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In re Spanish Peaks Holdings II, LLC

United States Court of Appeals, Ninth Circuit

September 12, 2017

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,

          Argued and Submitted April 6, 2017 Seattle, Washington

          Amended September 12, 2017

         Appeal from the United States District Court for the District of Montana No. 2:14-cv-00040-SEH, Sam E. Haddon, Senior District Judge, Presiding

          Mark A. Lindsay (argued) and David W. Ross, Babst Calland Clements and Zomnir P.C., Pittsburgh, Pennsylvania, for Plaintiffs-Appellants.

          James 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 Defendants-Appellees.

          Before: Alex Kozinski and William A. Fletcher, Circuit Judges, and Frederic Block, District Judge. [*]

         SUMMARY [**]


         The 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.

         Agreeing 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.


          BLOCK, Senior District Judge:

         The 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 property.

         In this 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.


         A. Pre-Bankruptcy Background

         Spanish 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").

         A 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 resort.

         In 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.

         In 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

         Facing 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.[1] 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 joint administration.

         SPH's 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").

         The 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."

          The trustee then moved the bankruptcy court for an order authorizing and approving the sale.[2] 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 otherwise protected.

         The 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 the sale.

         After a 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.

         Both 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 ...

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