In Re Lil' Things, Inc.
MEMORANDUM OPINION ON MOTION TO ASSUME AND ASSIGN NON-RESIDENTIAL REAL PROPERTY LEASE
Came before the Court for consideration, the Motion to Assume and Assign Non-Residential Real Property Lease (“Motion”) filed by Lil’ Things, Inc. (“Debtor”) and the objection to the Motion (“Objection”) filed by Lincoln Property Company CSE, Inc., as agent for Creekwalk, Inc. (“Lincoln”). This memorandum opinion constitutes findings of fact and conclusions of law under
I. Background Facts
The Debtor commenced this case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code on June 10, 1997. As of the petition date, the Debtor owned and operated a chain of thirteen retail stores located in Texas, Arizona, Colorado, Oklahoma and California, selling furniture, toys and clothing for children in the age group of infant to six years of age. The Debtor filed for bankruptcy protection in order to close its less profitable stores and reorganize its remaining operations.
On November 20, 1997, the Debtor came before the Court at a status conference and indicated that it no longer had the ability to reorganize. The Debtor requested an expedited hearing to determine procedures for a liquidation of its operations. With the approval of the Court, on November 25, 1997, the Debtor initiated a liquidation of its assets, including the marketing of the Debtor’s retail store leases. To facilitate the liquidation and sale, on December 19, 1997, the Debtor and the Creditors’ Committee filed a joint motion seeking an order from the Court, pursuant to
One of these store leases was the lease on store # 108 located in Plano, Texas (the “Plano Lease”), which is the subject of the current Motion before the Court. The best offer to purchase the Plano Lease from the Debtor was from Michael’s Stores, Inc. (“Michael’s”). The Debtor filed a motion for approval of Michael’s bid on January 9,1998. The final bid by Michael’s was in the amount of $95,000.00, $10,000.00 of which was tendered to the Debtor as earnest money at the time of the bid. Lincoln objected to the assumption and assignment to Michael’s on various grounds, including Lincoln’s contention that the debtor was prevented from assigning the lease to Michael’s without Lincoln’s consent, pursuant to the provisions of Bankruptcy Code § 865(c) and Texas Property Code § 91.005.
II. Issue
Does
III. Analysis
(f)(1) Except as provided in subsection (e) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—
(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and
(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
Thus, Lil’ Things may generally assume any of its leases, including the Plano Lease, under
The trustee may not assume or assign an executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if—
(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and
(B) such party does not consent to such assumption or assignment.
Several courts have addressed the scope of
A. Can the Debtor Assume the Lease?
For a debtor to assign a contract or lease, it must first be assumed. 4 If there has been a default under the contract or lease, assumption requires that a debtor:
(1) cures, or provides adequate assurance that [it] will promptly cure, such default;
(2) compensates, or provides adequate assurance that [it] will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(3) provides adequate assurance of future performance under such contract or lease. 5
Some courts have put into doubt a debtor’s ability to assume its own executory contracts or unexpired leases in light of the language in
One of these courts was the Third Circuit in
West Electronics,
which read
Most courts that have considered this “separate entity” theory have rejected it, and have criticized
West Electronic’s
conclusion that a debtor in possession is somehow different from the pre-bankruptcy contracting party and can be prevented from assuming its contracts by
I do not believe that a “solvent contractor and an insolvent debtor in possession going through bankruptcy,” are different entities for the purposes of the Non-Assignment Clause. The interpretation of the Adana court notwithstanding, I think that provision really meant to avoid having the U.S. government contractually bound to a wholly separate entity that received an assignment from the actual contracting party. I do not believe that when it enacted Section 15 of Title 41, Congress considered the issue of whether a debtor in possession should be viewed as a party different than the debtor.... The government may well have the right to terminate the contract in issue on other grounds, but I am not convinced that41 U.S.C. Section 15 is the appropriate vehicle for the severance of West Electronics’ rights under the contract. 10
This view is consistent with the one expressed by the Supreme Court in N.L.R.B. v. Bildisco & Bildisco, 11 which found the theory that a debtor in possession is a new entity separate and distinct from its pre-bankruptcy persona unrealistic when reconciling conflicting provisions of the National Labor Relations Act and the Bankruptcy Code. The Bildisco Court said:
Obviously if the debtor-in-possession were a wholly “new entity,” it would be unnecessary for the Bankruptcy Code to allow it to reject executory contracts, since it would not be bound by such contracts in the first place. For our purposes, it is sensible to view the debtor-in-possession as the same “entity” which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have done absent the bankruptcy filing. 12
Following the lead of the Supreme Court, this Court also rejects the “separate entity” theory and finds that a debtor may assume its own contracts and leases if it complies with
B. Does
Most of the bankruptcy courts that first addressed the language of
The circuit courts which have considered whether
It may well be that the impetus for Congress’ enactment of§ 365(c) was to preserve the pre-Code rule that “applicable law” precluding assignment of personal service contracts is operative in bankruptcy. However, the drafters actually codified a much broader principle. Surely if Congress had intended to limit§ 365(e) specifically to personal services contracts, its members could have conceived of a more precise term than “applicable law” to convey that meaning. 20
Therefore, the only question left for this Court to decide is where the reach of
C. Reconciling
Several Circuit courts of appeal have taken on the task of reconciling the seemingly “inescapable conflict” between subsection (f) of
The first reported attempt was made by the First Circuit in
In re Pioneer Ford Sales, Inc.
23
In
Pioneer Ford,
the court found that the reach of
As a matter of logic, however, we see no conflict, for (c)(1)(A) refers to state laws that prohibit assignment “whether or not” the contract is silent, while (f)(1) contains no such limitation. Apparently (f)(1) includes state laws that prohibit assignment only when the contract is not silent about assignment; that is to say, state laws that enforce contract provisions prohibiting assignment. These state laws are to be ignored. The section specifically excepts (c)(l)(A)’s state laws that forbid assignment even when the contract is silent; they are to be heeded. 24
In other words, subsection (f) only ¿pplies to assignments that are barred by legally en
This reconciliation of the conflicting provisions in
There is simply nothing in the language of§ 365(f) which supports the limitation read into it by [the Pioneer Ford] court.... We must readsections 365(f) and (c) together. At first, it might seem that they are not consistent, but a careful parsing of the provisions suggests that§ 365(f) contains the broad rule and§ 365(c) contains a carefully crafted exception to the broad rule made necessary by general principles of our common law and our constitu-tion_ Subsection (f) states that although the contract or applicable law prohibits assignment, these provisions do not diminish the broad power to assume and assign executory contracts granted the trustee by§ 365(a) . In other words, a general prohibition against the assignment of executory contracts, i.e., by contract or “applicable law,” is ineffective against the trustee.... However, subsection (f), by specific reference to subsection (c), allows one specific circumstance in which the power of the trustee may be diminished. Subsection (c) states that if the attempted assignment by the trustee will impact upon the rights of a non-debtor third party, then any applicable law protecting the right of such party to refuse to accept from or render performance to an assignee will prohibit assignment by the trustee. While subsections (f) and (c) appear contradictory by referring to “applicable law” and commanding opposite results, a careful reading reveals that each subsection recognizes an “applicable law” of markedly different scope. 26
The court then cited to the concurring opinion of Judge Guy for a more thorough explanation of the distinct meanings of “applicable law” in the two sections. In his concurring opinion, Judge Guy states:
The two sections refer to completely different legal concerns, with§ 365(f) covering “applicable law” (and contractual clauses) prohibiting or restriction assignments as such, and§ 365(c) embracing legal excuses for refusing to render or accept performance, regardless of the contract’s status as “assignable” according to state law or its own terms. 27
He concluded that an “applicable law” under
The analysis used in
Magness
was adopted by the district court in
In re
Antonelli,
29
which was subsequently affirmed without a published opinion by the Fourth Circuit. The district court in
Antonelli
found that a provision in the Uniform Partnership Act was a rule prohibiting assignment rather than a rule excusing performance, and therefore
This principle clearly brings within the ambit ofSection 365(c) the classic “personal services” contracts which all courts agree cannot be assigned under that section. It also covers most cases where contracts are held to be non-assignable because they impose upon the debtor duties which are said to be “non-delegable.” 32
The Eleventh Circuit in
James Cable Partners,
also recognized the apparent conflict between subsections (c) and (f) of
“A statute should be construed so that effect is given to all of its provisions, so that no part of it will be inoperative or superfluous, void or insignificant.” Subsection (f) states that “applicable law” prohibiting assignment of an executory contract does not bar assignment of an executory contract by a trustee (or debtor in possession). Thus the “applicable law” to which subsection (c) refers must mean “applicable law” other than general prohibitions barring assignment.... A general prohibition against assignment does not excuse the City from accepting performance from a third party within the meaning of§ 365(c)(1) . In order to be excused from accepting performance, the City would need to point to applicable law such as a Tennessee law that renders performance under the cable franchise agreement nondelegable. 35
Although the court’s decision turned on a provision in the lease between Midway Airlines and the Metropolitan Airports Commission which allowed assignments in bankruptcy under certain conditions, the Seventh Circuit said as much the same thing in Metropolitan Airports Commission v. Northwest Airlines:
Section 365(c) is an exception to the general rule that a bankruptcy trustee may freely assign and delegate a debtor’s rights and duties under his executory contracts and unexpired leases. Its purpose is rather narrow: to prevent a trustee from forcing a party to accept performance from, or provide performance to, someone other than the party with whom it contracted in those situations where the identity of the party is central to the obligation itself. The paradigmatic example of such an agreement is the so-called “personal services contract,” a contract entered into on the basis of the “character, reputation, taste skill, or discretion of the party that is to render performance.” ... [T]he payment of rent pursuant to a lease is hardly the type of performance that depends upon the identity of the party that is to perform, i.e., the lessee. 36
The view expressed, in different ways, by the majority of circuit courts to address the conflicting language between subsections (c) and (f) of
IV. Conclusion
After an in-depth review of all of the circuit court decisions and most of the district and bankruptcy court decisions in this area, and keeping in mind that a statute should not be read in a vacuum, but should be construed in a way that gives meaning and effect to all its provisions,
37
this Court finds that
This outcome is also consistent with the basic rationale behind
For the above stated reasons, the Court finds that
Notes
. This Motion came before the Court for hearing on January 14th and 20th 1998, at which time the Court issued its ruling that the Debtor would be allowed to assume and assign the lease to Michael’s Stores, Inc. ("Michael's”); and the Court made oral findings of fact and conclusions of law (“Findings”). Counsel for Michael’s was asked to present an order and findings of fact and conclusions of law tracking the Court’s oral ruling at the hearing, so that the assignment could move forward immediately. At the January 20th hearing, the Court indicated that it would supplement its Findings with this memorandum opinion and would go into greater detail on the issue of whether Bankruptcy Code
. Property Code § 91.005 contains the following provision: ‘‘During the term of a lease, the tenant may not rent the leasehold to any other person without the prior consent of the landlord.”
This provision has been interpreted by the Texas courts as a general prohibition against assignment, regardless of whether the lease contains a provision restricting assignments.
See Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc.,
.
Except as provided in sections 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.
A debtor in possession generally has all of the rights, powers and duties of the trustee, including the right to assume and assign leases under§ 365 . See11 U.S.C. § 1107(a) .
.
.
.
See In re Plum Run Serv. Corp.,
.
In re West Elec., Inc.,
. Id. at 83.
.
See In re G.P. Express Airlines, Inc.,
.
West Elec.,
.
N.L.R.B. v. Bildisco & Bildisco (In re Bildisco)
. Id.
. The Court found that the Debtor was able to cure the defaults and provide adequate assurance of future performance under the Plano Lease in its findings of fact and conclusions of law, entered on January 22, 1998.
.
See e.g., In re Sunrise Restaurants, Inc.,
. Taylor, 6 B.R. 370 (Bankr.N.D.Ga.1980).
.
See Rieser v. Dayton Country Club Co. (In re Magness),
.
Taylor,
.
See City of Jamestown Tennessee v. James Cable Partners, L.P. (In re James Cable Partners, L.P.),
.
In re Braniff Airways, Inc.,
.
Braniff Airways, Inc.,
.
.
See In re Catron,
.
Pioneer Ford,
. Id. at 29 (citation omitted).
.
Rieser v. Dayton Country Club Co. (In re Magness),
.
Magness,
. Id. at 699.
. Id. at 699-700.
.
In re Antonelli,
. Id.
. Id.
. Id.
.
City of Jamestown Tennessee v. James Cable Partners, L.P. (In re James Cable Partners, L.P.),
. Id.
.
James Cable Partners,
.
Metropolitan Airports Comm’n. v. Northwest Airlines, Inc. (In re Midway Airlines, Inc.),
.
United States v. Nordic Village, Inc.,