Fifth Circuit Weighs In on Bankruptcy Asset Sales Free and Clear of Leasehold Interests

Summary

This article discusses a recent Fifth Circuit decision on the rights of a lessee (or sublessee) where the debtor does not reject the lease and the leased real property is sold free and clear under Section 363(f) of the Bankruptcy Code. The ability of a trustee or Chapter 11 debtor in possession (DIP) to sell bankruptcy estate assets free and clear of competing interests in the property has long been recognized as one of the most important advantages of a bankruptcy filing as a vehicle for restructuring a debtor's balance sheet and generating value. Still, Section 363(f) of the Bankruptcy Code, which delineates the circumstances under which an asset can be sold free and clear of "any interest in such property," has generated a fair amount of controversy. This is so in part because the statute itself does not define "interest."