In the Matter of Spanish Peaks Holdings II, LLC

Facts: A commercial landlord and a tenant enter into a long-term lease. The landlord later files for bankruptcy. The bankruptcy trustee sells the property to a buyer in a bankruptcy trustee’s sale, stating it is free and clear of the tenant’s lease encumbering the property. The bankruptcy trustee does not formally reject the terms of the tenant’s lease.

Claim:  The tenant seeks to retain possession of the property, claiming they have a right to do so since federal bankruptcy law protects a tenant’s leasehold interest in a property after a bankruptcy.

Counterclaim: The buyer claims the bankruptcy trustee’s sale wiped out the tenant’s lease since federal law authorizes a property to be sold free and clear of all interests, including leases.

Holding: The Ninth Circuit Court of Appeals holds the tenant may not retain possession of the property since the bankruptcy trustee was authorized to sell the property free and clear of all leases, and the federal law which protects tenants in a landlord’s bankruptcy only applies when the lease is rejected. [In the Matter of Spanish Peaks Holdings II, LLC (July 13, 2017)_US9th_]

Read the case text.

Editor’s note — In this case, the laws which protect sellers (under 11 United States Code §363(f)) and tenants (under 11 USC §365(h)) do not come into conflict since the bankruptcy trustee did not ultimately reject the tenant’s lease. When a trustee does reject the tenant’s lease, creating a conflict between the tenant and the seller of the property, §365 has historically prevailed over §363, protecting the tenant’s right to retain possession.