635 B.R. 533
Bankr. D. Haw.2021Background
- Minesen operates the Inn at Schofield Barracks under a suite of interlinked agreements: an MWR contract (expires May 31, 2026), two leases, and an operating agreement; Minesen sought bankruptcy-court authority to assume these under 11 U.S.C. § 365.
- The Fund (US Army Morale, Welfare and Recreation Fund) is a nonappropriated fund instrumentality (NAFI); parties dispute whether the Anti‑Assignment Act and § 365(c)(1) bar assumption.
- The Fund alleges multiple defaults by Minesen: unpaid electricity ($561,538.89 through June 2021 plus later charges), prohibited sales of distilled spirits and liquor sales without a county license, failure to fund the replacement reserve account (RRA), room-rate overcharges ($1,097,438.95), and reporting/notice deficiencies; Minesen disputes some facts and defenses.
- The court held multi‑day evidentiary hearings, evaluated whether defaults were material/curable, whether the Fund waived Anti‑Assignment Act protections, and whether Minesen provided adequate assurance of future performance and exercised reasonable business judgment.
- The court concluded the Fund is a government entity (NAFI), found many defaults proved and curable, required immediate cures/refunds (electricity payment, room refunds, RRA accounting, cessation of alcohol sales unless licensed), and granted assumption conditioned on satisfying those cures and providing adequate assurance.
Issues
| Issue | Plaintiff's Argument (Minesen) | Defendant's Argument (Fund) | Held |
|---|---|---|---|
| Applicability of Anti‑Assignment Act / §365(c)(1) | Government not a party to MWR contract; Act therefore inapplicable | Fund is a NAFI and government instrumentality; Act applies to leases/contracts with government | Act covers these agreements, but MWR clause (consent not unreasonably withheld) waived Anti‑Assignment Act protection; §365(c) does not bar assumption |
| Waiver of Anti‑Assignment Act via contract language | Contract language disclaiming government liability means Act inapplicable | Contract elsewhere identifies Fund as a NAFI and delegation authority; Act applies | Court treats Fund as part of government; but express contractual consent-limitation (consent not unreasonably withheld) constitutes waiver of Act's protections |
| Notice of defaults (prepetition) | Fund failed to give prepetition cure/termination notices; therefore cannot assert defaults | Postpetition notice and motions under §365 suffice; contract imposes performance duties independent of notice | Prepetition notice failure does not bar Fund; postpetition notice is sufficient and Minesen’s obligations remain |
| Electricity nonpayment | Bills unreliable; meter access prevented; billing method disputed | Minesen owes past-due electricity billed by garrison (>$561k) | Minesen in default; owes $561,538.89 through June 2021 plus subsequent charges; must pay immediately |
| Alcohol sales / licensing | Alcohol sales are normal hotel amenity or were tacitly permitted | MWR contract forbids distilled spirits; state/local liquor laws apply; no license on file | Distilled spirits sales breached contract; beer/wine sold without required county license breached contract; Minesen must stop sales until licensed; no damages awarded for past sales |
| Pangolin management/refinancing transaction | Pangolin repayment/subrogation was not a material refinancing needing Fund consent | Transaction was functionally a refinancing/replacement lender; required Fund consent which was not given | Transaction treated as refinancing without consent; Pangolin must release or convert claims against Minesen |
| Replacement Reserve Account (RRA) | Expenditures effectively satisfied RRA requirement | Minesen failed to deposit required 4% of gross revenues into RRA | Minesen breached RRA deposit obligation; Fund to provide detailed shortfall statement; Minesen must deposit undisputed amounts or contest with support |
| Room rate overcharges | Fund released related claims in 2017 settlement / lacks standing | Overcharges violated MWR contract rates; settlement did not release these claims | Minesen must refund $1,097,438.95 to the Fund and attempt refunds to affected guests; settlement did not bar these claims |
| Business judgment / adequate assurance to assume | Assumption is sound business judgment; Inn profitable | Fund doubts Minesen's intentions due to past conduct | Court finds Minesen meets business-judgment standard and has adequate assurance if it completes the court-ordered cures; assumption granted conditionally |
Key Cases Cited
- Perlman v. Catapult Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999) (applies the "hypothetical test" under §365(c)(1) regarding assignability)
- Vanderpark Properties, Inc. v. Buchbinder (In re Windmill Farms, Inc.), 841 F.2d 1467 (9th Cir. 1988) (immaterial defaults need not be cured to assume a lease)
- Durkin v. Benedor Corp. (In re G.I. Indus., Inc.), 204 F.3d 1276 (9th Cir. 2000) (business judgment rule governs assumption/rejection decisions)
- Tuftco Corp. v. United States, 614 F.2d 740 (Ct. Cl. 1980) (government may waive Anti‑Assignment Act protections by contract or conduct)
- Minesen Co. v. McHugh, 671 F.3d 1332 (Fed. Cir. 2012) (describing NAFIs as federal government entities with governmental attributes)
- Standard Oil Co. of Cal. v. Johnson, 316 U.S. 481 (U.S. 1942) (military exchanges/NAFIs treated as arms of the government for some purposes)
- In re Claremont Acquisition, 113 F.3d 1029 (9th Cir. 1997) (historical-fact theory concerning noncurable interruptions of operations)