Does a Tenant's Right of Possession Trump a Sale Under Section 363?

The interplay between sections 363(f) and 365(h) of the Bankruptcy Code continues to plague various courts. This article explores several recent decisions evaluating whether a tenant's rights under section 365(h) survive a sale of the debtor's assets free and clear of all liens, claims, and encumbrances pursuant to section 363(f). In many cases, the issue boils down to the language of section 363(f), which permits a sale “free and clear of any interest in such property of an entity other than the estate ' ” (emphasis added). Courts have grappled with the question of whether the phrase “ any interest” in the context of a real property sale includes not only fee interests, security interests and other ownership interests, but also a tenant's possessory right under section 365(h). Some courts have construed the broad language of “any interest” to encompass leasehold interests and thus have determined that section 363(f) trumps section 365(h), permitting debtors and trustees to sell real property free and clear of leasehold interests. Other courts have reached different conclusions.