Precision Industries v. Qualitech Steel SBQ

In June 1998, Precision Industries, Inc. and Circo Leasing Co., LLC (collectively, Precision) (plaintiff) entered into two agreements with Qualitech Steel Corporation and Qualitech Steel Holdings Corporation (collectively, Qualitech). A supply agreement provided that Precision would build a supply warehouse on Qualitech’s property in Pittsboro, Indiana and operate it for 10 years. A related lease agreement provided that Qualitech would lease the property for the warehouse to Precision for 10 years. In March 1999, Qualitech filed a Chapter 11 bankruptcy petition and assumed debtor-in-possession status. In June 1999, Qualitech sold substantially all of its assets to prepetition lenders who held the primary mortgage on the Pittsboro property. After a noticed hearing, the bankruptcy court entered a sale order, pursuant to 11 U.S.C. § 363(f) and other provisions, that instructed Qualitech to transfer its assets to the buyers free of all liens, claims, encumbrances, and interests apart from those specifically carved out. Precision’s leasehold interest was not expressly preserved by the order. Precision submitted no objections. The buyers of Qualitech’s assets transferred them to the newly created Qualitech Steel SBQ, LLC (New Qualitech) (defendant). Negotiations for assumption of the Precision supply and lease agreements were held but never successfully concluded. As a result, the agreements were de facto rejected. When New Qualitech took possession of the Pittsboro warehouse, Precision filed a lawsuit against it in federal district court. The matter was referred to the bankruptcy court, which held that Precision’s possessory interest in the property had been extinguished by the earlier sale order and pursuant to § 363(f). The district court reversed on the grounds that the protection of leasehold interests set forth at § 365(h) were controlling. New Qualitech appealed.