If a debtor seeks to sell, pursuant to a 363 sale, real property as to which it is the landlord under an unexpired prepetition lease, can such property be sold “free and clear” of the non-debtor tenant’s leasehold interest? Although section 365(h) of the Bankruptcy Code allows a nondebtor tenant to elect to remain in possession of nonresidential leased property following rejection by a debtor landlord, the Ninth Circuit has held in In re Spanish Peaks Holdings II, LLC that section 365(h) does not act as an absolute bar to extinguishing a non-debtor tenant’s leasehold interest in a 363 sale.
Lenders rejoice. The Second Circuit recently issued its highly anticipated opinion in In re MPM Silicones, LLC, where it held that the appropriate cramdown interest rate in chapter 11 cases is the market rate (so long as an efficient market exists) rather than the formula rate applied by the US Supreme Court in individual debtors’ chapter 13 cases.
The opinion is significant considering that the Second Circuit encompasses the Bankruptcy Court for the Southern District of New York, which has traditionally been a common venue for many large chapter 11 cases. Where a secured claim is significantly large, even a small increase to the cramdown interest rate as result of applying the market rate can result in a substantial increase in the amount of deferred cash payments due to the secured creditor.