## Facts

- Spanish Peaks Holdings II, LLC owned a 5,700-acre resort development in Big Sky, Montana, financed by a $130 million secured loan, later held by an assignee of the original lender.
- The property was subject to two recorded, long-term, below-market commercial leases held by Pinnacle Restaurant at Big Sky, LLC and Montana Opticom, LLC.
- The debtor entered bankruptcy; the case was converted to Chapter 7, and a trustee sought to sell substantially all real property under 11 U.S.C. § 363(f) “free and clear of any interests.”
- The sale motion did not preserve the tenants’ leasehold interests, and the trustee did not move to reject the leases under 11 U.S.C. § 365.
- The bankruptcy court approved the sale to CH SP Acquisitions, LLC and clarified that the property was sold free and clear of the tenants’ leases.
- The tenants objected, arguing that § 365(h) protected their right to remain in possession and prevented extinguishment of their leases through a § 363(f) sale.

## Issues

1. Whether a trustee may sell estate real property under 11 U.S.C. § 363(f) free and clear of unexpired leasehold interests.
2. Whether 11 U.S.C. § 365(h) prevents a § 363(f) sale from terminating a tenant’s possessory rights when the trustee has not rejected the lease.
3. Whether the statutory conditions for a free-and-clear sale under § 363(f) were satisfied on these facts.

## Decision

- The Ninth Circuit affirmed the district court, which had affirmed the bankruptcy court’s sale order.
- The court held that § 363(f) authorized the trustee to sell the property free and clear of the tenants’ leases on the facts presented.
- The court held that § 365(h) did not apply because the trustee did not reject the leases.
- The court concluded the tenants could not use § 365(h) to block or limit the free-and-clear sale where § 363(f) applied and the statutory prerequisites were met.

## Legal Principles

- Section 365(h) protects a tenant’s possessory and related rights only when the trustee rejects an unexpired lease; absent rejection, § 365(h) is not triggered.
- Section 363(f) permits a bankruptcy trustee to sell property of the estate free and clear of third-party interests, including leasehold interests, if one of the statute’s conditions is satisfied and affected parties receive the protections required by the Bankruptcy Code.
- A court may approve a free-and-clear sale that extinguishes leasehold interests where the leasehold is susceptible to being terminated for money satisfaction or otherwise cut off under applicable law, consistent with § 363(f)’s criteria.
- The interaction between §§ 363(f) and 365(h) is resolved by applying each provision according to its express trigger and scope, rather than treating § 365(h) as an automatic categorical bar to free-and-clear sales.

## Conclusion

The Ninth Circuit held that a Chapter 7 trustee could sell real property under § 363(f) free and clear of unexpired leases because the leases were not rejected and thus § 365(h)’s tenant-possession protections did not apply, leaving the tenants’ remedy to the protections available within the § 363 sale framework.


In re Spanish Peaks Holdings II, LLC, 872 F.3d 892 (9th Cir. 2017)