601 B.R. 340
Bankr. D.N.J.2019Background
- Debtor Orama operated a restaurant in Edgewater, NJ and purchased a liquor license from landlord/creditor Mitsuwa under a 2012 Contract for Sale of Liquor License (CFS): $700,000 price ($50k cash, $650k promissory note) with a repurchase option (§13) allowing Mitsuwa to buy back the license by cash or offset/credit-bid.
- Prepetition state-court litigation arose over lease defaults and amounts due; Mitsuwa sought return of the license in an amended complaint but did not execute a clear written exercise of the CFS option.
- Debtor filed Chapter 11 (converted to Chapter 7); Trustee seeks to sell the liquor license free and clear for estate benefit.
- Trustee moved for summary judgment that the repurchase option was an executory contract rejected by operation of §365 and, alternatively, that the option is unenforceable under N.J.S.A. 33:1-26 (prohibiting encumbrances on liquor licenses).
- Mitsuwa contends it had a prepetition exercised right to the license (including credit-bid/offset), and that rejection does not strip it of substantive equitable relief (specific performance), citing Mission Product.
Issues
| Issue | Plaintiff's Argument (Mitsuwa) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Was the repurchase option an executory contract subject to rejection? | Option had been exercised prepetition (state-court demand) and Mitsuwa owed no further material performance, so contract not executory. | Option (and transfer) left mutual unperformed obligations at petition date; executory and deemed rejected (Chapter 7 60-day rule). | The option was an executory contract and was rejected. |
| Does rejection permit Mitsuwa to obtain specific performance (i.e., compel transfer or credit-bid)? | Rejection does not rescind rights already granted; Mission Product supports that equitable rights survive rejection, so Mitsuwa can seek specific performance. | Mission Product preserves rights already obtained (e.g., use of IP) but does not require debtor to perform obligations post-rejection; remedy should be an unsecured claim for damages. | Specific performance denied; Mitsuwa is limited to a claim for damages rather than compelling the estate to transfer the license or allow credit-bid. |
| Is the repurchase/credit-bid structure enforceable under New Jersey law (N.J.S.A. 33:1-26)? | Kalogeras allows specific enforcement of contracts to transfer liquor licenses; parties impliedly must seek municipal approval, so such agreements can be enforced. | The CFS + credit-bid functions as an effective security interest/encumbrance in violation of N.J.S.A. 33:1-26; Kalogeras does not validate arrangements that operate as liens. | The repurchase option (coupled with credit-bid) is an unenforceable device that, in practical effect, creates a prohibited encumbrance and will not be enforced. |
| Did Mitsuwa validly exercise the option prepetition by alleging return in its state complaint? | Count III of the amended complaint seeking transfer constituted exercise of the option. | The complaint did not satisfy the CFS notice/exercise requirements or state whether purchase would be cash or offset; no closing steps were taken; thus no effective exercise. | The complaint was not a sufficient exercise under the CFS; even if exercised, transfer required municipal approval and closing steps that had not occurred. |
Key Cases Cited
- Mission Product Holdings v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (Supreme Court held rejection of an executory contract equals breach, not rescission, so rights already vested under contract survive).
- In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010) (definition/test for executory contract and related precedent in Third Circuit).
- Kalogeras v. 239 Broad Ave., L.L.C., 997 A.2d 943 (N.J. 2010) (New Jersey Supreme Court held contracts to transfer liquor licenses can be specifically enforced; government approval is an implied condition and parties must cooperate).
- Unsecured Creditors' Comm. v. Southmark Corp., 139 F.3d 702 (9th Cir. 1998) (discusses when option/first-refusal rights are executory contracts).