Editor’s Note: The following article, “Spanish Peaks’ Reinvigoration of the Precision Industries Debate: Rejection in the Context of a § 363 Sale Free and Clear of Commercial Leasehold Interests” won the prize for third place in the Tenth Annual ABI Bankruptcy Law Student Writing Competition. Mr. Binder is a third year student at Michigan State University College of Law in East Lansing, Michigan. In the summer of 2017, he served as a Judicial Extern in Judge David McKeague's chambers at the United States Court of Appeals for the Sixth Circuit and as a Research Extern at the Michigan Court of Appeals. This summer, Nicholas will be a summer associate at Kirkland & Ellis in Chicago. Thank you to Jenner & Block for sponsoring this prize.

In the summer of 2017, the Ninth Circuit addressed whether §§ 363 and 365 of the Bankruptcy Code conflict when a trustee proposes a § 363 sale free and clear of an unexpired commercial lease without first rejecting it. Section 363(f) of the Code allows the trustee to sell property of the estate free and clear of interests if certain conditions are met. Section 365(h) allows the trustee to reject an unexpired lease on a debtor-lessor’s real property. However, the Code does not define “rejection.” If the trustee rejects an unexpired lease, then the lessee may retain its appurtenant possessory rights in the property for the balance of the lease term. Intuitively, an attempt to sell free and clear of an unexpired lease seems like rejection. But courts reject common intuition when they decide how the Code contemplates rejection.

This article examines certain key provisions in asset-purchase agreements that practitioners will want to pay attention to when purchasing assets in bankruptcy sales.

Good-Faith Deposits

Although the Bankruptcy Code does not contain any requirement concerning a deposit, it has become routine to require prospective purchasers to escrow a good-faith deposit in connection with their bid. While the amount of the deposit may vary, it is not uncommon for a debtor to require that up to 10 percent of the purchase price be placed in escrow. Potential bidders should pay careful attention regarding when they are entitled to the return of their good-faith deposit (so as to avoid having funds tied up with the estate for an extended period of time) and may want to try to negotiate, especially as the stalking-horse bidder, that any claim by the debtor for breach of the asset-purchase agreement (APA) is limited to the amount of such deposit.

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