Lease Issues Throw Revel Sale into Turmoil
Stay of Sale Order Pending Appeal Disrupts Casino Sale
Debtors frequently sell property free and clear of liens and other interests under 11 U.S.C. § 363 as a way to quickly liquidate assets in bankruptcy. The most common property rights at issue in these sales are the rights of secured parties. However, in some cases, the rights of other parties enjoy favorable treatment under the bankruptcy code. For example, 11 U.S.C. § 365(h) allows a tenant to remain in possession of leased property when a debtor rejects that lease. Bankruptcy Courts have struggled with the interplay of § 363(f), which allows sales free and clear of any interest in property, so long as the holder of that interest is afforded adequate protection, and § 365(h) which protects tenants from being thrown out of their leases. These provisions were at odds in a recent proposed sale of the Revel Casino in Atlantic City.
The Revel filed for chapter 11 in June 2014, and shortly thereafter ceased operations. The bankruptcy court approved procedures for the sale of substantially all assets of the debtors, and an auction was conducted, which concluded on October 1, 2014. The high bidder at the sale did not close, and the debtors then sought to consummate the sale with the back up bidder, Polo North. On January 8, 2015, the bankruptcy court entered an order ("Sale Order") approving the sale to Polo North free and clear of liens and other interests, including the possessory interests of certain tenants. In doing so, the bankruptcy court followed the reasoning of the Seventh Circuit in Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), which allowed a sale free and clear of possessory rights under § 365(h) and is the only circuit court to issue an opinion on the matter. Certain tenants filed an appeal of the Sale Order, arguing that it improperly divested them of rights under § 365, without providing adequate protection. The tenants argue that the bankruptcy court improperly found that § 363 allows a sale free and clear of their possessory interests in a rejected lease, notwithstanding the express protections in § 365(h), and without providing adequate protection of such interests.
The tenants also sought a stay pending appeal of the Sale Order before both the bankruptcy court and the district court, based upon the bankruptcy court's alleged improper termination of their possessory interests. The bankruptcy court and district court each declined to enter a stay pending appeal. However, one tenant filed an emergency appeal with the Third Circuit. The Third Circuit reversed the district court's denial of a stay and granted a stay only of the provisions of the Sale Order impacting the appellant's lease. On remand, the district court applied the stay to all of the tenants who originally appealed the Sale Order.
While the merits of an appeal have not been decided, in order to grant a stay pending appeal, the Third Circuit determined that the appellants had a substantial likelihood of success on the merits of their appeal, the crux of which is the argument that their property rights were improperly vitiated without adequate protection.
As a result of the Third Circuit's decision, the deadline to close the sale to Polo North expired after the bankruptcy court denied a request to extend that deadline. The debtors sought a ruling that they are entitled to keep the $10 million deposit for the sale and re-start the sale process. A hearing on this request was held on February 17, 2015 and the Court indicated that it would issue a ruling on February 19, 2015.
The sale process in the Revel case and the associated disputes with the debtors' lessees highlights one of the issues that can arise in a complex § 363 sale. In considering such sales, parties should be aware of applicable rights under § 365(h) and the ways in which courts have interpreted those rights so as to prevent this issue from overtaking the entire process as it appears to have done in this case.
For additional information, please contact Dylan Trache at email@example.com or 202-545-2993
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