The Petitioners, Dunkin’ Donuts Franchising LLC and Dunkin’ Donuts Franchised Restaurants LLC (collectively “Dunkin’ Donuts” or “Dunkin”), Baskin-Robbins Franchising LLC and Baskin-Robbins Franchised Shops LLC (collectively “Baskin-Robbins”), and DB Real Estate Assets I LLC (“DB Realty”), (collectively, “Dunkin’ Brands”), seek leave to file an interlocutory appeal from a decision of the Bankruptcy Court (Dorothy D.T. Eisenberg, J.), granting the Debtors’ motion making a determination that the provisions of 11 U.S.C. § 365(d)(4) are inapplicable to the Petitioners’ lease agreements with the Debtors. In the alternative, the Petitioners request a finding that the decision is a final order. For the reasons that follow, the Court finds that the bankruptcy decision was not a final order and denies leave to file an interlocutory appeal.
I. BACKGROUND
The Debtors-Respondents operate franchises of Dunkin’ Donuts and/or Baskin-Robbins stores. Six of the stores are in Maryland and six are in New York. Dun-kin’ Donuts and Baskin Robbins (collectively “Franchisors”) are the franchisors of the Debtors’ stores. Four of the Debtors, CDDC Acquisition Company, LLC, Middle Country Road Donuts, LLC, Mountain Road Donuts, LLC, and Benfield Donuts, LLC, have a lease agreement with DB Realty (the “Dunkin’ Leases”), a subsidiary of Dunkin’ Donuts, which was entered into at the same time as, and in conjunction with, their franchise agreement. No one disputes that DB Realty would not have signed the Dunkin’ Leases with the Debtors, if the Debtors had not simultaneously signed a franchise agreement with the Franchisors which allowed them to operate a Dunkin’ Donuts and/or Baskin-Robbins franchise on the premises.
Moreover, the lease agreements expressly provide that if the franchise agreement is terminated for any reason, the landlord shall have the right to terminate the lease. In addition, the lease agreements provide that the premises may only be used for operation of a Dunkin’ Donuts and/or Baskin-Robbins store in accordance with the terms and conditions of the franchise agreements. In sum, the Dunkin’ Leases and the franchise agreements are part of a single transaction, and both parties acknowledged this for purposes of the previous motion and order in the Bankruptcy Court that is presently on review.
The Petitioners claim that the debt of the Debtors is significant, including unpaid royalty and advertising fees under the franchise agreements, as well as pre-petition unpaid rent and miscellaneous charges under the lease agreements. Furthermore, according to the Petitioners, the Debtors continue to operate at a loss, and each month the amount of the loss increases as their debts continue to grow.
Section 365(d)(2) of the Bankruptcy Code provides that debtors may have until plan confirmation to determine whether they will assume or reject executory contracts. See 11 U.S.C. § 365(d)(2). However, there is a carve-out in subsection (d)(4) of this statute, in which debtors have only 120 days, or 210 days with the court’s permission, to decide whether to assume or reject nonresidential real property leases. Here, the Bankruptcy Court provided the Debtors with the maximum 210 days to determine whether they wanted to assume or reject the Dunkin’ Leases. However, when the 210 day time limit was near expiration, the Debtors filed a motion seeking either (1) a determination that the Dunkin’ Leases need not be assumed or
In light of the Debtors’ position, United States Bankruptcy Judge Dorothy T. Ei-senberg extended the time to assume or reject the Dunkin’ leases beyond the 210 days, until March 29, 2011, so that she could make a final decision as to the issue. On March 22, 2011, Judge Eisenberg issued a Memorandum Decision and Order addressing the Debtors’ contentions. First, she found that each lease and corresponding franchise agreement were “economically interrelated and interdependent” so that they “constituted an integrated transaction and should be treated as a single controlling agreement.”
In re FPSDA I, LLC,
The question that is the subject of the requested interlocutory appeal is whether 11 U.S.C. § 365(d)(4) is applicable to a non-residential lease, where that lease and a corresponding executory franchise agreement are part of a single transaction. The Petitioners request a reversal of the Bankruptcy Court’s Order and for a directive to the Bankruptcy Court to act in conformity with the holding of this Court.
II. DISCUSSION
A. Whether the Order From the Bankruptcy Court is Final
As an initial matter, the Petitioners note that they consider the Bankruptcy Court’s March 22, 2011 Order to be final, so that permission to appeal is not needed because it may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1) and Fed. R. Bankr.P. 8001. In support of this contention, the Petitioners state that an order is final if it disposes of “discrete disputes within the larger case.”
In re Saco Local Dev. Corp.,
The Petitioners mainly rely on cases which have found that a bankruptcy order determining whether an agreement is an executory contract or whether or not it is a lease or other agreement is a final order.
See In re Ravenswood Apartments, Ltd.,
Thus, the conclusion of the Bankruptcy Court now subject to this interlocutory appeal is not the categorization of the lease agreement but the timeline under which the Debtors can make their determination to assume or reject the Dunkin’ Leases. The Court agrees with the Respondents that this determination does not completely resolve all issues with respect to the Dunkin’ Leases because it merely extended the time to assume or reject the leases. See In re Calpine Corp., 356 B.R. 585, 596 (Bankr.S.D.N.Y.2007) (“The bankruptcy court’s Extension Order and denial of the Trustee’s request to move for summary judgment in the adversary proceeding are not final orders as they are clearly interlocutory and do not involve a ‘final determination’ of the controversy”).
Accordingly, the Bankruptcy Court’s March 17 Order was not a “final order” within the meaning of 28 U.S.C. § 158(a)(1), and the Court will proceed to assess whether an interlocutory appeal is permissible in the instant case.
B. Legal Standard to Grant an Interlocutory Appeal from, a Bankruptcy Court Order
“Under Section 158(a)(3), a district court has discretionary appellate jurisdiction over an interlocutory order of a bankruptcy court.”
In re Kassover,
Thus, in deciding whether to grant leave to appeal an interlocutory bankruptcy court order, a district court should consider whether: (1) “such order involves a controlling question of law,” (2) “as to which there is substantial ground for difference of opinion” and (3) “an immediate appeal from the order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b);
see Yerushalmi v. Shibolelth,
As a general matter, the power of a debtor to assume, or keep, reject, or disavow, contracts and leases entered into pri- or to bankruptcy is set forth in § 365(a) of the Bankruptcy Code. 11 U.S.C. § 365(a). The concept of rejection has its roots in the principle that the debtor may abandon burdensome property.
U.S. v. Dewey Freight Sys.,
Pursuant to 11 U.S.C. § 365(b), a trustee, or in this case a debtor, may not assume an executory contract or unexpired lease unless at the time of assumption of such contract or lease, the debtor does the following:
(A) cures, or provides adequate assurance that [debtor] will promptly cure, such default other than a default that is a breach of a provision relating to the satisfaction of any provision (other than a penalty rate or penalty provision) relating to a default arising from any failure to perform nonmonetary obligations under an unexpired lease of real property, if it is impossible for the [debtor] to cure such default by performing non-monetary acts at and after the time of assumption, except that if such default arises from a failure to operate in accordance with a nonresidential real property lease, then such default shall be cured by performance at and after the time of assumption in accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with the provisions of this paragraph.
11 U.S.C. § 365(b)(1)(A).
Courts have held that where a nonresidential real property lease is part of an integrated arrangement consisting of another executory agreement, such as a franchise agreement, a debtor cannot assume the lease obligation without also curing the defaults under the related executory agreement.
See In re Szenda,
Pursuant to 11 U.S.C. § 365(d)(2), a debtor has until confirmation of a plan of reorganization to decide whether to assume or reject an executory contract such
Pursuant to 11 U.S.C. § 365(d):
(2) In a case under chapter 9, 11, 12 or 13 of this title, the trustee [or debtor] may assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor at any time before the confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee [or debtor] to determine within a specified period of time whether to assume or reject such contract or lease.
(4)(A) Subject to subparagraph (B), an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee [or debtor] shall immediately surrender that nonresidential real property to the lessor, if the trustee [or debtor] does not assume or reject the unexpired lease by the earlier of—
(i) the date that is 120 days after the date of the order for relief; or
(ii) the date of the entry of an order confirming a plan.
(B)(i) The court may extend the period determined under subparagraph (A), prior to the expiration of the 120-day period, for 90 days on the motion of the trustee [or debtor] or lessor for cause.
(ii) If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.
11 U.S.C. § 365. Thus, Section 365(d)(4) sets forth a firm deadline as to a debtor’s time to assume or reject a nonresidential real property lease. “The deadline was originally enacted to address problems caused by extended vacancies or partial operation by a debtor of tenant space located in shopping centers which reduced customer traffic to other nondebtor tenants due to delays in debtors deciding whether to assume or reject the real property leases.”
In re FPSDA I, LLC,
D. As to Whether an Interlocutory Appeal Should Be Granted
1. Controlling Question of Law
“To establish that an order contains a controlling question of law, it must be shown that either (1) reversal of the bankruptcy court’s order would terminate the action, or (2) determination of the issue on appeal would materially affect the outcome of the litigation.”
N. Fork Bank,
For example, “though the question of whether to stay a proceeding on the basis of international comity, pending the outcome of another case, is fairly considered a ‘legal’ question,” courts tend to deny leave to file an interlocutory appeal challenging the bankruptcy court’s finding because the resolution of the issue “requires a heavily fact-based analysis.”
In re Complete Retreats, LLC,
To determine whether the Dunkin’ Leases are governed by Section 365(d)(4) and consequently whether the debtors are bound by the 120/210 day time limit for assumption or rejection of those leases, the Court need not go through an in-depth evidentiary analysis of the testimony and documentary evidence. Rather, this question appears to present a “pure question of law” that this Court could decide “quickly and cleanly” without an in-depth review of the record.
Enron/Springfield,
The Debtors assert that by viewing the entire transaction as “one controlling exec-utory agreement” and determining that the Dunkin’ Leases need not be assumed or rejected under Section 365(d)(4), the Bankruptcy Court made a fact-based determination. However, the Court finds that Judge Eisenberg’s decision was of a legal nature, in that she was determining what treatment should be given under the Bankruptcy Code to lease agreements that are entirely integrated with corresponding franchise agreements for the purposes of assumption or rejection. Although particular undisputed provisions of the agreements were certainly relevant to this analysis, it was essentially the generic nature of the relationship and arrangement that led to Judge Eisenberg’s conclusion. In other words, contrary to the Petitioners’ assertions, the specific and unique facts of Dunkin’ Brands serving as both franchisor and landlord was not the relevant inquiry, but rather was the factual predicate upon which Judge Eisenberg’s determination was based on.
Therefore, the Court finds that whether the Bankruptcy Court correctly ruled that the Section 365(d)(4) is inapplicable to the Dunkin’ Leases can properly be considered a controlling issue of law.
2. Substantial Ground For Difference of Opinion
However, the existence of a controlling issue of law alone is not a sufficient ground to grant leave to file an interlocutory appeal. A court should only grant leave to file an interlocutory appeal where “the case law shows there to be a substantial ground for difference of opinion with respect to the controlling question.”
In re Pappas,
As to the second requirement, the Petitioners contend that there is a substantial ground for difference of opinion as to whether, as a matter of law, Section 365(d)(4) is inapplicable to a nonresidential real property leases when there are corresponding franchise agreements relating to the leased premises. However, before the Court addresses this contention, a few initial considerations must be addressed,
a. As to the Bankruptcy Court’s Initial Determinations
A large portion of Judge Eisenberg’s decision was devoted to whether the franchise and lease agreements are integrated, so that a decision to assume or reject either of the contracts must be done simultaneously. The Bankruptcy Court found first, that it was undisputed by the Debtors and Dunkin’ Brands that, at least for purposes of the motion, each of the Dun-kin’ Brands Leases and the corresponding franchise agreements constitute an “integrated arrangement” that was “economically interrelated and interdependent.” This was based upon the fact that: (1)
Building upon the determination that each Dunkin’ Brands Lease and the corresponding franchise agreement relating to the leased premises constituted an integrated transaction, Judge Eisenberg went on to find that the Debtors could not assume a Dunkin’ Brands Lease unless they cured not only the defaults under the lease but also any defaults under the respective franchise agreement.
See In re FPSDA
I,
LLC,
The basic premise that the leases and corresponding franchise agreements are part of a single transaction does not appear to be disputed by either party. DB Realty maintained in the bankruptcy proceedings that a Dunkin’ Lease could not be assumed unless the respective franchise agreement was also assumed. Presently, the Petitioners contend that the two agreements are not severable. (See Petitioner Mem. at 4 (“Dunkin’ Lease Are Not Sever-able from Franchise Agreements”).) The Respondents appear to accept this contention. They note that in their initial Section 365 motion, they argued before the Bankruptcy Court that it was precisely because the Dunkin’ Lease and Franchise Agreements constituted a single transaction, that they should not be forced to forego their rights under 11 U.S.C. § 365(d)(2) with respect to the franchise agreements due to the draconian provisions of 11 U.S.C. § 365(d)(4). Accordingly, because neither side appears to dispute that the agreements are interrelated and that assumption or rejection must be done concurrently, this is not the relevant controlling law the Court need now address but rather the underlying premise for the relevant inquiry.
However, whether there is a substantial ground for difference of opinion with respect to the controlling law is nevertheless complicated by how to frame the issue presented by this requested interlocutory appeal. One may pose the relevant inquiry as what timeline is applicable to a lease agreement when it is related to a corresponding franchise agreement, when the agreements are not read together as a single executory contract. If so, there is not a single case that has approached the issue in that fashion, and thus, the question is one of first impression. On the other hand, if the issue is presented as whether the lease and franchise agreements are integrated and thus should be read as one single executory contract, so that the timeline in (d)(4) would presumably not be applicable, then there is in fact a plethora of case law on the subject.
The latter framing of the issue can be put another way — whether the lease agreement is unitary with or severable from the related franchise agreements.
It is not entirely clear from the parties’ submission what the appropriate lens is through which to address the Bankruptcy Court’s Order. The Petitioners at times appear to be under the impression that only the latter inquiry is relevant. (See Petitioner Mem. at 12 (“In the present case, the Bankruptcy Court determined that the Dunkin’ Lease are executory contracts, rather than nonresidential leases, for purposes of 11 U.S.C. § 365(d)(4)”).) Nevertheless, under either inquiry, the present interlocutory appeal does not satisfy the requirement that there be a substantial ground for difference of opinion with respect to the controlling law. The Court will address each framing of the controlling law in turn,
b. As to Whether (d)(4) is Applicable if the Leases and Franchise Agreements Form a Single Executory Contract
First, assuming that the Dunkin’ Brands Leases and the corresponding franchise agreements constitute a single integrated transaction, so that one could not be assumed or rejected without the other, the next possible inquiry is whether the two contracts should be considered as a single controlling executory contract. The parties do not appear to address this issue in their memoranda of law. However, the Bankruptcy Order appears to expressly base its determination on that finding. In addition, the case exclusively relied upon by the Bankruptcy Court,
In re Harrison,
also based its conclusion upon this finding — it held that the time period in (d)(4) was not applicable specifically because it found that the group of dealer agreements, motor fuel station leases, auto care agreements, and auto care limited warranties between a franchiser and the debtor-franchisee were integrated, and collectively formed
one controlling executory agreement
among the parties.
Assuming that this is the controlling law at issue, the Court finds that there is no substantial ground for difference of opinion as to whether here, the Dunkin’ Leases and the franchise agreements may be considered pieces of a single executory contract under the rule of indivisibility. In determining whether separate instruments should be integrated, courts use the same fact-intensive tests that are used to determine severability, such as (1) the differing nature and purpose of the agreements; (2) the separate and distinct consideration for the agreements; and (3) the interrelatedness of the obligations of the parties to the document.
In re Plum Run Serv. Corp.,
While the nature of the lease and franchise agreements may be characterized differently, the purpose of both was to effectuate the franchising relationship. In addition, consideration for one agreement supported the other. More importantly, the interrelatedness of the obligations of the parties to the documents is apparent. As set forth above, the agreements were entered into contemporaneously; one would not have been entered into without the other; the only permitted use for the leased premises was to operate the franchise; if a debtor defaulted under the lease, then the franchise agreement could also be terminated; and a lease could not operate independently of the corresponding franchise agreement. In light of these factors, the Petitioners have not raised any reasons as to why the instruments should not be integrated and hence to constitute a single executory contract.
In addition, a number of courts in analogous circumstances have found a lease agreement to be part of a single controlling executory contract because of the nature of the integrated business transaction.
See Dunkin’ Donuts Inc. v. Liu,
Coincidentally, the only case in this district that has reached the opposite conclusion was in connection with Dunkin’ Donuts and Baskin-Robbins, and found that the lease and franchise agreements did not form a single, unitary whole so that if the lease was not terminated pre-petition, then the franchise agreement would still be in effect.
See In re 717 Grand Street Corp.,
The Petitioners assert that the Bankruptcy Court rejected the holdings of every published opinion, except one, on the issue, but does not explain which cases it is disputing; why rejecting those cases was wrong; or points out any other cases that the Court should have presumably followed. For instance, the Petitioners appear to rely on
In re East Hampton Sand & Gravel Co., Inc.,
In sum, it seems that implicit in the Bankruptcy Court’s Order was the finding that because the two agreements are so interrelated, they form a single overarching executory contract and it was for that reason that the rules governing executory contracts under (d)(2) are applicable.
See In re FPSDA I, LLC,
c. As to Whether (d)(4) is Applicable if the Leases and Franchise Agreements Do Not Form a Single Execu-tory Contract
Even if the Court were to find that there was not a single controlling executo-ry contract, but simply two agreements that were interrelated, there would still not be a substantial ground for difference of opinion as to whether (d)(4) is applicable to the Dunkin’ Leases.
If the controlling issue of law is framed in this manner, then it would appear to be a question of first impression in this circuit. However, that alone is insufficient to satisfy this prerequisite.
See In re Flor,
First, this would not be a traditional lease in the sense that Dunkin’ Donuts is not a traditional landlord. Sections 365(d)(3) and (4) apply only to “true” or “bona fide” leases.
Liona Corp., N.V. v. PCH Assocs. (In re PCH Assocs.),
Second, the rationale thoroughly explained by the Bankruptcy Court is compelling, and there does not appear to be a substantial ground for difference of opinion as to this reasoning. Proceeding upon the assumption that the leases and franchise agreements must be decided at one time, if the shorter time period of (d)(4) was applicable to both, then it would essentially force debtors to prematurely decide whether to assume or reject the exec-utory franchise agreements. However, the timing as to leases is an anomaly, and the rationale for its short duration should not compel the same result as to executory franchise agreements. The Court agrees with the Respondents that forcing the Debtors to assume or reject the executory franchise agreements within 210 days “would improperly expand the scope of [ (d)(4) ]”. (Resp. Mem. at 18.)
Moreover, the relatively fast-paced timing to assume or reject non-residential lease agreements, made extremely inflexible with the 2005 BAPCPA amendments, has been fairly criticized, even when applied to undisputedly pure lease agreements.
See generally
Symposium,
Great Debates Resolved: Congress Should Eliminate the Special BAPCPA Protections for Lessors and Providers of Goods,
April 29, 2010 Am. Bankr.Inst. 15 (“Perhaps the most widely criticized provision of BAPC-PA was its amendment to section 365(d)(4) of the Bankruptcy Code_the pendulum has now swung so far in the other direction that even landlords are reeling under the impact of revised section 365(d)(4). While the shortened assumption period has certainly provided landlords with greater clarity on the future of their leases, it has, more importantly, significantly diminished the likelihood that the future of those leases will involve the debtor. As the likelihood of a debtor’s reorganization dwindles, so too does the
Most importantly, the Petitioners cannot cite to a single case in which a franchise agreement and accompanying lease agreement were subject to different timelines under 365(d), even when not viewed as one integrated controlling document. As the Respondents point out, the submission of conflicting case law is important in persuading the Court that there exists substantial doubt about the law.
See Genentech, Inc. v. Novo Nordisk A/S,
Therefore, whether or not the lease and franchise agreements are viewed as a single controlling executory contract, there is not a substantial ground for difference of opinion as to whether (d)(4) is applicable in the instant case. While the issue of this provision’s applicability is a controlling issue of law, the motion for an interlocutory appeal is denied because this is not an issue about which there is a substantial ground for disagreement. Accordingly, the Court need not address issues of judicial economy — whether an immediate appeal on that issue could materially advance the ultimate termination of this litigation.
See In re S. African Apartheid Litig.,
Nos.
3. Exceptional Circumstances
Finally, in the Court’s view, exceptional circumstances that would justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment do not exist in this case.
See e.g., Coopers & Lybrand v. Livesay,
E. Collateral Order Doctrine
In addition to the arguments set forth above, the Petitioners assert that even if the Bankruptcy Court’s Order is not a final order, it may be appealable under the collateral order doctrine. This doctrine is “a judicially created exception [that] allows immediate appeal from orders that are collateral to the merits of the litigation and cannot be adequately reviewed after final judgment.”
Germain v. Connecticut Nat’l Bank,
In order to be final under the collateral order doctrine, a bankruptcy order “must (1) conclusively determine a disputed question, (2) resolve an important issue completely separate from the merits of the action, and (3) be effectively unreviewable on appeal from a final judgment,”
Kennedy & Assocs., Inc. v. WorldCom, Inc. (In re WorldCom),
No. 08 Civ. 10354,
The Petitioners fail to demonstrate that the Bankruptcy Court’s Order will be unreviewable on appeal or that their rights will be irretrievably lost if this Court does not permit an interlocutory appeal. Although this case does involve the delivery of physical property, the lessors’ ultimate ability to receive this property is not affected in any way so as to make their rights irretrievably lost. Rather, it was only determined that the Petitioners will need to wait a longer period of time before a decision by the Debtors is made as to whether the lease is assumed or rejected and consequently whether the Petitioners will receive the physical property. Thus, the Petitioners’ arguments for applicability of this doctrine is without merit.
The Second Circuit has repeatedly emphasized that interlocutory bankruptcy appeals should only be granted in exceptional cases where early appellate review might avoid protracted and expensive litigation. Thus, it was not intended “to open the floodgates to a vast number of appeals from interlocutory orders in ordinary litigation” or to be a “vehicle to provide early review of difficult cases.” The issues posed by the Petitioners are by no means clear-cut. As one Court has Bankruptcy Court has noted:
There appears to be no end in the litigation arising out of 11 U.S.C. § 365(d)(4). Time after time bankruptcy practitioners and debtors-in-possession have tested the equitable powers of the bankruptcy court by failing to follow the requirements of this section. Since the addition of this section in the Bankruptcy Amendments and Federal Judgeship Act of 1984, courts have struggled to find solutions where infractions of the statutory requirements are weighed against the importance of leaseholds to debtors’ reorganizations.
Matter of Lew Mark Cleaners Corp.,
The Court finds that the determination by Judge Eisenberg does not constitute the appropriate circumstances for an interlocutory appeal in that it does not demonstrate the exceptional circumstances needed to overcome the general aversion to piecemeal litigation.
See In re AroChem Corp.,
For the above stated reasons, it is hereby
ORDERED, that the March 22, 2011 Bankruptcy Order is not a “final order” that may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1); and it is further
ORDERED, that the Petitioners’ request for leave to file an interlocutory appeal from the March 22, 2011 Bankruptcy Order is denied.