180 F.3d 149 (4th Cir. 1999), 98-1082, In re Merry-Go-Round Enterprises, Inc.

Docket Nº:98-1082.
Citation:180 F.3d 149
Party Name:In re MERRY-GO-ROUND ENTERPRISES, INCORPORATED, Debtor. Deborah Hunt Devan, Chapter 7 Trustee for Merry-Go-Round Enterprises, Incorporated and its Affiliates, Trustee-Appellant, v. Simon DeBartolo Group, L.P., Successor by Merger to DeBartolo Properties Management, Incorporated, Creditor-Appellee, v. Office of U.S. Trustee, Party in Interest.
Case Date:June 08, 1999
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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Page 149

180 F.3d 149 (4th Cir. 1999)

In re MERRY-GO-ROUND ENTERPRISES, INCORPORATED, Debtor.

Deborah Hunt Devan, Chapter 7 Trustee for Merry-Go-Round Enterprises, Incorporated and its Affiliates, Trustee-Appellant,

v.

Simon DeBartolo Group, L.P., Successor by Merger to DeBartolo Properties Management, Incorporated, Creditor-Appellee,

v.

Office of U.S. Trustee, Party in Interest.

No. 98-1082.

United States Court of Appeals, Fourth Circuit

June 8, 1999

Argued Dec. 3, 1998.

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[Copyrighted Material Omitted]

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ARGUED:

Joel Ira Sher, Shapiro & Olander, Baltimore, MD, for Appellant.

Joyce Ann Kuhns, Weinberg & Green, L.L.C., Baltimore, MD, for Appellee.

ON BRIEF:

Kimberly A. Manchester, Shapiro

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& Olander, Baltimore, MD, for Appellant.

Shoshana Katz, Weinberg & Green, L.L.C., Baltimore, MD, for Appellee.

Before ERVIN and HAMILTON, Circuit Judges, and HILTON, Chief United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge ERVIN wrote the opinion, in which Judge HAMILTON and Chief Judge HILTON joined.

OPINION

ERVIN, Circuit Judge:

The question before this Court is what administrative priority, if any, should be given to a Chapter 11 postpetition commercial lease that is subsequently breached after Chapter 7 conversion. While under Chapter 11, Merry-Go-Round Enterprises, Inc. and its affiliated corporations ("MGRE") voluntarily entered into a new lease with the Simon DeBartolo Group, L.P. ("DeBartolo") 1 for commercial property. When MGRE converted from Chapter 11 to Chapter 7, the newly-appointed Chapter 7 trustee Deborah Hunt Devan (the "Trustee") breached the lease and returned the premises to DeBartolo. DeBartolo filed a Chapter 7 administrative claim for damages which included future rent for the remainder of the lease. The bankruptcy court awarded DeBartolo a Chapter 11 administrative claim. See In re MGRE, 208 B.R. 637, 645 (Bankr.D.Md.1997). The district court affirmed.

Because we believe granting DeBartolo a Chapter 11 administrative claim best balances the competing interests of (1) encouraging parties to do business with a Chapter 11 estate against (2) preserving a Chapter 7 trustee's discretion, we affirm the judgment of the district court.

I.

MGRE maintained approximately 1,450 retail clothing stores throughout the United States. Over 1,400 of these retail locations were leased. MGRE experienced financial difficulties and on January 11, 1994 MGRE voluntarily filed for bankruptcy under Chapter 11.

Under Chapter 11, MGRE continued to operate and reorganize in an effort to salvage its failing business. During that time, MGRE entered into ten leases with DeBartolo for retail premises. The specific property at issue in this case is retail space located at the Cutler Ridge Mall in Miami, Florida. MGRE entered into a ten-year lease with DeBartolo for the Cutler Ridge property on August 19, 1994 commencing on December 1, 1994 with a monthly rent of $5,524,50. Article XXII of the lease, entitled "Default by Lessee," stated:

In the event of any failure of [MGRE] to pay any installment of Minimum Rent or additional rent or any other payment required to be made by [MGRE] when due hereunder, ... or if [MGRE] shall be in breach of its obligations ... DeBartolo shall have the immediate right to reenter the Premises ... and to dispossess [MGRE] ... [MGRE] shall be liable for and shall pay [DeBartolo] any deficiency between the Minimum Rent and all items of additional rent reserved herein and the net avails ... of reletting, if any, for each month of the period which otherwise would have constituted the balance of the term of this Lease.

Seven months later, MGRE filed an unopposed Motion for Entry of Order Approving Post-Petition Lease of Nonresidential Real Property Known as Cutler Ridge Merry-Go-Round which stated that MGRE had "determined, in [its] business judgment, that it is in the best interest of the estates and creditors to seek Court approval of the Lease." The bankruptcy

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court approved the lease on April 24, 1995 as "a post-petition lease entered into in the ordinary course of [MGRE's] business pursuant to 11 U.S.C.A. § 363(c)(1), and for good cause." In re MGRE, 208 B.R. at 639.

MGRE was unable to remain solvent under Chapter 11. One month before it converted to Chapter 7, MGRE submitted an Emergency Motion for Approval of Store Closing Sales at Retail Stores and the Retention of an Inventory Liquidation Agent to the bankruptcy court. MGRE requested a Chapter 11 liquidation going-out-of-business ("G.O.B.") sale of merchandise at its retail stores including its Cutler Ridge Mall location. In this motion, MGRE stated that "(a) [MGRE is] no longer pursuing reorganization as an ongoing business, and (b) it is in the best interest of the estate to liquidate the inventory under the terms stated herein." MGRE explicitly stated that one of the purposes of its Chapter 11 liquidation was to avoid administrative claims:

[MGRE] believes that the requested relief is in the best interest of the estate and creditors. Given the inability of [MGRE] to continue as an ongoing concern and the continued risk of depletion of the estate through ongoing administrative claims, this arrangement represents the best reasonably available prospect for [MGRE] to quickly convert inventory into cash for the benefit of creditors and to terminate administrative claims against the estate as quickly as possible.

The bankruptcy court approved the G.O.B. sale on February 22, 1996 in an order stating in relevant part:

ORDERED that the [Liquidating] Agent shall have the right to use the Stores and all furniture, fixtures and equipment in the Stores ... for the purpose of G.O.B. sales free of any interference from third parties[;]

...

ORDERED that, without prejudice to other claims and statutory rights of landlords, [MGRE] shall pay timely all rent and other charges due under the leases for the period commencing February 1, 1996, and continuing until such time as [MGRE] and/or the agent are no longer conducting G.O.B. sales on the premises; and it is further

...

ORDERED that this Order shall be binding upon any subsequent trustee appointed under either Chapter 11 or Chapter 7 of the Bankruptcy Code.

On March 1, 1996, the bankruptcy court converted MGRE to Chapter 7 and the next day appointed the Chapter 7 trustee. A number of landlords, including DeBartolo, jointly filed a Motion to Compel Chapter 7 Trustee's Immediate Payment of Post-Petition Rent for Assumed and Court-Approved Post-Petition Nonresidential Real Property Leases to secure payment of their leases. In an effort to liquidate the remaining leases and begin repaying claims against MGRE, the Trustee filed a Motion Authorizing Trustee to Conduct an Auction Sale of Certain Leasehold Interests on March 25, 1996. Therein, the Trustee stated that she

had determined, in the exercise of her sound business judgment, that the assumption, assignment, and sale of the Lease may be in the best interests of the Trustee and the estates.... The Chapter 11 estate assumed almost 69 prepetition leases. Further, the Chapter 11 estate entered into 18 leases or renewals during the Chapter 11. Unless those leases are sold, the estate may be liable for substantial damages under those leases as administrative expenses.

The bankruptcy court granted both motions. The court granted the landlords' motion in part on March 28, 1996, ordering that, pursuant to 11 U.S.C.A. § 365(d)(3), "the Trustee shall timely perform the monthly rent obligations but on an apportioned biweekly basis, for the 60 day postconversion period through April 30, 1996 for [MGRE]'s nonresidential, assumed and

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postpetition leases." In re MGRE, 208 B.R. at 640. The court also granted the Trustee's motion, authorizing a sale by auction of the leases on March 29, 1996. It considered the landlords' objections to the auction moot because, in part, "[t]he Trustee has previously represented to this court that she will pay the rent on those leases that had been assumed by the Debtor or entered into postpetition." Id.

The Trustee then negotiated a settlement with DeBartolo concerning nine of its leases. In an Order Approving Overbids (the "Overbid Order") dated May 3, 1996, DeBartolo waived "all of its past, present and future claims" with respect to nine of the ten leases in exchange for $50,000 from the Trustee. DeBartolo conceded that it possesses no administrative claims with regard to these nine leases. Although these nine leases were "terminated" by the Overbid Order, the remaining lease--the Cutler Ridge lease--was "deemed rejected." The next day, the Trustee returned possession of the Cutler Ridge premises to DeBartolo.

On July 8, 1996, the claims bar date, DeBartolo filed proof of a claim for (1) $16,013.62 in damages as a Chapter 11 administrative claim arising from MGRE's past use of the Cutler Ridge premises and (2) $1,322,265.48 for future rent as a Chapter 7 administrative claim arising from the Trustee's breach of the Cutler Ridge lease. Because the Trustee objected to this claim as a Chapter 7 administrative expense, a hearing concerning it was held on December 6, 1996.

On May 16, 1997, the bankruptcy court issued a published memorandum opinion holding that DeBartolo was entitled not to a Chapter 7 administrative claim, but rather a Chapter 11 administrative claim. See In re MGRE, 208 B.R. at 645. The Trustee appealed to the district court on May 28, 1997. DeBartolo cross-appealed on June 6, 1997. On December 24, 1997, the district court affirmed the bankruptcy court's decision in an unpublished opinion. The Trustee appealed to this Court on...

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