Precision Industries, Inc. v. Qualitech Steel Sbq, LLC

327 F.3d 537 (2003)


D owned and operated a steel mill. D had entered into two related agreements with Ps. P would construct a supply warehouse at D's facility and operate it for a period of ten years. D would also lease to P the property underlying the warehouse for a period of ten years. In exchange for nominal rent of $1 per year, the lease granted P exclusive possession of the warehouse and any other improvements or fixtures it installed on the land for the term of the lease; and in the event of an early termination or default under either the lease or the supply agreement, P had the right to remove all improvements and fixtures from the property. If no default, D had the right at the end of the lease term to purchase the warehouse, its fixtures, and other improvements for $1. A month after the parties entered into the lease agreement, D filed Chapter 11, and substantially all of D's assets were sold at auction for a credit bid of $180 million to a group of senior pre-petition lenders. The bankruptcy court approved the sale. P did not object to the Sale Order, which directed D to convey its assets to the pre-petition lenders 'free and clear of all liens, claims, encumbrances, and interests,' except for specifically enumerated liens, pursuant to section 363(f). The lenders subsequently transferred their interest to newly-formed Qualitech Steel SBQ, LLC, which assumed the rights of the purchaser and took title to the property. The Sale Order also reserved for the purchaser the debtor's right to assume and assign executory contracts pursuant to 11 U.S.C. § 365. Eventually, P's lease and supply agreements were de facto rejected. New Qualitech, (D), changed the locks on the building. P then filed a diversity suit in the district court contending that D was guilty of trespass, conversion, wrongful eviction, breach of an implied contract, and estoppel. The district court referred P's complaint to the bankruptcy court, and it resolved the matter in D's favor. The court held that P's possessory interest was among those interests extinguished by the Sale Order. P appealed, and the district court reversed. The court determined that the provisions of sections 363(f) and 365(h) were in apparent conflict and concluded that the terms of section 365(h) prevail over those of section 363(f) as applied to the rights of lessees. D appealed.