Fontainebleau Hotel Corp., In re
| Decision Date | 11 July 1975 |
| Docket Number | No. 74-4205,74-4205 |
| Parties | In the Matter of FONTAINEBLEAU HOTEL CORPORATION, Debtor. PENNSYLVANIA REAL ESTATE INVESTMENT TRUST, Appellant, v. FONTAINEBLEAU HOTEL CORPORATION and Warren M. Simon, Trustee, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert E. Winn, Robert E. Barkley, Jr., New Orleans, La., for appellant.
Edward J. Boyle, Jr., Peter J. Butler, New Orleans, La., for Trustee Simon.
Edward M. Heller, New Orleans, La., for Trustee Miller.
Lee C. Grevemberg, New Orleans, La., for Fontainebleau Hotel Corp.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before BROWN, Chief Judge, and THORNBERRY and AINSWORTH, Circuit Judges.
This Chapter X reorganization petition of Fontainebleau Hotel Corporation was filed on August 1, 1974. On the same day, the district court issued an order appointing a trustee and placing him in possession of the business and property of the debtor. The court also enjoined all persons from interfering with the possession by trustee of the debtor's business and property during the pendency of this proceeding. The court's order stated that "all persons, firms or corporations owning any lands or buildings occupied by said debtor or said trustee or wherein is contained any property of the within estate be, and they hereby are, jointly and severally, stayed, pending the further order of this court, from removing or interfering with any such property." Shortly thereafter, on August 8, 1974, Pennsylvania Real Estate Investment Trust filed a motion to rescind the court's original order and a motion for possession of the leased premises, including all movables and immovables located thereon.
An evidentiary hearing was held, and the district court issued its order on October 25 which denied PREIT's motion for possession and also held that under 11 U.S.C. § 544 the debtor's reorganization petition had been filed in good faith. PREIT then brought this appeal.
Fontainebleau Hotel Corporation is engaged in the hotel business in New Orleans, Louisiana, and subleases the hotel premises, including the furniture, fixtures and equipment, from Pennsylvania Real Estate Investment Trust. According to the terms of the sublease, if the hotel corporation defaults in payment of rent, PREIT may give sublessee five days' notice of intention to terminate and at the expiration of that period the sublease shall terminate.
The hotel became substantially delinquent in payment of rent and on July 22, 1974, PREIT gave the debtor corporation written notice of default and of intention to terminate the sublease on July 27, 1974. On July 30, 1974, PREIT delivered written notice to the debtor corporation to vacate the premises and deliver possession to it. Thereafter, as previously stated, this petition for corporate reorganization was filed on August 1, 1974. PREIT contends that the lease had terminated prior to the filing of the corporate reorganization proceeding and that it is entitled to possession because the trustee had no right or interest in possession of the leased premises.
We are unable to agree with this contention. The law of Louisiana requires legal proceedings against a delinquent lessee and a judgment of the proper court before possession may be obtained. Thus the cancellation of the lease for nonpayment of rent is not effective until a court has ordered termination and granted possession. See Edwards v. Standard Oil Co. of Louisiana, 175 La. 720, 144 So. 430 (1932); Lemoine v. Devillier, La.App., 3 Cir., 189 So.2d 694 (1966); Louisiana Materials Co. v. Cronvich, La.App., 4 Cir., 236 So.2d 510 (1970). No judicial proceedings having been instituted in this case prior to the filing of the petition for corporate reorganization, the trustee succeeded to the possession of the debtor upon his appointment by the district court.
It was within the equity power of the district court, under the circumstances here, to decline forfeiture of the lease and continue the trustee in possession. Reorganization of the hotel would not be possible if the trustee were deprived of possession of the hotel premises, furniture and equipment. Necessarily any opportunity which the creditors might have to recover would be substantially impaired, if not lost altogether.
The authorities support the district court's finding that though a debtor corporation may be in default in the payment of rent under a lease, the reorganization court may nevertheless deny lessor's motion for immediate possession of the premises. Though differing on its facts from the present case, Smith v. Hoboken R. R., Warehouse & S. S. Connect. Co., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946) is still applicable in principle. In that case the Supreme Court declined to permit a forfeiture of the debtor's lease which would (as here) have prevented the possibility of reorganization. Three circuits have, on the basis of Smith, declined to order the forfeiture of possession for breach of the lease involved in these cases. No circuit decision is to the contrary. See In re Fleetwood Motel Corporation, 3 Cir., 1964, 335 F.2d 857; Weaver v. Hutson, 4 Cir., 1972, 459 F.2d 741, cert. denied, 409 U.S. 957, 93 S.Ct. 288, 34 L.Ed.2d 227 (1973); and Queens Boulevard Wine & Liquor Corp. v. Blum, 2 Cir., 1974, 503 F.2d 202. We align ourselves with the principles set forth in these decisions. Finn v. Meighan, 325 U.S. 300, 65 S.Ct. 1147, 89 L.Ed. 1624 (1945), relied upon by PREIT, is not to the contrary. 1
In Queens Boulevard, the Second Circuit approved the rationale of Fleetwood and Weaver, stating:
The purpose of a Chapter XI arrangement, as with a Chapter X reorganization, is to preserve a viable business enterprise where possible and especially when that will be in the "best interest of . . . creditors." 11 U.S.C. § 766 (1970). See In re Peoples Loan & Investment Co., 410 F.2d 851 (8 Cir. 1969). Cf. 9 Collier, Bankruptcy P 9.17, at 281 (14th ed. 1972). In determining whether to enforce the lease termination here, therefore, we must consider not only the interests of the landlord but also those of the debtor and its creditors. Possession by Queens will not prejudice Carol, which is protected by a sizeable security deposit, except to deny it a windfall in the form of increased rent to which we hold it is not equitably entitled. Enforcement of the forfeiture, on the other hand, would destroy a now profitable debtor by depriving it of its most valuable asset its location. It also would needlessly injure trade creditors and those outside investors who have furnished capital which has resulted in Queens' rehabilitation. In our view, these individuals stand on no less significant a footing than did the shareholders of the debtors in Weaver and Fleetwood.
Our decision clearly is distinguishable from and in no way inconsistent with those cases which have upheld a termination clause such as that in the instant case. E. g., Finn v. Meighan, supra, 325 U.S. at 301 (65 S.Ct. 1147, 89 L.Ed. 1624); Model Dairy Co., Inc. v. Foltis-Fischer, Inc., 67 F.2d 704, 706 (2 Cir. 1933). Cf. B. J. M. Realty Corp. v. Ruggieri, 326 F.2d 281, 282 (2 Cir. 1963). In none of these cases would forfeiture have "seriously impaired", let alone totally frustrated, an arrangement by depriving the debtor of an asset absolutely necessary to its continued viability. Compare Finn v. Meighan, supra, 325 U.S. at 302 (65 S.Ct. 1147, 89 L.Ed. 1624).
The district court correctly held, therefore, on the basis of these authorities, that 2
The district court's finding that the debtor corporation's reorganization petition...
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