In re Player's Poker Club, Inc.
| Citation | 636 B.R. 811 |
| Decision Date | 04 February 2022 |
| Docket Number | Case No.: 9:21-bk-10357-MB |
| Parties | IN RE: PLAYER'S POKER CLUB, INC., Debtor. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
Michael S. Kogan, Kogan Law Firm, APC, Los Angeles, CA, for Debtor.
Brian David Fittipaldi, US Department of Justice, Santa Barbara, CA, for U.S. Trustee.
Player's Poker Club, Inc. dba Players Casino (the "Debtor"), debtor and debtor in possession, filed a motion ("Motion") for approval of its rejection, under Bankruptcy Code section 365(a), of a nonresidential real property lease and parking area license under which Hofer Properties, LLC ("Hofer" and the "Hofer Lease and License") is the lessor and licensor.1 The Debtor requests approval of the rejection as of the petition date, or, alternatively, the day after the petition date, which is when the Debtor filed the Motion. In other words, the Debtor requests an order with retroactive effect, i.e., on a date prior to when the Motion is granted and an order is entered by the court.
Hofer objects to the Motion, arguing that rejection of the lease and license lacks a reasonable business justification. Hofer also argues that the Debtor improperly filed this case in bad faith, for the sole purpose of rejecting the Hofer Lease and License.
The court held a hearing and approved the Motion in open court. The court files this Memorandum of Decision to further explain its conclusions: (i) the Debtor's decision to reject the Hofer Lease and License under Bankruptcy Code section 365(a) constitutes an appropriate exercise of business judgment, which the court will not disturb; (ii) the court has the authority to grant retroactive approval of such a rejection, notwithstanding the Supreme Court's decision in Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano , ––– U.S. ––––, 140 S. Ct. 696, 206 L.Ed.2d 1 (2020) (per curiam); and (iii) cause exists to enter a nunc pro tunc order approving the Debtor's rejection of the Hofer Lease and License, retroactive to the date on which the Motion was filed and served.
The Debtor is a gaming business. Prior to its closure due to COVID-19 health restrictions imposed by state and local health officials, the Debtor operated the "Players Casino," a nearly 80-year-old card club in Ventura, California, featuring No Limit Hold'em, 21st Century Blackjack, 3 Card Poker, Pai Gow Poker, Ultimate Texas Hold'em, EZ Baccarat, Big O, Omaha, and other card games.
The COVID-19 pandemic and related restrictions on its operations severely impacted the Debtor's revenues. In 2018 and 2019, the Debtor's gross revenues exceeded $16 million each year. In 2020, however, its revenues plummeted to $4 million. Considering the operational restrictions placed on the Debtor by state and local health authorities, the resulting financial distress, and uncertainty regarding the duration of those operational restrictions, the Debtor elected to seek relief under chapter 11 of the Bankruptcy Code. The Debtor filed its voluntary petition on April 6, 2021.
One day later, the Debtor filed the Motion, seeking approval of the Debtor's decision to reject the Hofer Lease and License. The lease pertains to the premises at 6580 Auto Center Drive, Ventura, CA 93003, where the Debtor had been operating the Players Casino until its operations were interrupted by the pandemic. The license pertains to an adjacent parking lot. The Players Casino closed at the outset of the COVID-19 pandemic in early 2020, in accordance with state and local health directives. The casino briefly reopened and operated pursuant to various restrictions, but it was required by health authorities to close again in late 2020. The casino did not re-open, and the Debtor elected to vacate the premises on March 31, 2021.
The lease was entered into as of December 1, 2010. The lease specifies a lease term ending on March 31, 2021. The lease also contains an option for an additional five-year extension, if requested by no later than September 30, 2020. The parties disagree on whether a lease extension was ever effectuated. Hofer contends that the Debtor—then contemplating the possibility of future operations at the location—timely provided notice of a request for the extension. Hofer further contends that the Debtor then failed to cooperate with the process under which the property would be appraised and a new lease rate established. Hofer argues that the lease term was extended notwithstanding the Debtor's conduct. In contrast, the Debtor contends that no extension became effective and that the lease terminated according to its terms on March 31, 2021.2
Not surprisingly, the Debtor describes its motivation for rejecting the Hofer Lease and License as an "abundance of caution." The Debtor does not believe there was any lease or license in existence after March 31, 2021. But, to the extent the Hofer Lease and License did not terminate on that date, the Debtor seeks to reject them under Bankruptcy Code section 365(a), relegate any resulting damages claim to a prepetition claim under Bankruptcy Code section 365(g), and limit the amount of that damages claim under Bankruptcy Code section 502(b)(6).3
Although Hofer disagrees that the lease terminated on March 31, 2021, Hofer does not dispute that on that date, the Debtor vacated the premises, conducted a lease-end walk-through of the premises with the landlord's representative, and returned the keys. The Debtor asserts that it vacated the premises prepetition because it determined that restarting operations at that location would be risky and unprofitable—particularly under the lease renewal terms being sought by Hofer. Once that decision was effectuated, and the Debtor filed for relief under chapter 11, the Debtor contends that rejection of the Hofer Lease and License was appropriate (to the extent not effectively terminated prepetition) to protect the estate from administrative rent and other expenses for premises that it was not using and did not intend to use.
Hofer objects to the Debtor's decision to reject. Hofer argues that the Debtor failed to demonstrate that rejection of the Hofer Lease and License is in the interests of the Debtor's estate. Hofer contends that the premises contain highly customized tenant improvements and that the premises are "likely the only acceptable property in Ventura for the business." Case Dkt. 33 at 7-8. Further, Hofer contends that the Debtor has cash in the bank and could elect to operate at the premises under current restrictions, which permit limited indoor operations. Hofer also questions the Debtor's good faith in commencing the bankruptcy and filing the Motion. Hofer argues (i) that the Debtor is not actually insolvent, and (ii) it is bad faith to file a case solely for the purpose of rejecting an unexpired lease or executory contract.
Hofer does not specifically challenge the retroactive nature of the requested relief or specify a preference between the two alternative rejection approval dates requested by the Debtor: (i) April 6, 2021 (the petition date) or (ii) April 7, 2021 (the date the Motion was filed). Moreover, neither party addresses whether the court's authority to grant retroactive approval of a rejection under Bankruptcy Code section 365(a) has been affected by the Supreme Court's recent decision in Acevedo Feliciano, an issue the court addresses below in Section IV.B.
The court has jurisdiction over the Motion because the Debtor seeks relief expressly provided under a provision of title 11, i.e., Bankruptcy Code section 365. 28 U.S.C. § 1334(b). For the same reason, the Motion gives rise to a statutorily and constitutionally "core" matter, over which the court has the adjudicative authority to enter a final order. See Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). Venue is proper under 28 U.S.C. § 1409(a).
Pursuant to Bankruptcy Code section 365(a), a chapter 11 debtor in possession, "subject to the court's approval, may ... reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a).4 " Agarwal v. Pomona Valley Med. Group, Inc. (In re Pomona Valley Med. Group, Inc.) , 476 F.3d 665, 670 (9th Cir. 2007) ).
The Ninth Circuit applies the same corporate business judgment rule in bankruptcy that is applicable outside of bankruptcy. Id. (citing Lubrizol Enters. v. Richmond Metal Finishers , 756 F.2d 1043, 1047 (4th Cir. 1985) ). "Thus, in evaluating the rejection decision, the bankruptcy court should presume that the debtor-in-possession acted prudently, on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the bankruptcy estate." Id. (citing authorities). "It should approve the rejection of an executory contract under § 365(a) unless it finds that the debtor-in-possession's conclusion that rejection would be 'advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice.' " Id. .
On the record before it, the court is unable to conclude that the Debtor's rejection of the Hofer Lease and License was manifestly unreasonable or based on bad faith, whim, or caprice. On the petition date, the Debtor not only had ceased operations at the premises, but vacated those premises, conducted a walk-through with the landlord, and returned the keys. Under these...
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