In the distressed M&A arena, Bankruptcy Code Section 363 sales are by far the preferred method to complete a transaction. After all, the Bankruptcy Code provides would-be purchasers unmatched protection with its promise that such sales are “free and clear” of all liens, claims and encumbrances. Right? A recent decision from the U.S. Court of Appeals for the Third Circuit in the high-profile Revel AC bankruptcy case, however, serves as a warning that reliance on the typical “free and clear” language in a sale order is not always a safe bet, see IDEA Boardwalk v. Revel Entertainment Group (In re Revel AC ), Case No. 17-3607 (3d Cir. Sept. 26, 2018).

The Revel AC bankruptcy culminated in the sale of a $2.5 billion dollar casino project to development company Polo North Country Club, Inc. for an infamously low price. As is typical of bankruptcy sales executed pursuant to Section 363 of the Bankruptcy Code, Polo North acquired the Revel property free and clear of all liens, claims, encumbrances and other interests of any kind. The purchase agreement underlying the sale, however, did carve out certain exceptions. Under the terms of the sale, Polo North stepped into the debtor’s shoes as landlord of certain nightclubs and restaurants within the casino. Importantly, the purchase agreement expressly preserved certain tenant rights, including setoff and recoupment as well as the right to enforce the provisions of Section 363(h) of the Bankruptcy Code—which, in relevant part here, permitted tenants to enjoy the same rental terms as originally set forth in its lease. IDEA Boardwalk, the operator of certain entertainment venues within the casino, was a tenant whose lease remained in effect with Polo North post-sale and elected to enforce its Section 363(h) rights.

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