In re Merry-Go-Round Enterprises, Inc., 98-1082.
Citation | 180 F.3d 149 |
Decision Date | 08 June 1999 |
Docket Number | No. 98-1082.,98-1082. |
Parties | 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. |
Court | United States Courts of Appeals. United States Court of Appeals (4th Circuit) |
COPYRIGHT MATERIAL OMITTED
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 & 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.
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.
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 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:
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 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, "the 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 January 13, 1998. DeBartolo has not cross-appealed.
We review the district court's findings of fact for clear error, see Fed R. Bankr.P. 8013, and its conclusions of law de novo. See In re K & L Lakeland, Inc., 128 F.3d 203, 206 (4th Cir.1997). This Court reviews statutory interpretation of the Bankruptcy Code de novo. See Ford Motor Credit Co....
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