In Re: Quality Properties
| Decision Date | 31 January 2011 |
| Docket Number | No. 10-42783-JJR-11,10-42783-JJR-11 |
| Parties | In re: QUALITY PROPERTIES, LLC Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
In this matter the Court must decide whether rejection pursuant to 11 U.S.C. § 365(a) by a chapter 11 debtor in another case, of its residual obligations under a lease that had been assigned to the debtor in this case, resulted in the termination of the assigned leasehold estate thereby leaving nothing for the debtor in this case to assume.1 The Court concludes that because the leasehold estate had been assigned before its purported rejection, only the assignor/debtor's residual obligations as former lessee were rejected, and the assigned leasehold estate was left untouched by the rejection and may be assumed by the debtor in this case.
The chapter 11 debtor in this case, Quality Properties, LLC ("Quality"), filed a Motion to Assume Lease and Related Assignments and Obligations, etc. (Doc. 44, and herein, the "Lease Motion"), with respect to a Lease Agreement dated February 5, 1979 (the "Lease") and the assignments under which Quality claims to have succeeded to the lessee's interest under the Lease. Quality also filed related Motions to Assume three subleases (the "Subleases") under which it claims to be the sublessors (Docs 42, 48, 49 and herein the "Sublease Motions" and together with the Lease Motion, the "Motions"). The Motions were filed pursuant to Section 365(a) of the Bankruptcy Code and Rule 6006(a) of the Federal Rules of Bankruptcy Procedure.2 In response to the Motions, John Hilsman Investments, LLC, Denny Family Properties, LLC, Mike McCollum, and Tracy Honea (collectively, the "Landlords") filed their Lessors' Opposition to Debtor's Motions to Assume (Doc. 83 and herein, the "Opposition"), in which they stated they were the successors to the lessor's interest under the Lease, and as such objected to the assumptions of the Lease and Subleases as proposed by Quality.3 The Landlords also filed a Motion For Relief From Stay (Doc. 84 and herein, the "Stay Relief Motion"), the essence of which is discussed below.
The Lease was originally made by W. C. and Chloris A. Portwood as lessors ("Original Lessors"), and Bruno's, Inc. as lessee ("Original Lessee"), and covered an unimproved tract of real property located in Marshall County, Alabama on which the Original Lessee later constructed a retail shopping center (the "Leased Premises"). The term of the Lease was for fifty years, and provided for an annual rental of $15,000. (Lease ¶s 1, 2). The Lease is what is commonly referred to as a "ground lease" and granted the lessee a virtually unfettered right to construct a shopping center and other retail shops on the Leased Premises; all improvements were to remain the lessee's property until termination of the Lease. (Lease ¶s 5, 6). Paragraph 10 of the Lease, which is critical to the Court's decision on the Motions and the Opposition, reads as follows:
Lessee may, without the consent of Lessor, assign this Lease, or sublease or vacate the leased premises, in whole or in part, at any time during the term of this Lease, provided, however, that Lessee shall continue to remain liable and responsible for the payment of all rentals required to be paid under the terms and provisions hereof and for the due performance of all other terms, covenants and conditions herein set forth....
And paragraph 25 provides that "[t]his Lease and all the covenants and provisions thereof shall inure to the benefit of and be binding upon the parties hereto, and their respective heirs, legal representatives, successors and assigns...."
In October 2005, the Original Lessee as assignor, and Bruno's Supermarkets, Inc. as assignee ("Supermarkets"), entered into a Lease Assignment (the "First Assignment") pursuant to which Supermarkets was assigned all the Original Lessee's right, title and interest as the lessee under the Lease, and Supermarkets assumed all the obligations of the lessee under the Lease arising from and after the date of the assignment.4 Also in October 2005, Supermarkets as assignor and Quality as assignee, entered into an Assignment and Assumption of Ground Lease (the "Second Assignment" and together with the First Assignment, the "Assignments"). The Second Assignment stated that the Original Lessee's interest under the Lease had been assigned to Supermarkets, and that interest was being further assigned by Supermarkets to Quality. It further provided for Quality's assumption of the lessee's obligations under the Lease.5 The Subleases each cover a portion of the Leased Premises, and as the assignee of the prime lessee's interest under the Lease, Quality also claims to be the sublessor under the Subleases.
On February 5, 2009, Supermarkets filed for relief under chapter 11 of the Bankruptcy Code (). The SM Case was filed in the Southern Division of this District and was assigned to Judge Benjamin G. Cohen. The Landlords filed a motion in the SM Case in which they sought, among other relief, the entry of an order deeming the Lease terminated (SM Case Doc. 1171 and herein, the "Landlords' SM Motion"). The only parties in the contested matter commenced by the Landlords' SM Motion were the Landlords and Supermarkets; Quality was not a party to that contested matter.
On March 26, 2010, Judge Cohen entered an Order on the Landlords' SM Motion (SM Case Doc. 2301, and herein the "March 26, 2010 Order"), in which he held, inter alia, that:
In regard to ermarkets' interest in the [L]ease, while the [Landlords' SM Motion] is not a specific motion to require ermarkets to assume or reject the [Lease], it is due to be granted to the extent that this Court finds that ermarkets and the [L]andords had an unexpired lease that was rejected by operation of law and pursuant toermarkets' confirmed plan.
March 26, 2010 Order, p.8.
The March 26, 2010 Order continued, and Judge Cohen specifically withheld any decision regarding Quality's interest in the Lease: (Id,, p.9).6 In their Stay Relief Motion, the Landlords have asked this Court to lift the stay in the instant case—Quality's case—and thereby allow them to seek an adjudication from Judge Cohen in the SM Case regarding the status of the Lease vis-a-vis Quality as successor lessee.
These are contested matters under Bankruptcy Rules 4001(a), 6006(a) and 9014, and the Court has jurisdiction to hear the same pursuant to 28 U.S.C. §§ 157 and 1334, and the General Order of Reference, as amended, entered by the United States District Court for the Northern District of Alabama. These are core proceeding pursuant to 28 U.S.C. § 157(b), and the Court has authority to enter a final order. More specifically, Quality's Motions seeking assumption of the Lease and Subleases, and the Landlords' Opposition and Stay Relief Motion, are all proceedings arising under title 11—Code §§ 365(a) and 362(d). Accordingly, it is fitting, if not mandatory for this Court to address in this case—Quality's chapter 11 case—what effect Supermarkets' rejection of the Lease in its chapter 11 case had on Quality's lessee's interest in the Lease. Inasmuch as Quality is now adebtor in a bankruptcy case pending in this Court, and seeks to assume the Lease and Subleases under Code § 365(a), there is no good reason to abstain from hearing these matters or otherwise defer to state courts for an adjudication of the issues raised in the Motions, Opposition and Stay Relief Motion.7 Bankruptcy courts should retain, and not abstain from hearing core proceedings, if for no other reason than bankruptcy courts are better versed in the Bankruptcy Code and Bankruptcy Rules, and Congress obviously expected them to exercise jurisdiction in such matters. 11 U.S.C. §157. For the sake of timeliness, judicial economy and consistency of results, Congress gave bankruptcy courts broad jurisdiction that contemplates consolidation in a single forum of all proceedings arising under the Bankruptcy Code, arising in a bankruptcy case or, subject to certain limitations, related to a case.8Allowing piecemeal adjudication by conceding jurisdiction to state courts, especially in core proceedings, defeats the single-forum benefits of bankruptcy jurisdiction. Moreover, under the circumstances in this case it would be inappropriate for this Court to burden another court, including another bankruptcy court, with core matters arising in a case pending before this Court. Recall that in his March 26, 2010 Order Judge Cohen specifically refrained from ruling on what consequences, if any, the rejection of the Lease by Supermarkets might have had on Quality's interest in the Lease.9
This Court concludes that it would be ill-advised to now grant the Stay Relief Motion and thereby surreptitiously impose upon Judge Cohen the chore of adjudicating an issue he properly avoided, the resolution of which would have little or no impact in the SM Case, but will likely have a significant impact on Quality's ability to successfully reorganization in its chapter 11 case.
The crux of the Landlords' argument is rejection of the Lease by Supermarkets in the SM Case caused Quality to lose the leasehold estate it obtained through the Assignments, thereby leaving Quality with no remaining rights or interest to assume under Code § 365(a).10 This argument fails to take into account exactly what Supermarkets rejected; after all, it could reject no more than what it had retained after the Second Assignment.
As mentioned, the Lease specifically permitted the Original Lessee to assign the lessee's interest in the Lease without the...
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