Section News

June, 2007

Qualitech and Proposed Bankruptcy Code Amendments

On May 9, 2007, the Real Property, Probate and Trust Section (“RPPT”) of the American Bar Association submitted to the ABA House of Delegates for consideration and adoption at the 2007 Annual Meeting in San Francisco a Report and Recommendation that the ABA urge Congress to amend section 363(f) of the Federal Bankruptcy Code to overturn the decision of the Seventh Circuit Court of Appeals in Precision Industries, Inc. v. Qualitech SBQ, LLC, 327 F.3d 537 (7 th Cir. 2003). This decision held that real estate owned by an entity that is the subject of a bankruptcy case may be sold free and clear of a lease of that realty provided that one of five conditions set forth in this Bankruptcy Code section is satisfied. Unlike the protections granted to a nonbankrupt lessee whose lease is rejected by a bankrupt lessor by section 365(h) of the Bankruptcy Code, a lessee of realty that has been sold free and clear of the lease is not permitted by statute to remain in possession of the property until the leasehold term expires. The Report and Recommendation submitted to the House of Delegates calls upon Congress to amend section 363(f) “to clarify that a sale of real property free and clear of an unexpired lease under which the debtor is the lessor can be accomplished only if the non-debtor lessee is granted the same rights afforded to non-debtor lessees when their leases are rejected.”

The history of this Report and Recommendation goes back to 2003, shortly after the Qualitech decision was published by the Seventh Circuit. At that time, the Real Property Division of the RPPT formed a working group consisting of Michael D. Goler, Raymond J. Werner and Patrick E. Mears to determine whether and under what circumstances Congress might be approached by the ABA to overrule Qualitech. This opportunity did not present itself until 2005, when Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act that significantly amended the Bankruptcy Code although it did not address the problem created by Qualitech.

At present, the Senate and House Judiciary Committees are in the process of preparing technical amendments to the 2005 bankruptcy legislation and staff members of those committees have advised the RPPT working group that they would welcome a draft proposal fixing the Qualitech problem.

At the November, 2006 RPPT Leadership Meeting in Scottsdale, Arizona, the Section Council approved a proposal for submission of the Report and Recommendation described above to the ABA House of Delegates for consideration at the 2007 Midyear Meeting in Miami, Florida. The language of the Report and Recommendation submitted to the House of Delegates was negotiated with representatives of the Business Law, Legislation and other ABA Sections. However, at the February meeting in Miami, some Delegates asked that the Report and Recommendation be tabled until the 2007 Annual Meeting so that the language could be vetted further by other ABA Sections. The RPPT Section Delegates, David Tang, Lee Sher and David English, agreed to withdraw the Report and Recommendation to accomplish this proposed further review. During the last few months, final agreement on the language of the Report and Recommendation was achieved by all interested ABA Sections and this proposal will be voted on this August in San Francisco.

If you are interested in receiving this Report and Recommendation, please contact Patrick Mears at pmears@btlaw.com.