In Re Fpsda I, LLC
MEMORANDUM DECISION AND ORDER
Before the Court is the motion by FPSDA I, LLC, Commack Road Donuts, LLC, FPSDA II, LLC, Highbridge Donuts, LLC, Metro Shops, LLC, Middle Country Road Donuts, LLC, Five Points Development Partners, LLC, Mountain Road Donuts, LLC, Benfield Donuts, LLC, Upper Marlboro, LLC, CDDC Holding Company, Miller Place Donuts, LLC, CDDC Acquisition Company; LLC, D3C, LLC, Kingdom Donuts, LLC, and Blue Point Ventures, LLC (collectively, the “Debtors”) for the entry of an order (I) determining that certain of the Debtors’ non-residential real property leases need not be assumed or rejected pursuant to
FACTS
The Debtors operate several quick serve restaurant franchises that produce and sell beverages, donuts, baked goods and other food products, with seven retail stores located in New York and six retail stores located in Maryland. The Debtors have been operating their businesses in Chapter 11 as debtors in possession since or about July 13, 2010. The bankruptcy cases are jointly administered but have not been substantively consolidated.
The Debtors’ most significant assets consist of the separate franchise agreements entered into by twelve of the Debtors with Dunkin’ Donuts Franchising LLC, Dunkin’ Donuts Incorporated, Dun-kin’ Donuts Franchised Restaurants LLC, Baskin-Robbins Franchising LLC and/or Baskin-Robbins Franchised Shops LLC (collectively, “Dunkin’ Franchisors”) as follows:
Franchise Agreement
Debtor Date
CDDC Acquisition, LLC June 28, 2004
Commack Road Donuts, LLC June 28, 2004
FPSDA I, LLC June 22, 2007
Kingdom Donuts July 1, 2007
FPSDA I, LLC October 4, 2007
Mountain Road Donuts, LLC October 12, 2007
Highbridge Donuts November 9, 2007
Middle Country Road Donuts, December 26, 2007 LLC
Miller Place Donuts, LLC December 26, 2007
Benfield Donuts, LLC December 26, 2007
D3C, LLC March 4, 2008
Metro Shops, LLC September 17, 2008
Each of the franchise agreements set forth the location of the franchise unit that is to be operated under the respective franchise agreement in terms of the specific street address. At the termination of the franchise agreement, the Dunkin’ Franchisors have the option to take over any interest the franchisee has in the real property lease or any other agreement related to the premises where the franchise unit was operating whether the landlord is affiliated with the Dunkin’ Franchisors or is a third party. If the franchisee acquires ownership or control of the premises, then the Dunkin’ Franchisors have the option to lease the premises from the franchisee for the remaining term of the franchise agreement should the franchisee default under the agreement or under any lease relating to the premises.
Thеse franchise agreements also contain cross guarantee provisions that if the franchisee or any partner, member or shareholder of a franchisee holds or subsequently acquires an interest in any other unit franchised by the Dunkin’ Franchisors, the franchisee would be jointly and severally liable to the Dunkin’ Franchisors as guarantor of the obligations of the franchisee under each franchise agreement for such other unit. Such guarantee would include the payment of all franchise fees, advertising fees, equipment payments, note payments rental and other lease рayments to the Dunkin’ Franchisors or any of its parent, subsidiaries and affiliates.
It is undisputed that these franchise agreements are executory contracts which require Debtors to make certain payments of franchise and advertising fees to the Dunkin’ Franchisors based upon a percentage of their sales revenue. The Debtors’ bankruptcy fifing was precipitated by the breakdown in negotiations between the Debtors and the Dunkin’ Franchisors to restructure their obligations under the franchise agreements and the imminent threat of the Dunkin’ Franchisors trans
In addition to the franchise agreemеnts, the Debtors are also tenants under various nonresidential real property leases. Four of those leases are with DB Real Estate Assets I LLC and/or Third Dunkin’ Donuts Realty, Inc. (together with the Dun-kin’ Franchisors, “Dunkin’ Brands”) as the landlord. The Debtors, Middle Country Road Donuts, LLC, Mountain Road Donuts, LLC, Benfield Donuts LLC, and CDDC Acquisition Company, LLC, each entered into a nonresidential real property lease with Dunkin’ Brands (“Dunkin’ Brands Leases”) at the same time they entered into the related franchise agreement. It is undisputed that the Dunkin’ Brands Leases are true nonresidential real property leases. Each of the Dunkin’ Brands Leasеs set forth the specific franchisor and franchise agreement that permits the respective Debtor to operate on the premises. Each of the Dunkin’ Brand Leases also provides that the Debtors are only permitted to use the premises to operate a Baskin-Robbins and/or Dunkin’ Donuts unit, and in two cases they include a Togo’s Eatery, at the location covered by the Dunkin’ Brands Lease. Each lease is subject to the franchise agreement remaining in full force and effect. If the franchise agreement is terminated for any reason, then Dunkin’ Brands have the right to terminate the lease immediately. Dunkin’ Brands would not have signed a lease with a debtor had that debtor not simultaneously signed a franchise agreement with the Dunkin’ Franchisors to operate a Dunkin’ Donuts and/or Baskin-Robbins franchise on the leased premises. There are some prepetition rent arrears due on the Dun-kin’ Brands Leases but the Debtors are current with their postpetition rent obligations under these leases.
Pursuant to
Dunkin’ Brands opposed the Motion but agreed to extend the Debtors’ time to assume or reject their leases to March 4, 2011 for purposes of having the Court hear oral arguments relating to the Debtors’ Motion.
According to Dunkin’ Brands, the Dun-kin’ Brands Leases and the franchise agreements constitute a single transaction or arrangement as a result of the various cross dеfault provisions. They argue that before the Debtors can assume any of the Dunkin’ Brands Leases, the Debtors would need to cure not only the defaults under those leases but also the existing defaults under the related franchise agreements. According to Dunkin’ Brands, the Debtors owe at least $700,000 in prepetition and postpetition franchise and advertising fees,
The Debtors point out that they operate separate and apart from one another, have their own franchise agreements and leases, their own individual employees, their own credit and security agreements with secured lenders and their own separate agreements with various trade creditors. They are not substantively consolidated and remain individual debtors in this Court. The Debtors argue that under Dunkin’ Brands’ argument, if the Debtors were compelled to assume the Dunkin’ Brand Lеases at this time before they have made a determination as to whether to assume or reject the franchise agreements, then the Debtors would be forced not only (i) to remain current on payments to Dunkin’ Brands under the leases and corresponding franchise agreements in addition to payments to their secured lenders and other creditors, but also (ii) to cure all the arrears on the franchise agreements and the Dunkin’ Brands Leases. If the Debtors were to ultimately determine that the applicable franchise agreements must be rejected, then the subsequent breach of any assumed lease will result in substantial additional postpetition administration liabilities which would prejudice the Debtors and the creditors of the Debtors’ bankruptcy estates. The Debtors argue that they should not be compelled to assume or reject the Dunkin’ Brand Leases until they are ready to make a determination on each of the franchise agreements. In the alternative, the Debtors request that the Court permit the Debtors to assume the Dunkin’ Brands Leases and cure only the prepetition arrears under the leases, including the non-Dunkin’ Brands leases, without having to cure the аrrears under the franchise agreements.
The Official Committee for the General Unsecured Creditors and the Debtors’ secured lenders, Bank of the West, First Franchise Capital, Sovereign Bank, and The CIT Group (“CIT”) have argued in support of the Debtor’s Motion and opposed the position taken by Dunkin’ Brands as they would be prejudiced by any premature assumption or rejection of the leases and implicitly the franchise agreements. The four locations at issue under the Dunkin’ Brands Leases represent a significant asset by way of collateral secured in favor of these other creditors of the Debtors’ bankruptcy estates and any recovery to these creditors and the unsecured creditors may depend upon any value that can be attributable to the franchise agreements and the leases.
At the hearing on the Debtors’ Motion held on March 3, 2011, the Court made an interim ruling that the Debtors’ time to assume or reject the Dunkin’ Brands Leases could be extended, despite the lack of consent by Dunkin’ Brands, to March 29, 2010 without prejudice to any further requests for extensions. This memorandum decision sets forth the Court’s final ruling on the Debtors’ Motion.
DISCUSSION
The issues before the Court are (1) whether each of the Dunkin’ Brands Leases and the corresponding franchise agreements constitute an integrated arrangement whereby the respective franchise agreement and the Dunkin’ Brands Lease should be treated together as a single controlling agreement between the parties; (2) whether, to the extent the franchise agreements and Dunkin’ Brands Leases
I. Whether an integrated, arrangement exists.
It is undisputed by Debtors and Dunkin’ Brands that at least for purposes of this Motion, that each of the Dunkin’ Brands Leases and the corresponding franchise agreements constitute an integrated arrangement. Each debtor that was a party to a Dunkin’ Brands Lease entered into the lease contemporaneously with a franchisе agreement to operate a franchise unit at the leased premises. Although the name of the franchisor on the franchise agreement is different from the name of the landlord under the Dunkin’ Brands Lease, Dunkin’ Brands have stated that the entities are affiliates or related entities. Each Dunkin’ Brands Lease and franchise agreement are “economically interrelated and interdependent”.
In re Szenda,
II. Whether a debtor may assume a nonresidential real -property lease without curing defaults under a related executory contract.
At the hearing, Debtors requested that should they be required to assume the Dunkin’ Brands Leases prior to the expiration of the deadline set forth under
(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 expired lease of real property, if it is impossible for the [debtor] to cure such default by performing nonmonetary 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 assumptionin accordance with such lease, and pecuniary losses resulting from such default shall be compensated in accordance with the provisions of this paragraph.
While
Because each of the Dunkin’ Brands Lease and the respective franchise agreement constitute one controlling agreement, the Debtors cannot assume a Dunkin’ Brands Lease unless they cure not only the defaults under the Lease but also any defaults under the respective franchise agreement. In essence, should the Debtors wish to assume the Dunkin’ Brands Leases, they would also need to assume the related franchise agreements and cure the defaults thereunder. This requirement is consistent with the nature of these economically integrated transactions. A debtor cannot separate parts of an integrated transaction by picking the pieces it wishes to assume and which pieces it wishes to reject as such would provide the debtor with a windfall at the expense of the creditor by denying the creditor the benefit of its bargained for transaction.
In re East Hampton Sand & Gravel Co., Inc.,
III. Whether
Pursuant to
Pursuant to11 U.S.C. § 365(d) :
(2) In a case under chapter 9, 11, 12 or 13 of this title, the trustee may assume or reject an executory contract or unexpired lease of residential real prоperty or of personal property of the debtor at any time before the confirmation of a plan but the court, on the request of anyparty to such contract or lease, may order the trustee 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 shall immediately surrender that nonresidential real property to the lеssor, if the trustee 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 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.
Where as here the assumption of the nonresidential real property lease implicitly requirеs the assumption of the related executory contract because both agreements are part of a single transaction and must be viewed as one controlling agreement, an issue arises as to when the debt- or must determine whether it wants to assume or reject the entire transaction.
One court has noted, where a franchise agreement and a lease form an integrated business relationship and one controlling agreement between the parties, the deadline for assumption or rejection of nonresidential leases is not applicable.
In re Harrison,
Although the ruling in
Harrison
dealt with a prior version of
In considering the purpose of the Bankruptcy Code and the equities of the situation, it is reasonable and appropriate that a debtor’s time to assume or reject integrated agreements that are treated as one controlling agreement to be subject to the more generous deadline for executory contracts set forth in
To allow creditors who have a dual role of franchisor and landlord the relief stated in
Given the power bestowed upon the franchisor/landlord and the potential effect on the outcome of the bankruptcy case and
In the context of the cases before this Court, the Debtors are at the point where one of the secured creditors has filed a motion to convert these cases to cases under chapter 7 of the Bankruptcy Code which is returnable on March 29, 2011. The Debtors have continued to operate at a loss on a combined basis postpetition and they have not been able to significantly reduce their expenses and it is uncertain whether they will be able to do so. Given the timing of the motion to convert, the Debtors do not have much time to determine whether it is feasible to find a purchaser for the Debtors to assume and assign the franchise agreements and the accompanying leases or whether the cases should be converted to a chapter 7 to allow a trustee to do the same. It is unlikely that a confirmation of a plan would be achieved prior to the determination of the motion to dismiss or convert as a plan of reorganization has not yet been filed and the Debtors are seeking to extend them exclusivity period to file such a plan.
However, regardless of the outcome of the motion to convert, whether there is anything to reorganize and recover for the benefit of the bankruptcy estates depends upon whether there is anything for the Debtors to assume and assign. Because the franchise agreements and the accоmpanying leases are the most valuable assets of the respective Debtors’ bankruptcy estates, the application of
The Court notes that this decision does not deal with the nonresidential real property leases entered into by some of the Debtors with third party landlords. While those leases may or may not reference the franchise agreement pursuant to which those Debtors operate a Dunkin’ Donuts and/or Baskin-Robbins store at the leased premises, those leases are not before the Court pursuant to this Motion. Therefore, this decision is limited only to the Dunkin’ Brands Leases and the franchise agreements to which they relate.
CONCLUSION
Based upon the foregoing, the Debtors’ Motion for a determination that
So ordered.
Notes
.
... if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.