In the Matter of Spanish Peaks Holdings II, LLC, Debtor.
CH SP Acquisitions, LLC; Ross P. Richardson, Ch. 7 Trustee, Defendants-Appellees. Pinnacle Restaurant at Big Sky, LLC; Montana Opticom, LLC, Plaintiffs-Appellants,
and Submitted April 6, 2017 Seattle, Washington
Amended September 12, 2017
from the United States District Court for the District of
Montana No. 2:14-cv-00040-SEH, Sam E. Haddon, Senior District
A. Lindsay (argued) and David W. Ross, Babst Calland Clements
and Zomnir P.C., Pittsburgh, Pennsylvania, for
F. Wallack (argued) and Peter D. Bilowz, Goulston &
Storrs PC, Boston, Massachusetts; Steven M. Johnson, Church
Harris Johnson & Williams P.C., Great Falls, Montana; for
Before: Alex Kozinski and William A. Fletcher, Circuit
Judges, and Frederic Block, District Judge. [*]
panel affirmed the district court's judgment affirming
the bankruptcy court's decision that a bankruptcy
trustee's sale of a debtor's property was free and
clear of unexpired leases.
with the Seventh Circuit, the panel held that 11 U.S.C.
§ 363(f), authorizing a trustee to sell a debtor's
assets free and clear of third-party interests, applied, and
did not conflict with § 365(h), which protects the
rights of lessees, because the trustee did not
"reject" the leases.
Senior District Judge:
primary function of the Bankruptcy Code is to set out the
rules for dividing up assets that are insufficient to pay a
debtor's creditors in full. One such rule, contained in
11 U.S.C. § 363(f), authorizes a trustee in bankruptcy
to sell-with some exceptions and limitations-a debtor's
assets free and clear of third-party interests. Another,
contained in 11 U.S.C. § 365(h), empowers the trustee to
"reject"-that is, in effect, to breach-an unexpired
lease of the debtor's property, but allows the lessee to
retain any existing rights, including possession of the
case, we are called upon to decide what happens when property
that the trustee proposes to sell is subject to unexpired
leases. We hold that, on the facts of this case, section 363
applies and section 365 does not. We therefore affirm the
bankruptcy court's conclusion that the sale was free and
clear of the leases.
Peaks was a 5, 700-acre resort in Big Sky, Montana, the
brainchild of James J. Dolan, Jr., and Timothy L. Blixseth.
The project was financed by a $130 million loan, which was
secured by a mortgage and assignment of rents, from Citigroup
Global Markets Realty Corp. ("Citigroup").
Citigroup later assigned the note and mortgage to Spanish
Peaks Acquisition Partners, LLC ("SPAP").
collection of interrelated entities owned the resort and
managed its amenities, including a ski club, a golf course,
and residential and commercial real-estate sales and rentals.
At issue here are two leases of commercial property at the
2006, Spanish Peaks Holdings, LLC ("SPH"), leased
restaurant space to Spanish Peaks Development, LLC
("SPD"), for $1, 000 per month. Dolan was an
officer of both companies, and signed the lease for both
lessor and lessee. A year later, SPH and SPD replaced the
2006 lease with a lease under which SPD received a 99-year
leasehold in the restaurant property in exchange for $1, 000
per year in rent. In 2008, SPD assigned its interest to The
Pinnacle Restaurant at Big Sky, LLC ("Pinnacle"), a
company specially created for that purpose.
2009, SPH leased a separate parcel of commercial real estate
at the resort to Montana Opticom, LLC ("Opticom"),
of which Dolan was the sole member. The lease had a term of
sixty years and an annual rent of $1, 285.
B. Bankruptcy Proceedings
a shrinking real-estate market and mounting operational
losses, SPH began to default on its loan payments. On October
14, 2011, SPH and two related entities-The Club at Spanish
Peaks, LLC, which managed the resort's ski and golf
facilities, and Spanish Peaks Lodge, LLC, which managed its
real-estate sales-petitioned for bankruptcy protection under
Chapter 7 of the Code. The petitions were filed in Delaware, but
the proceedings were transferred to the Bankruptcy Court for
the District of Montana, where they were consolidated for
largest creditor was, by far, SPAP, which had a valid claim
of more than $122 million secured by the mortgage on the
property. SPAP subsequently assigned its interest to CH SP
Acquisitions, LLC ("CH SP").
trustee and SPAP agreed to a plan for liquidating
"substantially" all of the debtors' real and
personal property. Their stipulation contemplated an auction
with a minimum bid of $20 million. It further stated that the
sale would be "free and clear of all liens."
trustee then moved the bankruptcy court for an order
authorizing and approving the sale. The trustee represented that
the proposed sale would be "free and clear of any and
all liens, claims, encumbrances and interests, " except
for certain specified encumbrances, and that other specified
liens would be paid out of the proceeds of the sale or
Pinnacle and Opticom leases were not mentioned in either the
list of encumbrances that would survive the sale or the list
of liens for which protection would be provided. Noting the
omission, both companies objected to "any effort to sell
the Debtors['] assets free and clear of [their] leasehold
interests." They argued that the Code gave them the
right to retain possession of the property notwithstanding
hearing, the bankruptcy court authorized the sale. It did not
rule on Pinnacle's and Opticom's objection. Instead,
further discussion of the claimed right to possession was
deferred to the hearing on the motion to approve the sale.
the auction and the approval hearing took place on June 3,
2013. CH SP won the auction with a bid of $26.1 million. At
the approval hearing, Pinnacle and Opticom renewed their
claim that they were entitled to retain possession pursuant
to their leases, and argued that language in the proposed
approval order providing that the sale would be free and
clear of those interests was inconsistent with their claimed
right. In response, CH SP's principal testified that its
bid was contingent on ...