
or without a hearing, shall prohibit or condition such . . .
sale . . . as is necessary to provide adequate protection of
such interest.” We note that although section 363(f) refers
to the powers and obligations of the “trustee,” these are
powers and obligations which, in a Chapter 11 case, inure
to the debtor-in-possession. See 11 U.S.C. § 1107(a).
The Bankruptcy Code does not define “any interest,” and
in the course of applying section 363(f) to a wide variety
of rights and obligations related to estate property, courts
have been unable to formulate a precise definition. Folger
Adam Security, Inc. v. DeMatteis/MacGregor, JV, 209
F.3d 252, 258 (3d Cir. 2000). But the Code itself does
not suggest that “interest” should be understood in a
special or narrow sense; on the contrary, the use of the
term “any” counsels in favor of a broad interpretation. See
United States v. Gonzalez, 520 U.S. 1, 5, 117 S. Ct. 1032,
1035 (1997). As commentators have pointed out, the
Supreme Court elsewhere has observed that the term
“interest” is a broad term no doubt selected by Congress to
avoid “rigid and technical definitions drawn from other
areas of the law . . . .” Russello v. United States, 464 U.S.
12 No. 01-2753
16, 21, 104 S. Ct. 296, 299 (1983); see Steven R. Haydon
& Nancy J. March, Sale of Estate Property Free and Clear
of Real Property Leasehold Interests Pursuant to §363(f):
An Unwritten Limitation?, 19 AMERICAN BANKR. INST. J. 20,
20 (2000) (hereinafter, “Unwritten Limitation?”). The
Russello Court thus concluded that “interest,” as used in
the Racketeer Influenced and Corrupt Organizations
statute, 18 U.S.C. § 1963(a)(1), “comprehends all forms
of real and personal property, including profits and pro-
ceeds.” 464 U.S. at 21, 104 S. Ct. at 299. See also United
States v. Reckmeyer, 836 F.2d 200, 205 (4th Cir. 1987)
(broadly construing “legal interest” as used in criminal
forfeiture statute, 21 U.S.C. § 853(n)(2), to include “all
legally protected rights, claims, titles, or shares in real
or personal property”).
Here, we likewise conclude that the term “any interest”
as used in section 363(f) is sufficiently broad to include
Precision’s possessory interest as a lessee. BLACK’S de-
fines “interest” to mean “[a] legal share in something; all
or part of a legal or equitable claim to or right in property.”
BLACK’S LAW DICTIONARY, 816 (7th ed. 1999). The right
that a leasehold confers upon the lessee is one to possess
property for the term of the lease. It is, therefore, not
simply a right that is connected to or arising from the
property, see In re Trans World Airlines, Inc., 322 F.3d 283,
289-90 (3d Cir. 2003), but a (limited) right to the property
itself. That right readily may be understood as an “interest”
in the property. FutureSource LLC v. Reuters Ltd., supra,
312 F.3d at 285; see also In re Downtown Athletic Club of
New York City, Inc., 44 Collier Bankr. Cas. 2d 342, 2000
WL 744126, at *4 (S.D.N.Y. June 9, 2000) (“under the ex-
pansive interpretation of ‘any interest’ under § 363(f)(4),
Defendants’ asserted possessory rights as lessees fall within
the scope of this section”); In re Taylor, 198 B.R. 142, 162
(Bankr. D. S.C. 1996) (“it appears that a leasehold is a type
of ‘interest’ that fits within the plain text of the . . . stat-
No. 01-2753 13
ute”); see also C.H.E.G., Inc. v. Millenium Bank, 121 Cal.
Rptr. 2d 443, 448 (Cal. Ct. App. 2002) (holding that contrac-
tual right to commission in event of sale of property leased
from debtor is an “interest” in estate property that may be
extinguished pursuant to section 363(f)). This inclusive
interpretation of the phrase “any interest” is consistent
with the expansive use of that same phrase in other pro-
visions of the Code. See, e.g., 11. U.S.C. § 541(a)(3), (4), (5),
and (7) (identifying various interests comprising property of
the estate).
Because Precision’s right to possess the property as a
lessee qualifies as an interest for purposes of section 363(f),
the statute on its face authorized the sale of Qualitech’s
property free and clear of that interest. Although the
statute conditions such a sale on the satisfaction of one
of five conditions, the parties before us do not dispute that
at least one of those conditions was satisfied.3 On the
contrary, both parties to the appeal proceed from the
premise that section 363(f) standing alone permits the
sale of estate property free and clear of a lessee’s posses-
sory interest.
Where the parties lock horns is on whether the terms
of section 365(h) conflict with and override those of sec-
tion 363(f). Section 365 generally provides the trustee
(and here, the debtor-in-possession, see § 1107(a)) with the
3
New Qualitech asserts in its opening brief that “[p]utting aside
the issue of whether §365(h) somehow trumps a §363(f) sale, it
is not disputed that the Debtor was authorized to sell the property
free and clear of Precision’s unrecorded lease.” New Qualitech
Br. at 7 n.2. Precision does not take issue with this assertion in
its response brief. Accordingly, we shall assume, as New Qualitech
asserts, that one or more of the statutory criteria were met
and that a sale of the property free and clear of Precision’s
possessory interest as a lessee was permissible.
14 No. 01-2753
right to reject executory contracts, a power that serves
to relieve the debtor of contractual obligations that are
unduly burdensome. See N.L.R.B. v. Bildisco & Bildisco,
465 U.S. 513, 528, 104 S. Ct. 1188, 1197 (1984). However,
insofar as lessees of the estate’s property are concerned,
the power of rejection is limited so as to preclude eviction
of the lessee. In relevant part, section 365(h)(1)(A)(ii)
provides:
If the trustee rejects an unexpired lease of real prop-
erty under which the debtor is the lessor and—
...
(ii) if the term of such lease has commenced,
the lessee may retain its rights under such
lease . . . 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 en-
forceable under applicable non-bankruptcy law.
The terms of section 365(h) thus allow a lessee to remain
in possession of estate property notwithstanding the debtor-
in-possession’s decision to reject the lease. In this way,
the statute strikes a balance between the respective
rights of the debtor-lessor and its tenant: the lessee retains
the right to possess the property for the remainder of the
term it bargained for, while the rejection frees the debtor-
lessor of other burdensome obligations that it assumed
under the lease (as, for example, the duty to provide
services to the lessee). See Taylor, 198 B.R. at 165-67(summarizing legislative history and case law); In re LHD
Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982);
Unwritten Limitation?, 19 AM. BANKR. INST. J. at 22.
The district court, following the lead of other lower
courts, concluded that the limitations imposed by section
365(h) vis à vis rejection of leases necessarily conflict with
and override the debtor-in-possession’s ability to sell estate
No. 01-2753 15
property free and clear of a lessee’s possessory interest. But
for the reasons that follow, we conclude that the terms
of section 365(h) do not supersede those of section 363(f).
First, the statutory provisions themselves do not sug-
gest that one supersedes or limits the other. Notably,
sections 363 and 365 both contain cross-references indicat-
ing that certain of their provisions are subject to other
statutory mandates. See §§ 363(d), 365(a). But nowhere in
either section 363(f) or section 356(h) is there a similar
cross-reference indicating that the broad right to sell
estate property free of “any interest” is subordinate to
the protections that section 365(h) accords to lessees. The
omission suggests that Congress did not intend for the
latter section to limit the former. See, e.g., City of Chicago
v. Environmental Defense Fund, 511 U.S. 328, 338, 114 S.
Ct. 1588, 1593 (1994) (“ ‘[I]t is generally presumed that
Congress acts intentionally and purposely’ when it ‘includes
particular language in one section of a statute but omits
it in another.’ ”) (quoting Keene Corp. v. United States, 508
U.S. 200, 208, 113 S. Ct. 2035, 2040 (1993)); see also
Unwritten Limitation?, 19 AM. BANKR. INST. J. at 21.
Second, the plain language of section 365(h)(1)(A) sug-
gests that it has a limited scope. By its own terms, that
subsection applies “[i]f the trustee [or debtor-in-possession]
rejects an unexpired lease of real property . . . .” (Emphasis
supplied.) Here what occurred in the first instance was
a sale of the property that Precision was leasing rather
than a rejection of its lease. Granted, if the Sale Order
operated to extinguish Precision’s right to possess the
property—as we conclude it did—then the effect of the sale
might be understood as the equivalent of a repudiation of
Precision’s lease. See Taylor, 198 B.R. at 166 (“[t]o allow
a sale free and clear of a leasehold interest pursuant to
§ 363 . . . would effectively provide a debtor with means
of dispossessing the lessee”). But nothing in the express
terms of section 365(h) suggests that it applies to any
16 No. 01-2753
and all events that threaten the lessee’s possessory rights.
Section 365(h) instead focuses on a specific type of
event—the rejection of an executory contract by the
trustee or debtor-in-possession—and spells out the rights
of parties affected by that event. It says nothing at all
about sales of estate property, which are the province
of section 363. The two statutory provisions thus apply
to distinct sets of circumstances. See Downtown Athletic
Club, 2000 WL 744126, at *4; see also In re Stein, 281 B.R.
845, 851 (Bankr. S.D.N.Y. 2002) (“[T]he trustee is not
seeking to assume or reject the lease for the [debtor’s]
apartment; he is attempting to sell the property of the
estate under § 363(b). Thus, the effect of a theoretical
rejection is immaterial.”); cf. In re Webber Lumber & Supply
Co., 134 B.R. 76, 79-80 (Bankr. D. Mass. 1991) (§ 365(h)
applies only to rejection of lease and does not limit “strong-
arm” power to avoid lease pursuant to 11 U.S.C. § 544(a));
In re Sheets, 277 B.R. 298, 306-07 (Bankr. N.D. Tex. 2002)
(§ 365’s provisions regarding executory contracts for
purchase of property do not trump “strong-arm” authority
bestowed by § 544(a) to avoid obligations).
Third, section 363 itself provides for a mechanism to
protect the rights of parties whose interests may be ad-
versely affected by the sale of estate property. As noted
above, section 363(e) directs the bankruptcy court, on the
request of any entity with an interest in the property to
be sold, to “prohibit or condition such . . . sale . . . as is
necessary to provide adequate protection of such interest.”
Because a leasehold qualifies as an “interest” in property
for purposes of section 363(f), a lessee of property being
sold pursuant to subsection (f) would have the right to
insist that its interest be protected. “Adequate protection”
does not necessarily guarantee a lessee’s continued pos-
session of the property, but it does demand, in the alterna-
tive, that the lessee be compensated for the value of its
leasehold—typically from the proceeds of the sale. See
No. 01-2753 17
Unwritten Limitation?, 19 AM. BANKR. INST. J. at 22 & n.5,
citing, inter alia, In re Murel Holding Corp., 75 F.2d 941,
942 (2d Cir. 1935) (L. Hand, J.), and La Jolla Mortgage
Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 286 (Bankr.
S.D. Cal. 1982). Lessees like Precision are therefore not
without recourse in the event of a sale free and clear of
their interests. They have the right to seek protection under
section 363(e), and upon request, the bankruptcy court
is obligated to ensure that their interests are adequately
protected.
With these points in mind, it is apparent that the two
statutory provisions can be construed in a way that does
not disable section 363(f) vis à vis leasehold interests.
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 pos-
session 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 provi-
sion, 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.” The
interpretation is also consistent with the process of mar-
shaling the estate’s assets for the twin purposes of maxi-
mizing creditor recovery and rehabilitating the debtor,
which are central to the Bankruptcy Code. Unwritten
Limitation?, 19 AM. BANKR. INST. J. at 22-23, citing Basil H.
18 No. 01-2753
Mattingly, Sale of Property of the Estate Free and Clear
of Restrictions and Covenants in Bankruptcy, 4 AM. BANKR.
INST. L. REV. 431, 451-52 (1996).
Thus, section 363(f), as we interpret that provision,
permitted the bankruptcy court to allow the sale of
Qualitech’s Pittsboro property unencumbered by Preci-
sion’s possessory interest as a lessee. Precision neither
objected to the sale nor sought the protection that was
available under section 363(e). Its possessory interest
was extinguished by the sale.
III.
As the sale of Qualitech’s property terminated Preci-
sion’s possessory interest in the property as a lessee, we
REVERSE the district court’s judgment to the contrary.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-23-03