Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

Can a Commercial Real Estate Lease Be Voided by a Bankruptcy Sale of the Underlying Property?

Author: Joel R. Glucksman

Date: October 20, 2015

Key Contacts

Back

A new ruling by the Third Circuit Court of Appeals in IDEA Boardwalk, LLC v. Revel AC, Inc. (In re Revel AC, Inc.), __ F.3d __ (3d Cir. Sept. 30, 2015), raises a bankruptcy issue that has so far not been definitively resolved by the appellate courts: Whether a bankrupt lessor of commercial property may effectively destroy its tenant’s rights by selling the underlying property in a bankruptcy sale “free and clear” of all claims and interests, including the tenant’s rights in its leasehold.

Revel AC vs. IDEA Boardwalk

In this case, the Revel casino, as lessor, had a 10-year lease with IDEA Boardwalk, under which IDEA could run two night clubs and a beach club at the Revel casino. After a successful trip through Chapter 11, Revel’s operations failed to recover, and it had to file a second bankruptcy. In the second proceeding, it sought to sell all of its assets, free and clear of all liens, claims, and interests – including that of the IDEA lease. Needless to say, IDEA objected.

The battle highlighted a conflict between two different provisions of the Bankruptcy Code. Section 365(h) states that, if a bankrupt-lessor of real property seeks to “reject” the lease, the non-debtor tenant may choose to retains its rights under the lease. On the other hand, section 363(f) provides that a debtor may sell property free and clear “of any interest in such property” by a non-debtor. Use of this provision, however, requires that, among other things: non-bankruptcy law permit the sale “free and clear;” the non-debtor consent; the interest be a lien; or the interest be in bona fide dispute.

Precision Industries vs. Qualitech Steel

Revel sought to rely upon section 363(f) and claimed that it took precedence over the right of IDEA in the lease. In doing so, Revel relied upon a 2003 decision by the Seventh Circuit, Court of Appeals in Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3rd 537 (7th Cir. 2003). This held that a debtor’s authority to sell property free and clear of any interests, including that of a lease, takes precedence over the right of a tenant to keep its leasehold interest.

The Bankruptcy Court in the Revel case relied upon this opinion, as well as on the fact that, according to Revel, the lease was in fact in bona fide dispute, since IDEA was allegedly more akin to Revel’s partner rather than a mere tenant. The Bankruptcy Court accordingly allowed the sale to go forward, thereby threatening to void the IDEA lease.

The case was then appealed from the Bankruptcy Court’s decision, on an emergency motion to stay the sale order. Ultimately, the Third Circuit granted the stay. This will enable the matter to be fully decided on the merits, and hopefully for the Third Circuit to provide some clarity to what is now a murky area of bankruptcy law.

Are you a creditor in a bankruptcy?  Have you been sued by a bankrupt?  If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"
Understanding Chattel Paper: A Key Component in Secured Transactions post image

Understanding Chattel Paper: A Key Component in Secured Transactions

Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]

Author: Dan Brecher

Link to post with title - "Understanding Chattel Paper: A Key Component in Secured Transactions"
Crypto Compliance: A Comprehensive Guide post image

Crypto Compliance: A Comprehensive Guide

For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]

Author: Bryce S. Robins

Link to post with title - "Crypto Compliance: A Comprehensive Guide"
Supreme Court and Title VII: Implications for Reverse Discrimination post image

Supreme Court and Title VII: Implications for Reverse Discrimination

Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]

Author: Matthew F. Mimnaugh

Link to post with title - "Supreme Court and Title VII: Implications for Reverse Discrimination"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!