Bankruptcy, Bankruptcy Code, lessee protections, circuit split, sales free and clear, Qualitech, constitutional concerns, Section 365(h), Section 363(f), non-debtor lessee, right to continued possession, statutory interpretation, legislative history, unexpired real property lease, reorganization, plan of reorganization, unsecured claim, maximization of creditor recovery


The Fifth Circuit’s recent decision in In re Royal St. Bistro, LLC has awakened an unsettled issue in the Bankruptcy Code that has divided the bankruptcy community for over two decades. The question examined by the Fifth Circuit was whether a non-debtor lessee with a right to continued possession through section 365(h) of the Bankruptcy Code loses this right if the debtor-lessor can sell its property “free and clear” under section 363(f). While early decisions held that section 365(h) always protects lessees against debtors’ free and clear sales, some subsequent decisions created a circuit split by ruling that section 365(h) is inapplicable to section 363(f) sales.

This Note discusses the relevant statutes, case law, and scholarship addressing the circuit split. Ultimately, this Note proposes that the cases ruling on this issue can be further categorized into a third middle-ground category. Specifically, this Note concludes that section 365(h) presumptively applies when a leasehold interest is present in a bankruptcy case, but a section 363(f) sale can nevertheless strip the leasehold. In such a case, the lessee can request adequate protection of its interest, which may come in the form of continued possession. This Note argues that a proposed middle-ground approach is supported by rules of statutory construction, balances the rights of both parties, alleviates constitutional concerns, and aligns with the spirit of the Bankruptcy Code.



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