Casino Tenants Revel in Victory Enforcing Section 365(h) Rights

The ill-fated Revel Casino bankruptcy has presented a spectacle worthy of a television miniseries. From the very public destruction of a multibillion-dollar investment to the ongoing dispute with its adjoining power supplier, this case has managed to stay in the news for several years. It has also helped further develop several important legal issues that arise in contested Chapter 11 sales, one of which involves the ongoing rights of a tenant who is party to a rejected lease of property sold pursuant to Section 363. Generally, Section 365(h) of the Bankruptcy Code permits a tenant certain protections even after the debtor-landlord rejects its lease, including the ability to remain in possession for the balance of the term as well as any renewal or extension period. Obviously, this provision can be very important for tenants, particularly those with significant time remaining on a favorable lease. But what happens if the debtor sells the property “free and clear” pursuant to Section 363? The U.S. Bankruptcy Court for the District of New Jersey has shed further light on that issue by confirming that such rights are not wiped out by a “free and clear” sale of the debtors’ assets under Section 363 of the Bankruptcy Code, but rather remain intact under Section 365(h), in IDEA Boardwalk LLC v. Revel Entertainment Group LLC (In re Revel AC), 2015 Bankr. LEXIS 2090 (Bankr. D.N.J. June 24, 2015).

Prior to the debtors’ Chapter 11 bankruptcy filing in June 2014, IDEA Boardwalk LLC and other tenants entered into agreements to operate various retail facilities at the Atlantic City, New Jersey, casino premises. After filing, the debtors moved to reject the tenant agreements under Section 365 of the Bankruptcy Code. Less than a week after filing the rejection motion, the debtors ceased operations and barred the tenants from entering the premises. Each of the tenants gave notice of their intent to continue exercising possessory leasehold rights under Section 365(h). IDEA also immediately commenced an adversary proceeding against the debtors, seeking, among other things, a preliminary injunction prohibiting them from engaging in conduct that prevented IDEA from enjoying its possessory rights, including the right to utilities and necessary easements.