## Facts

- Qualitech entered a long-term supply agreement with Precision requiring Precision to construct and operate an on-site supply warehouse at Qualitech’s Pittsboro facility.
- Qualitech later executed a 10-year land lease to Precision for nominal rent, granting Precision exclusive possession of the warehouse and improvements and certain removal rights on early termination or default.
- Qualitech filed Chapter 11 and, as debtor-in-possession, sought to sell substantially all assets, including the Pittsboro property.
- The bankruptcy court approved a sale under 11 U.S.C. § 363(f) “free and clear” of liens, claims, encumbrances, and interests, with limited carve-outs that did not expressly preserve Precision’s leasehold.
- Precision did not object to the sale or request adequate protection in the sale proceedings.
- The purchasers conveyed the assets to a newly formed entity (New Qualitech), which took possession of the warehouse and excluded Precision.
- The bankruptcy court held the § 363(f) sale extinguished Precision’s possessory rights; the district court reversed, concluding § 365(h) preserved Precision’s possession notwithstanding the sale.

## Issues

1. Whether a lessee’s right to possession under a prepetition real property lease is an “interest” that can be extinguished by a sale “free and clear” under 11 U.S.C. § 363(f).
2. Whether 11 U.S.C. § 365(h) limits or overrides § 363(f) so that a lessee’s possessory rights survive a § 363(f) sale.
3. Whether a lessee’s remedy, when a § 363(f) sale threatens its leasehold, is to seek adequate protection under 11 U.S.C. § 363(e).

## Decision

- The Seventh Circuit reversed the district court and reinstated the bankruptcy court’s conclusion that the § 363(f) sale extinguished Precision’s possessory leasehold.
- The court held that a lessee’s possessory rights constitute an “interest” in property within the meaning of § 363(f).
- The court held that § 365(h) does not bar extinguishment of leasehold possession through a § 363(f) sale because § 365(h) addresses rejection of leases, not sales free and clear.
- The court stated that lessees are protected through § 363(e), which allows an interest-holder to request that the court condition or prohibit a sale absent adequate protection; Precision failed to pursue that relief.

## Legal Principles

- “Any interest” in § 363(f) is construed broadly and includes a tenant’s possessory leasehold interest.
- Section 365(h) governs a lessee’s rights upon rejection of an unexpired lease while the estate retains ownership; it does not, by its terms, resolve the effect of a § 363(f) free-and-clear sale on leasehold possession.
- Section 363(e) provides the mechanism for protecting interests affected by a proposed § 363 sale; upon request, the bankruptcy court must condition or prohibit the sale as necessary to provide adequate protection.
- A party that receives notice of a § 363(f) sale and neither objects nor seeks adequate protection risks losing its interest if the sale is approved free and clear without preserving that interest.

## Conclusion

The court held that a bankruptcy sale under § 363(f) may transfer real property free and clear of a tenant’s possessory rights, and that a tenant’s protection is to timely seek adequate protection under § 363(e) rather than rely on § 365(h) to preserve possession after a completed free-and-clear sale.


Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)