March 01, 2004

Precision Industries: Debtor-Lessor’s Property May Be Sold “Free and Clear” of Unexpired Lease (2004, 18:02)

Precision Industries: Debtor-Lessor’s Property May Be Sold “Free and Clear” of Unexpired Lease

Probate and Property, March/April 2004, Volume 18, Number 2

By John C. Murray
John C. Murray practices law with First American Title Insurance Company in Chicago, Illinois.

A federal appellate court sent shock waves through the real estate industry last April with its decision in Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003). In a case of first impression, the Seventh Circuit was asked to reconcile two provisions of the Bankruptcy Code: Section 363(f), which allows the sale of a debtor’s property “free and clear” of any “interest,” and Section 365(h), which protects the rights of a lessee when a lessor-debtor rejects a lease. The court’s determination—that Section 363(f) trumps Section 365(h)—presents potentially devastating ramifications for long-term leases and leasehold mortgages whenever a lessor files for bankruptcy. A careful analysis of the decision, however, suggests that there is still ample room for lessees to protect themselves. This article analyzes the court’s reasoning in the Precision Industries case. A companion article describes some of the measures that practitioners can take to protect lessees and leasehold mortgagees. See Precision Industries, Part 2: How Lessees and Leasehold Mortgagees Can Protect Themselves, at page 16 of this issue .

 

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