Lease Use Restrictions

In In re Rickel Home Centers Inc., 240 B.R. 826 (Bankr. D. Del. 1999), District Chief Judge Farnan addressed a number of issues related to assignment of leases. The leases in question had "use restrictions" that limited their use to home centers or home improvement centers. One owner agreed that these use restrictions may be "overlooked" for the purposes of an initial assignment, but argued that it would be inappropriate to "excise" these provisions from the leases and that they should be applicable to future assigns or sublets. However, the other landlord took a more aggressive position and held that the use restrictions should be enforced as against the initial assignee and any subsequent assignees. The uncontested testimony was that the type of home improvement center operated by the debtor was "obsolete" or was struggling to remain in existence. The court held that the landlords were relying on §365(b)(3)(C), which provides that the assumption or rejection of leases is subject to all the provisions of the relevant leases. However, the court noted that §365(b)(3) is not meant to be read in isolation, but must be read in conjunction with §365(f). Commentators that have addressed this issue have held that §365(f) not only renders unenforceable lease provisions that prohibit assignments, but also prohibits enforcement of lease provisions that are "so restrictive that they constitute de facto anti-assignment provisions." The court held that the provisions in question were de facto anti-assignment clauses, given that the market for such centers was non-existent or in dire straits. Such use restrictions would make it impossible for the debtor to assign the leases, and accordingly Judge Farnan held that it was appropriate to permanently strike those restrictive provisions from the leases in question.

Bank Reporting Waiver

In In re Service Merchandise Co., 240 B.R. 894 (Bankr. M.D. Tenn. 1999), the debtors sought a waiver of the §345 deposit requirements and reporting guidelines. The motion was opposed by the U.S. Trustee. It was initially granted by the bankruptcy judge, but remanded on appeal by the district court for clarification. Apparently, "cause" had not been addressed by any reported decisions in the context of §345. Thus, writing on a relatively clean slate, Chief Bankruptcy Judge George C. Paine listed several factors that should be considered in determining if cause exists for release from the strictures of §345(d). These include (1) the sophistication of the debtor's business, (2) the size of the debtor's business operation, (3) the amount of investments involved, (4) the bank ratings (Moody's and Standard & Poor's) of the financial institutions where the debtor-in-possession's funds are held, (5) the complexity of the case, (6) whether a safeguard is in place within the debtor's own business of ensuring the safety of the funds, (7) the debtor's ability to reorganize in the face of the failure of one or more of the financial institutions, (8) the benefit to the debtor, (9) the harm, if any, to the estate, and (10) the reasonableness of the debtor's request for relief from §345(d) requirements in light of the overall circumstances of the case. Analyzing those factors, the court found that cause existed for the waiver of the investment, deposit and reporting requirements in this "mega-case." The court also waived the debtors' banks' obligations to provide financial information directly to the U.S. Trustee, with the proviso that the debtors were not permitted to maintain funds in excess of $100,000 per account in any bank with a demand deposit rating of less than Moody's P-3 and Standard and Poor's A-. Further, the U.S. Trustee was not required to monitor the demand deposit ratings of the financial institutions holding funds of the debtors.

Aggregate Trustee Fees

In In re Rodriguez, 240 B.R. 912 (Bankr. D. Colo. 1999), Chief Bankruptcy Judge Charles E. Matheson addressed the issue of the appropriate fees to be paid to the chapter 7 trustee where a case is converted to chapter 13 prior to any disbursements by the chapter 7 trustee. The court held that the chapter 7 trustee would not be denied reasonable fees for his services, but that the aggregate of the reasonable fees allowed to the chapter 7 trustee, together with any reasonable fees allowed to the chapter 13 trustee, could not exceed the statutory cap on aggregate trustee fees.

Lease Rejection Pre-petition

In In re Edgewater Cove Associates L.P., 241 B.R. 273 (Bankr. D. Conn. 1999), Bankruptcy Judge Robert L. Krechevsky addressed the issue of when a claim arises on a guarantee and whether such a claim comes within core or non-core jurisdiction. The debtor-landlord filed bankruptcy on June 9, 1999. The tenant had filed bankruptcy in 1995 (pre-petition for the Edgewater debtor) but did not obtain an order rejecting the lease until June 8, 1999 (post-petition for the Edgewater debtor). The guarantor argued that the effective date of rejection related back to the date immediately prior to the tenant's bankruptcy filing, thus prior to Edgewater's filing. Relying on In re Orion Pictures Corp., 4 F.3d 1095 (2nd Cir. 1993), the guarantor argued that the claim on the guarantee was a pre-petition state law claim, which was non-core and never gave the bankruptcy court jurisdiction. Distinguishing Marathon and Orion, the bankruptcy court held that the debtor had no cause of action against the guarantor when it filed its chapter 11 petition because the lease had not been rejected. The fact that the rejection related back to a pre-petition period did not create a pre-petition state law cause of action. Thus, the court had jurisdiction.

Government Property Condemnation and §362

In In re PMI - DVW Real Estate Holdings L.L.P., 240 B.R. 24 (Bankr. D. Ariz. 1999), Bankruptcy Judge Robert G. Mooreman addressed Maricopa County's motion for relief from stay to allow it to condemn chapter 11 property as part of a proposed road realignment, through the exercise of the county's eminent domain power. The court found that, while the condemnation action was based on non-bankruptcy Arizona law, the matter involved property of the bankruptcy estate. The county's goal was to remove property or assets from the bankruptcy estate. Thus, the condemnation was a core proceeding, and the bankruptcy court had jurisdiction pursuant to 28 U.S.C. §157(b) to hear and determine the condemnation matter. The court then went on to address whether §362(b)'s police power exception applied to the condemnation proceeding. The debtor unsuccessfully argued that Congress had amended the Bankruptcy Code in such a way as to only include enforcement of violations of the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons within the police and regulatory exception to the automatic stay. The court found that Congress merely expanded and/or redefined the previous police and regulatory power exceptions to include any organization exercising authority under the Convention prohibiting chemical weapons. The court also found that this amendment effectively overruled the Ninth Circuit's decision in Hillis Motors Inc. v. Hawaii Auto Dealers Association, 997 F.2d 581 (9th Cir. 1993). In Hillis, the Ninth Circuit had essentially held that there was no governmental police or regulatory power exception to §362(a)(3), which restricts the ability to exercise control over property of the estate. The court held that because the amended statute also includes an exception to §362(a)(3), which restricts the police and regulatory power exception, the statute applies to acts by the government to obtain possession of property of the bankruptcy estate or to exercise control over bankruptcy estate property. Recognizing that the U.S. Supreme Court in Hawaii Houston Authority v. Midkiff, 467 U.S. 229 (1984), had held that the public-use requirement of eminent domain is "coterminous" with the government's police powers, the court held that the two powers were not necessarily identical. The court then held that the exercise of the condemnation power under the facts in question did not establish that there was a valid exercise of police and regulatory power, and thus continuation of the condemnation action would be a violation of the automatic stay.

Section 727 Involves All Creditors

In In re de Armond, 240 B.R. 51 (Bankr. C.D. Cal. 1999), Bankruptcy Judge Samuel L. Bufford was asked to approve a proposed settlement of a non-dischargeability action (§523) and denial of discharge action (§727). The court noted that there were three approaches to settling §§727 and 523 claims. The first approach, as illustrated by In re Moore, 50 B.R. 661 (Bankr. E.D. Tenn. 1985), takes the position that it is never appropriate for a court to approve the settlement of an objection to a debtor's discharge. A second and quite different approach is found in In re Margolin, 135 B.R. 671 (Bankr. D. Colo. 1992), where the court approved the settlement of a §523 claim and dismissal of a §727 claim, since the trustee and the creditor body were properly noticed and there was no objection to the settlement or dismissal. The majority view, found in a third line of cases, holds that any settlement of a §727 claim is limited to those circumstances where the terms of the settlement are fair and equitable and in the best interest of the estate. See In re Bates, 211 B.R. 338 (Bankr. D. Minn. 1997). Relying on Bates and similar cases, the court found that a creditor who files a §727 proceeding becomes a fiduciary of the other creditors. When the fiduciary duty conflicts with the parties' own interests under §523, "the fiduciary duties take priority." Under the facts of this case, the court held that, while it is possible for a creditor to settle a §727 claim, the settlement of any claim involving §727 belongs to all creditors. Thus, a creditor who joins and subsequently settles a §523 action with a §727 action must contribute all funds to the general creditor body, with no funds being allocated to the §523 action.

Miscellaneous

• In re Rogers, 239 B.R. 883 (Bankr. E.D. Tex. 1999) (outline of new procedures for dealing with claims of secured creditors in a "late confirmation" district);
• In re Handel, 240 B.R. 798 (1st Cir. Bankr. 1999) (BAP permitted immediate appeal of bankruptcy court's decision on venue because appeal involved controlling question of law as to which there was a substantial ground for difference of opinion, and immediate appeal would materially advance litigation by preventing a waste of time and resources if the bankruptcy case was allowed to go forward in the improper venue);
• In re Bircher, 241 B.R. 11 (Bankr. S.D. Iowa 1999) (capital gain from sale of a portion of the debtor's farm was "farm income" for purposes of chapter 12 eligibility requirements);
• In re Shaw Steel Inc. v. Morris, 240 B.R. 553 (N.D. Ill. 1990) (where a creditor had notice of the debtor's alleged dishonesty, it could not reasonable rely upon the debtor's written representations regarding its financial condition made in an affidavit submitted under oath without prior investigation of such statements);
• In re Raytech Corp., 241 B.R. 785 (D. Conn. 1999) (district court did not abuse its discretion by either application of an incorrect legal standard or by clearly erroneous findings of fact when it compensated counsel at the full hourly rate for non-productive time expended traveling); and
• In re Verdi, 241 B.R. 851 (Bankr. E.D. Pa. 1999) (chapter 7 trustee has standing to file a motion to reconvert a case from chapter 13 back to chapter 7).

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