Pinnacle Restaurant At Big Sky, LLC v. CH SP Acquisitions, LLC

The primary function of the Bankruptcy Code is to set out the rules for dividing up assets that are insufficient to pay a debt- or’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.

I

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…