In re Memphis-Friday's Associates
| Decision Date | 13 July 1988 |
| Docket Number | Bankruptcy No. 88-23082-B(jn). |
| Citation | 88 BR 830 |
| Parties | In re MEMPHIS-FRIDAY'S ASSOCIATES, a Tennessee General Partnership, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Tennessee |
William M. Gotten, Memphis, Tenn., for debtor.
Ellen Vergos, Paul Amos, Waring, Cox, Memphis, Tenn., for Overton Square Partners.
Thomas M. Minor, Edwin Dean White, III, Farris, Hancock, Gilman, Branan & Hellen, Memphis, Tenn., for Vernbrook Const. Co.
John D. Horne, David F. Leake, Memphis, Tenn., for Memphis-Friday's Associates.
Toni Campbell Parker, Memphis, Tenn., for Connecticut Mut. Life Ins. Co.
These proceedings are before the court on related motions of the Debtor, Memphis-Friday's Associates, to assume a commercial lease on property which houses its restaurant establishment known as T.G.I. Friday's; of the lessor, Overton Square Partners (hereinafter "OSP") to obtain relief from the automatic stay in order to obtain ultimate possession of the same property; of the lessor for adequate protection and for sequestration of rents; of the Debtor's franchisor, T.G.I. Friday's, Inc. (hereinafter "Friday's, Inc.") for relief from the automatic stay in order to terminate its franchise agreement with the Debtor and to seek legal remedies for damages; and of Vernbrook, Inc. (hereinafter "Vernbrook") for relief from the stay in order to proceed with a state court lien suit.
Primarily at issue is whether the lease in question was effectively terminated, under applicable nonbankruptcy law, prior to the entry of the order for relief in this case and, if not, whether the Debtor has demonstrated the capability to assume the lease by a showing of adequate assurance of future performance and ability to cure past defaults and to pay damages in accordance with the Bankruptcy Code.1 The determination of those matters will affect the other reliefs sought by all parties.
The issues presented here were consolidated for hearing on June 27 and June 28, 1988, and constitute core proceedings pursuant to 28 U.S.C. Section 157(b)(2)(A), (G), (M) and (O). The following findings of fact and conclusions of law are made in accordance with Bankruptcy Rule 7052. The parties agreed that the testimony and exhibits from an earlier May 19, and the June 27-28, 1988, hearings would be considered by the court.
The record, as a whole, reflects that the Chapter 11 case of Memphis-Friday's Associates (Debtor), ostensibly a limited partnership, was initiated by a filing of a voluntary petition on April 30, 1988. The petition was signed by an officer of Maruki Tennessee "F," Inc., the general partner of the Debtor. Maruki Tennessee "F," Inc. is owned by Maruki U.S.A. Co., Inc. It was subsequently brought to the court's attention in a May 19, 1988, hearing that the Debtor was not a limited partnership on whose behalf the managing partner could file a voluntary petition but was in fact a general partnership, requiring the consent of all partners for the filing of a voluntary petition. See 11 U.S.C. Section 303(b)(3), (d), and Bankruptcy Rule 1004(b) and 1011(a). The court entered a Memorandum Opinion and a separate order on June 7, 1988,2 and as a result, the voluntary petition was amended to an involuntary one, and the order for relief was vacated pending service on the other general partner of the Debtor, Kenmare Associates (hereinafter "Kenmare"). See Bankruptcy Rule 1004(b) and 1011(a) and (b). No answer or objection to the petition was timely filed by Kenmare pursuant to Bankruptcy Rule 1011(b); thus, a default occurred and the court orally directed an order for relief on June 27, 1988, and entered the order on July 13, 1988. As such, in accordance with 11 U.S.C. Section 303(h), the order for relief was effective on the date of entry, not on April 30, 1988. See 11 U.S.C. Section 102(6); 2 King Collier on Bankruptcy (15th Ed.) par. 102.07.
The record further reflects that prior to the filing of the original petition on April 30, 1988, the Debtor had received written notice (dated and mailed April 18, 1988) from its landlord, OSP, that due to the Debtor's noncompliance with the terms of the written lease agreement, the lease would terminate on April 30, 1988. (Tr. Ex. 3, 5/19/88). Moreover, the Debtor had also received written notice that due to violations of its franchise agreement with Friday's, Inc., the franchisor would be "compelled to exercise its rights under the agreement" if violations were not cured within thirty days of the notice dated April 5, 1988. (Tr. Ex. 22, 6/28/88). The viability of the franchise agreement is dependent on the Debtor's continued operation of its restaurant at its present location, 2115 Madison Avenue, Memphis, Tennessee. (Tr. Ex. 12, 6/27/88). Thus, of foremost importance here is the question of whether the lease has been effectively terminated and is not assumable as a matter of law.
The lease itself grants the Debtor a leasehold interest for a term of fifteen (15) years in nonresidential real estate. It requires that the Debtor, inter alia, make fixed monthly rental payments of $15,502.59 due the first day of each month and percentage rental payments based on gross sales, due annually or quarterly ; obtain the landlord's consent for any repairs or alterations to the building which would cost more than $5,000.00 (Par. 7.2(d)); provide the landlord with performance and labor and material payment bonds or a financial statement disclosing a net worth of ten times the cost of any repair work or alterations prior to the commencement of such work if estimated to cost more than $5,000.00 (Par. 7.2(d)); pay promptly when due the entire cost of any work to the premises (Par. 7.1(f)); and forthwith cause to be discharged of record any lien placed against the premises (Par. 7.1(m)). The lease further provides that in the case of default by the Debtor as to any of the above provisions, the landlord may, after providing an opportunity to cure, "serve upon Tenant a notice that this Lease and the Term will terminate on a date to be specified therein." (Par. 9.2(a)). The cure period for a rent default is five (5) days and ten (10) days for other monetary and nonmonetary defaults. (Par. 9.2(a)(i)).
The undisputed evidence in the instant proceeding establishes that the Debtor closed its operation and commenced renovations at the restaurant on January 18, 1988. The renovations were undertaken pursuant to a provision in the Debtor's modified franchise agreement with Friday's, Inc. that it would take steps necessary to conform its restaurant operation to the standards required by the franchisor. (Tr. Ex. 12, 6/27/88) At closing, the estimated time for completion of the renovations was two months, while the estimated cost was $250,000.00. The Debtor failed to satisfy the lease requirements that it obtain permission for renovations from the landlord, provide the landlord with specifications for the work to be done, and submit to the landlord performance and labor and material payment bonds or financial statements exhibiting a sufficient net worth of the Debtor, (Par. 7.1 and 7.2 of lease, Tr. Ex. 1, 5/19/88) and on March 1, 1988, the landlord sent notice of such failure, via certified mail, to Mr. Les Victor, an officer of the Debtor and of related entities. (Tr. Ex. 7, 5/19/88) Additionally, on March 1, 1988, the Debtor failed to make its rental payment for that month. Notice of this non-compliance, with instructions to cure same, was sent and received, via certified mail, on March 16, 1988. (Tr. Ex. 2, 5/19/88; Tr. Ex. 32, 6/28/88).
On March 17, 1988, the Tennessee Department of Employment Security filed a lien against the Debtor's property at the premises for non-payment of taxes due. (Tr. Ex. 15, 5/19/88). On March 31, 1988, Vernbrook, the contractor performing the renovations at the restaurant, filed a materialmen's lien against the premises for nonpayment of $117,164.47 in remodeling costs. (Tr. Ex. 11, 5/19/88). These liens are alleged to be in further contravention of the lease.
On April 1, 1988, the Debtor again failed to pay its monthly rental and on April 18, 1988, the landlord sent the Debtor the "Notice of Termination and Notice of Additional Defaults" via certified mail. The notice specifies the above defaults and provides that in light thereof, the "Lease and Term thereof will terminate on April 30, 1988." (Tr. Ex. 3, 5/19/88).
Mr. Victor, an officer of the Debtor, Maruki Tennessee "F," Inc. and of Maruki U.S.A. Co. Inc. testified that he attempted several times to cure the defaults by proposing settlement offers but that the landlord "would not let him pay." However, three witnesses for OSP, the landlord, testified that Mr. Victor's only attempt to propose a settlement was made telephonically on April 29, 1988, the day before the indicated termination. More will be said of this "offer" and its admission into evidence at a later point in this opinion.
Thus, with this history, the court comes to the question of whether the lease was effectively terminated by nonbankruptcy law on April 30, 1988, or whether it may be assumed by the Debtor pursuant to bankruptcy law.
CONCLUSIONS OF LAW WITH FINDINGS OF FACT:
LEASE ASSUMPTION
It is well settled that Section 365 of the Bankruptcy Code authorizes the trustee or debtor-in-possession3 to assume or reject an executory contract or unexpired lease of the Debtor. See, e.g., 2 King, Collier on Bankruptcy (15th Ed.), Par. 365.03. This is so, notwithstanding prior defaults by a debtor, if it can be shown that the defaults will be promptly cured and that compensation for actual pecuniary loss resulting from default will be made and that future performance will be in accordance with the...
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