Two of the most powerful tools of the Bankruptcy Code are found in sections 363(f) and 365(a), which allow debtors and trustees to sell property free and clear of non-debtor interests and reject unwanted executory contracts. In his California Bankruptcy Journal article, Member Daniel A. Lev discusses the complications involved when a restrictive covenant, which imposes restrictions on how land can be used, runs with the land in question.
Mr. Lev highlights several decisions in examining why numerous courts have rejected arguments that restrictive covenants are executory contracts subject to rejection under section 365(a). Mr. Lev also explains that the majority of courts have refused to allow debtors to use the free and clear provisions of section 363(f) to strip covenants that run with the land. However, a change of circumstances surrounding the property may allow debtors to shed restrictive covenants. As Mr. Lev illustrates, “…to demonstrate a change of circumstances, the general rule is that the change must be of such a dimension ‘that it is no longer possible to accomplish the original purpose intended by the restriction….’”.
Mr. Lev concludes that if reorganization is entirely dependent on whether a restrictive covenant can be rejected under section 365(a) or discarded under section 363(f), debtors must take special note of the underlying characteristics of the covenant. “Merely arguing that the property will be more profitable to the estate without the covenant will be insufficient,” Mr. Lev writes.
Read the full article here.