Sale of Estate Property Free and Clear of Real Property Leasehold Interests Pursuant to 363(f) An Unwritten Limitation
However, notwithstanding the apparently all-encompassing language of §363(f), two courts have held that the protections accorded real property lessees when their leases are rejected under §365 (h)(1) apply in the context of a sale of estate property pursuant to §363(f), and prevent a debtor from selling real property of the estate free and clear of a leasehold interest.4 See In re Taylor, 198 B.R. 142, 164-67 (Bankr. D. S.C. 1996); In re Churchill Properties III L.P., 197 B.R. 283 (Bankr. N.D. Ill. 1996). These courts have apparently created an absolute prohibition and exception under §363(f) for real property leases, and essentially have rewritten §363(f) to provide that a debtor may sell estate property free and clear of any interest, except for real property leases.
In concluding that §365(h)(1) overrides and limits §363(f), these courts did not apply well-established rules of statutory construction, did not consider substantive differences between §365(h)(1) and §363(f), and did not consider the safeguards already built into §363 that protect lessees in the context of a sale of estate property. As demonstrated below, given the clear language of §§363 and 365, applicable rules of statutory construction and the fundamental Bankruptcy Code policies promoted by §363, it is unnecessary and unjustified to elevate §365(h)(1) over §363(f) to provide special protection to a real property lessee in the context of a free-and-clear sale.
Section 363 Provides for Sales of Property Free and Clear of Any Interest
The starting point for interpreting a statutory provision is the language of the statute itself. United States v. James, 478 U.S. 597, 604, 106 S.Ct. 3116, 3120 (1986); O'Connell v. Hove, 22 F.3d 463, 468 (2d Cir. 1994) (citing Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 357 (1986)). When words of a statute are unambiguous, the plain meaning of the text must be enforced. Hudson v. Reno, 130 F.3d 1193, 1199 (6th Cir. 1997), cert. denied, 119 S.Ct. 64 (1998). "[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there." Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 1149 (1992). It is not proper for a court to delve further to determine what the plain and unambiguous language means. Id. at 254, 112 S.Ct. at 1149 ("When the words of a statute are unambiguous...judicial inquiry is complete.").
Because the phrase "any interest" is not limited by the Code, the phrase should be construed broadly in accordance with its plain, unambiguous and all-encompassing meaning. Accordingly, while the Bankruptcy Code does not define the term "interest," the term (as used in §363(f)) has been recognized to include a leasehold interest. In re Taylor, 198 B.R. at 162; see, also, In re Leckie Smokeless Coal Co., 99 F.3d 573 (4th Cir. 1996), cert. denied, 520 U.S. 1118 (1997) ("interest" as used in §363 is intended to refer to obligations that are connected to or arise from the property being sold). A broad and all-encompassing interpretation of the phrase "any interest" is supported by and consistent with the broad use of that phrase in other provisions of the Code. See, e.g., 11 U.S.C. §541(a)(3), (4), (5), and (7).
Moreover, such a broad and all-encompassing interpretation of the phrase "any interest" is further supported by the U.S. Supreme Court's construction of identical language in another federal statute. The forfeiture provisions of the Racketeer Influenced and Corrupt Organizations (RICO) statute, 18 U.S.C. §1963(a)(1), provide that a person convicted under RICO shall forfeit to the United States "any interest he has acquired or maintained in violation of [RICO]." See Russello v. United States, 464 U.S. 16, 104 S.Ct. 296 (1983). The defendant in that case contended that the RICO forfeiture did not require him to forfeit payments from a fire insurance company, payments that he claimed were "mere profits and proceeds" from a criminal conspiracy to commit arson. The Supreme Court disagreed.
In construing the term "any interest," the Supreme Court determined that since the term "interest" was not defined in the RICO statute, it must be given its ordinary meaning. See 464 U.S. at 21, 104 S.Ct. at 299; Richards v. United States, 369 U.S. 1, 9, 82 S.Ct. 585, 591 (1962). The Russello court then relied in part on the following definition of "interest" contained in Black's Law Dictionary—specifically, "[t]he most general term that can be employed to denote a right, claim, title or legal share in something." Thus, as the Russello court concluded, the term "interest" is a term that "comprehends all forms of real and personal property, including profits and proceeds." 464 U.S. at 21, 104 S.Ct. at 299. The court further ruled that:
It undoubtedly was because Congress did not wish the forfeiture provision of §1963(a) to be limited by rigid and technical definitions drawn from other areas of the law that it selected the broad term "interest" to describe those things that are subject to forfeiture under the statute. Congress selected this general term apparently because it was fully consistent with the pattern of the RICO statute in utilizing terms and concepts of breadth.
Id., 104 S.Ct. at 299-300. Moreover, "Every property interest, including a right to profits or proceeds, may be described as an interest in something." Id. at 22, 104 S.Ct. at 300 (emphasis added).
Without any limiting language or clearly evidenced congressional intent to the contrary, and in view of the requirements of statutory construction and the Supreme Court's interpretation of identical language, the plain and unambiguous language of §363(f) should be construed broadly. Accordingly, §363(f) means simply what it says: property may be sold free and clear of any interest, whether that interest is a lien, a joint ownership interest or a lease. Real property leases are not excepted from the interests that may be eliminated in a sale pursuant to §363(f), and in view of the plain, unambiguous and broad meaning of the language of §363(f), courts should not read such a limitation into the statute.
Moreover, when the terms of a statute are unambiguous, "judicial inquiry is complete except in rare and exceptional circumstances." Demarest v. Manspeaker, 498 U.S. 184, 190, 111 S.Ct. 599, 604 (1991). The strong presumption that congressional intent is fully and adequately expressed by the plain language of the statute can only be rebutted when a contrary legislative intent is clearly or otherwise expressed. Ardestani v. Immigration and Naturalization Service, 502 U.S. 129, 135-36, 112 S.Ct. 515, 520 (1991). The legislative histories of §§363 and 365, however, do not (clearly or otherwise) express any intent that §365(h)(1) should be applied to prevent the sale of estate property under §363(f) free and clear of a real property leasehold interest. Indeed, the legislative histories of §§363(f) and 365(h) make no reference to the application of the protections afforded by §365(h)(1) in the context of a sale of estate property encumbered by a real property lease. Rather, the legislative history of §365 discusses the protections afforded by §365(h)(1) only in the context of a lease rejection. See H. Rep. No. 95-595, 95th Cong., 1st Sess. 349 (1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 60 (1978).
In addition, the plain and unambiguous language of §363(f) should be construed to include leasehold interests because Congress could have excluded leasehold interests from the definition of "any interest," but chose not to do so. On the other hand, Congress imposed express limitations with respect to other specific types of property interests in §363. For example, §363(g) specifies the conditions under which a debtor may sell property free and clear of rights such as dower or curtesy, and §363(h) imposes limits on a debtor's right to sell property of the estate together with the interest of a co-owner of the property whose interest is not the subject of a bona fide dispute. These provisions indicate that Congress made exceptions to §363(f) when it deemed it appropriate to do so. See Diamond v. United States Agency for International Development, 108 F.3d 312, 316 (Fed. Cir. 1997) ("courts should assume that Congress was aware of the distinctions it was making and that it intended to make those distinctions"); see, also, United States v. Azeem, 946 F.2d 13, 17 (2d Cir. 1991). Congress did not place any similar restrictions on a debtor's ability to sell property free and clear of real property leases, and accordingly, none should be read into §363(f).
Further, the plain and unambiguous language of §363(f) should be construed to include real property leasehold interests because §363 expressly refers to other statutory provisions that are contained in §363 and that limit or restrict §363. For example, §363(d) expressly provides that a debtor may sell property under §363(b) "only to the extent not inconsistent with any relief granted under §362(c), 362(d), 362(e), or 362(f)..." This statutory language makes it clear that Congress considered other provisions of the Bankruptcy Code in drafting §363, and where it deemed it appropriate, it subordinated the broad relief available under §363 to other provisions of the Bankruptcy Code. Indeed, Congress even expressly considered §365 when drafting §363(l). Section 363(l) renders unenforceable provisions that operate to limit the trustee or debtor-in-possession's right to use, sell or lease property of the estate because of an ipso facto clause terminating or modifying the debtor's interest in property of the estate based on the debtor's bankruptcy, insolvency or other financial condition. 11 U.S.C. §363(l); see, also, In re Olympia Holding Corp., 68 F.3d 1304, 1307 (11th Cir. 1995). Congress expressly made the provisions of §363(l) subject to §365. Yet when Congress originally enacted the Bankruptcy Code, Congress did not expressly subordinate or condition §363(b), (e) or (f) to §365(h). Moreover, when Congress enacted substantial amendments to §365(h) in 1994 in order to strengthen the protections afforded real property lessees, Congress again did not expressly subordinate or condition §363(b), (e) or (f) to §365(h). Therefore, Congress did not intend such a subordination or condition, and none should be judicially created. Bates v. United States, 522 U.S. 23, 118 S.Ct. 285, 290 (1997) (When Congress includes particular language in one section of a statute and omits it in another, a court must presume Congress acted intentionally and purposefully in the disparate inclusion or exclusion.); Russello, 464 U.S. at 22-23, 104 S.Ct. at 300; Miles v. Apex Marine Corp., 498 U.S. 19, 32, 111 S.Ct. 317, 325 (1990) (court must assume that Congress is aware of existing law when it passes new legislation).
Lessees Accorded Ample Protections under §363
Analysis of §§363 and 365 and the separate purposes served by those provisions further support a conclusion that estate property may be sold free and clear of a leasehold interest. A primary purpose of §365 is to permit a debtor to reject and escape from the obligations of a contract or lease whose provisions are burdensome to the estate. A debtor may avail itself of §365 whether or not it is retaining the asset of the estate that is encumbered by the lease. Section 365(h)(1) tempers this relief by granting special protection to lessees whose leases are rejected, who might otherwise be entitled only to a pre-petition unsecured claim for damages. Specifically, §365(h)(1) protects the lessee's benefit of its bargain by allowing the lessee to remain in possession after a lease rejection. Both the Taylor court and the LHD Realty court focused on this special protection in ruling that a debtor could not sell its property free and clear of a leasehold interest. Both courts based their decisions on the fact that Congress intended, in enacting §365(h), to protect the property rights of a real property lessee when a debtor-lessor rejects its lease. Taylor, 198 B.R. at 165; LHD Realty, 20 B.R. at 719. The Taylor court further stated that to allow a debtor to "circumvent" the provisions of §365 by selling estate property under §363(f) free and clear of a leasehold interest "would seem to be in direct contravention of the lessee protections specifically afforded by §365." Id. This conclusion, however, would appear to be based on a faulty analysis.
In subordinating §363(f) to §365(h)(1), the Taylor and LHD Realty courts overlooked significant and substantive differences between §363 and §365. In the context of a lease rejection (rather than a sale of the underlying property) and without the provisions of §365(h)(1), a lessee would be faced with the loss of its premises and ordinarily would have only a pre-petition unsecured claim for rejection damages that may or may not be paid in full through the bankruptcy case. Thus, the lessee would face the complete loss of the benefit of its bargain upon rejection of its lease. Section 365(h)(1) sought to correct that imbalance by allowing a lessee to remain in possession of its premises following a rejection of its lease. See In re Lee Road Partners Ltd., 155 B.R. 55, 60 (Bankr. E.D.N.Y. 1993), aff'd., 169 B.R. 507 (E.D.N.Y. 1994) (citing legislative history and bankruptcy commentary). However, in the context of a sale under §363(f), the lessee is not faced with the complete loss of the benefit of its bargain because the lessee is entitled to adequate protection of its interest under §363(e). Notably, none of the courts that have decided that §365(h)(1) overrides and limits §363(f) have analyzed or even mentioned §363(e).
In conjunction with a sale of estate property, §363(e) requires a court, upon request of a person with an interest in the property to be sold, to either prohibit or condition a sale of the property to the extent necessary to provide adequate protection of the person's interest. The concept of adequate protection is derived from the Fifth Amendment's protection of property interests, and therefore, it must be fully compensatory. See In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935). Its purpose is "to insure that the creditor with [an interest in property] receive in value essentially what he bargained for," even though he "might not receive his bargain in kind." La Jolla Mortgage Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 286 (Bankr. S.D. Cal. 1982) (emphasis added). According to the legislative history of §363, in the context of a sale under §363(f), adequate protection most often will mean that the interest of the lessee (or other third party) will attach to the proceeds from the sale (see H. Rep. No. 95-595, at 5 (1977)),5 and the lessee would receive the value of its leasehold interest from the sale proceeds. Section 363 does not require that a lessee receive his bargain "in kind" when the debtor sells the underlying property, so long as the lessee's interest is adequately protected "in value."
"Adequate protection" under §363(e) therefore accomplishes purposes that are equivalent to those embodied in §365(h)(1). Accordingly, it is wholly unnecessary to incorporate §365(h)(1) into §363(f) in order to protect the lessee and its bargain. The lessee is already protected and assured through §363(e) of receiving in value the benefit of its leasehold interest.
Sections 363 and 365 Should Not Create a Conflict
The Taylor court concluded that allowing a sale of property free and clear of a lease interest under §363(f) "would seem to be in direct contravention of the lessee protections specifically afforded by §365." 198 B.R. at 165. No such conflict needs to exist because, as set forth above, the adequate protection provisions of §363(e) apply in the context of a sale of property subject to an interest of a third party free and clear of that interest. On the other hand, §365(h)(1) applies to a rejection of a lease by the debtor in contexts where §363 does not apply.
This interpretation is consistent with the general principle of statutory construction that two statutes should be construed to avoid a conflict between them. See Smith v. Babcock, 19 F.3d 257, 263 (6th Cir. 1994); United Steelworkers v. North Star Steel Co., 5 F.3d 39, 43 (3d Cir. 1993), cert. denied, 510 U.S. 1114 (1994); Herriman v. Conrail Inc., 887 F. Supp. 1148 (N.D. Ind. 1995). In particular, courts should attempt to construe statutory provisions so that one provision does not nullify another. United States v. Gordon, 961 F.2d 426, 431 (3d Cir. 1992); cf. DeRoche v. All American Bottling Corp., 38 F. Supp. 2d 1102, 1108 (D. Minn. 1998) (statutes relating to the same subject matter must be read so as to harmonize their respective provisions). Because §§363(f) and 365(h) can reasonably be construed without conflict, §363(f) should be the operative provision applying to sales of estate property, and §365(h)(1) should apply to rejections of real property leases. If §365(h)(1) is construed to prevent a debtor/lessor from selling estate property free and clear of a lessee's real property leasehold interest, then §365(h)(1) would, in effect, nullify §363(f) in the context of property subject to a lease (even a lease in bona fide dispute). In view of the requirements of adequate protection under §363(e), such a construction is unnecessary to fully protect the interest of a real property lessee.
Allowing Sales Is Consistent with Bankruptcy Code Policies
Maximization of the value of estate assets and the rehabilitation of debtors are undeniably principal purposes of the Bankruptcy Code. See Mattingly, Basil H., "Sale of Property of the Estate Free and Clear of Restrictions and Covenants in Bankruptcy," 4 ABI Law Review 431, 451-52 (1996). Section 363 furthers and effectuates these goals by enabling a debtor to convert estate assets into cash in order to benefit the creditors of the estate. This is accomplished by permitting the debtor, if necessary, to disencumber property from competing interests, and allow the holder of the disencumbered interest a claim against the bankruptcy estate and, frequently, an interest in the proceeds from the sale. Id. at 453. Subordinating the sale powers under §363(f) to the provisions of §365(h)(1) would frustrate and negate these fundamental public policies underlying the Bankruptcy Code. Rather, these fundamental policies compel a conclusion that property can be sold under §363(f) free and clear of a lessee's real property leasehold interest, notwithstanding §365(h)(1).
If a debtor were not permitted to sell estate property free and clear of a real property leasehold interest, a lessee could effectively wield veto power over the sale of the debtor's property, and potentially over the entire reorganization. Such a result is neither reasonable nor equitable, since such veto power could adversely affect not only the debtor, but also numerous creditors whose claims could be satisfied in full or in part through the sale of the debtor's property. Id. at 435.
At least one court has considered this imbalance in the context of §363. In In re Lady H Coal, 193 B.R. 233 (Bankr. S.D. W.Va. 1996), the debtors sought to reject collective bargaining agreements pursuant to 11 U.S.C. §1113 and to sell, pursuant to 11 U.S.C. §363, a substantial portion of their assets free and clear of any interests, including the claims of the trustees of the United Mine Workers Association's (UMWA) 1992 benefit plan. The court did not allow the debtors to reject their collective bargaining agreements. The union later opposed the proposed sale, arguing that since its collective bargaining agreement could not be rejected, then the sale also could not be free and clear of the agreement. Despite this argument, the court permitted the sale of assets free and clear of any interests asserted by the union, stating:
To do otherwise [than to overrule the objections of UMWA employees to the sale] would permit the UMWA employees to enjoin the sale of property following the financial failure of a UMWA organized company. No law permits this court to impose such a penalty on all creditors in the case.
193 B.R. at 246. The court correctly recognized that to allow the UMWA employees to block a sale that would be beneficial to numerous other constituencies would improperly shift the balance of power in a bankruptcy case.
Congress did not expressly subordinate §363 to §365(h). Therefore, §365(h)(1) should not be construed and applied to render §363(e) and (f) meaningless and impotent in the context of a sale free and clear of real property leasehold interests. Such a limitation could improperly give a single constituency of claimant veto power over the course of a debtor's reorganization by enabling that claimant to thwart sales that might bring substantial funds into a debtor's estate. Rather, the clear language of §363(f), the protections afforded by §363(e) in the context of a sale, the rules of statutory construction, and the rehabilitative and estate-maximization policies underlying the Bankruptcy Code and promoted by §363(f) all support the sale of estate property free and clear of real property leasehold interests.
1 Unless otherwise noted, all section references in this article are to the Bankruptcy Code. In addition, references to "debtor" mean debtor-in-possession or trustee. Return to article
2 In addition, "free and clear" sales must comply with §§363(b) and (c). Return to article
3 The legislative history reiterates and confirms the broad language of the statute. See H.R. Rep. 95-595 at 5 (1977) ("subsection (f) permits sale of estate property free and clear of any interest in the property of an entity other than the estate.") Return to article
4 Section 365(h)(1) (A) (ii) provides, in pertinent part:
If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and—11 U.S.C. §365(h)(1)(A)(ii). Return to article
(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 enforceable under applicable non-bankruptcy law.
5 Moreover, the lessee may be provided additional protection by obtaining the right to credit bid for the property being sold. See H. Rep. No. 95-595 at 5 (1977) ("At a sale free and clear of other interests, any holder of any interest in the property being sold will be permitted to bid. If that holder is the high bidder, he will be permitted to offset the value of his interest against the purchase price of the property."). Through such right, the lessee again may preserve the benefit of its bargain. Return to article