James Wilson Associates, Matter of

Citation965 F.2d 160
Decision Date05 November 1991
Docket Number91-3565 and 91-3726,91-3040,Nos. 91-1443,91-3039,91-3039 and 91-3040,s. 91-1443
Parties26 Collier Bankr.Cas.2d 1673, Bankr. L. Rep. P 74,636 In the Matter of JAMES WILSON ASSOCIATES, Debtor. Appeals of METROPOLITAN LIFE INSURANCE COMPANY. . Argued ()
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Trayton L. Lathrop (argued), David E. Rohrer, Michael J. Lawton, Kenneth B. Axe, Lathrop & Clark, Madison, Wis., for Metropolitan Life Ins. Co. Daniel W. Stolper, Stafford, Rosenbaum, Rieser & Hansen, Madison, Wis., for First Nationwide Bank.

Julie Plotkin, Murphy & Desmond, Madison, Wis., for JWP Investors.

Denis Vogel, Wheeler, Van Sickle & Anderson, Madison, Wis., for Fiaz Choudri.

Rachel A. Brickner, Kay & Eckblad, Madison, Wis., for Bruce G. Felland.

Francis J. Eustice, Eustice, Albert, Laffey & Fumelle, Sun Prairie, Wis., for Bank of Sun Prairie.

Daniel W. Hildebrand, James I. Statz, Denis Bartell (argued), Ross & Stevens, Madison, Wis., for James Wilson Associates, a Wisconsin Ltd. Partnership.

Before CUDAHY, POSNER, and COFFEY, Circuit Judges.

POSNER, Circuit Judge.

We have consolidated five (!) appeals by Metropolitan Life Insurance Company from adverse orders in a bankruptcy proceeding in which Metropolitan is the principal creditor. The debtor, James Wilson Associates (JWA), is a limited partnership that built and operates an office building in Madison, Wisconsin, and that in 1973 had borrowed $3.9 million from Metropolitan, secured by a first mortgage, with an assignment of rents as additional collateral. Later it borrowed more money, against a second mortgage (and assignment of rents) now held by First Nationwide Bank. The balance outstanding on the two mortgages is roughly $4.6 million. In 1976 JWA sold the building for $7 million under a land contract to JWP Investors, another and (despite the similar initials) unrelated limited partnership, which leased the building back to JWA. Although the purpose of the sale and lease back was to finance JWA's operation of the building rather than to transfer control, the transaction created a genuine lease under Wisconsin law because it did not vest title in JWA at the lease's termination. In re Spring Valley Meats, Inc., 94 Wis.2d 600, 609-10, 288 N.W.2d 852, 856 (1980); American Industrial Leasing Co. v. Moderow, 147 Wis.2d 64, 70-71, 432 N.W.2d 617, 620 (Ct.App.1988).

JWP Investors did not assume the mortgages; JWA remained liable under them, and eventually defaulted. In 1990 the two mortgagees brought foreclosure suits in a Wisconsin state court, which at the request of both appointed a receiver to collect the rents from the building's tenants and enjoined the tenants from paying rent to anyone else. Three weeks later JWA filed for bankruptcy under Chapter 11 of the Bankruptcy Code, and in its new status as debtor in possession resumed collecting the tenants' rents because the bankruptcy filing automatically stayed all judicial proceedings against the debtor, including the receivership. 11 U.S.C. § 362(a). Metropolitan moved to lift the stay with regard to the receivership, arguing that the lease was not an asset of the bankrupt estate.

A lease is, with regard to its unexpired portion, an executory contract; and a trustee in bankruptcy (or debtor in possession, as here) is free to repudiate without liability the debtor's executory contracts, expressly including any unexpired leases. 11 U.S.C. § 365(a). But he doesn't have to repudiate them; he can if he prefers assume them, in which event they are assets of the bankrupt estate. Section 365(d)(4) of the Bankruptcy Code provides, however, that if the trustee or debtor in possession does not either assume or reject an unexpired lease of nonresidential real property of which the debtor is the lessee within sixty days after the filing of the petition for bankruptcy (the statute says, within sixty days after "the order for relief," but the filing of the petition for bankruptcy is deemed such an order, 11 U.S.C. § 301; In re Elm Inn, Inc., 942 F.2d 630, 633 (9th Cir.1991)--and rightly so, since the automatic stay kicks in then), the lease is deemed rejected and the trustee or debtor must immediately surrender the property to the lessor. The bankruptcy judge can extend the time for this election, at least if he does so within the sixty-day period (the circuits are divided over whether he can do so later). 11 U.S.C. § 365(d)(4); In re American Healthcare Management, Inc., 900 F.2d 827, 829-30 (5th Cir.1990). But there was no extension here.

Metropolitan argued that JWA had missed the deadline and therefore that the lease was not a part of the estate in bankruptcy, so naturally the stay had to be lifted. JWA responded by submitting a document which states that JWP Investors had continued since the bankruptcy to receive the monthly rental specified by its lease to JWA and that the parties considered the lease to be continuing. Was this an assumption? Loosely speaking, it was. But it was not executed within the sixty-day period. And no formal motion was filed asking that the bankruptcy judge approve the assumption, as the bankruptcy rules require. Bankr.R. 6006(a), 9014; Sea Harvest Corp. v. Riviera Land Co., 868 F.2d 1077 (9th Cir.1989); In re BDM Corp., 71 B.R. 142 (Bankr.N.D.Ill.1987); In re Austin, 102 B.R. 897, 899 (Bankr.S.D.Ga.1989). Moreover, the purported assumption changed the lease from one of fixed term to one from month to month, and ordinarily such a modification would be inconsistent with an assumption; a provision that allows the lessee's obligations to be assumed by another does not allow the terms of the lease to be altered to the lessor's detriment. In re Chicago, Rock Island & Pacific R.R., 860 F.2d 267, 272 (7th Cir.1988); In re Gardinier, Inc., 831 F.2d 974, 975 n. 1 (11th Cir.1987). But here the lessor is not objecting, Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir.1985) (per curiam), the creditor (Metropolitan) does not have an interest in the lease, and these circumstances led both the bankruptcy judge and the district judge to deny the motion to lift the stay on the ground that Metropolitan did not have standing to complain about a violation of section 365(d)(4).

One appeal is from this order; the next two appeals challenge three other orders affirmed by the district judge. One turned down Metropolitan's request, premised on the argument that JWA had acted in bad faith in filing for bankruptcy, to lift the automatic stay with regard to the foreclosure proceeding. Another order allowed JWA to pay attorney's fees incurred in administering the bankrupt estate (an estate consisting be it noted solely of the debtor's interest in the office building) out of the tenants' rents. The third order allowed a portion of those rents to be diverted to the account of First Nationwide, the second mortgagee, to protect its lien. The bankruptcy judge had determined that Metropolitan had adequate protection even after these diversions. The office building alone (that is, ignoring the past rentals, deposited in the debtor's account, out of which the diversions have been made) has a market value of $6 million, while Metropolitan, the senior lienor, is owed only about $3.2 million on its mortgage, including interest.

The final two appeals concern the plan of reorganization that JWA submitted and that the bankruptcy judge, affirmed by the district judge, approved after the other appeals had been filed. One appeal attacks the plan itself, as unfair to Metropolitan. The other allows additional attorneys' fees to be paid out of the tenants' rent; Metropolitan concedes that this appeal must be decided the same way as the appeal from the previous such order.

The plan of reorganization envisages that all creditors will be paid in full over a period of years, with interest. And all the creditors voted for the plan except Metropolitan, which under the plan is to receive, for seven years, payments based upon a 25-year amortization of its loan at an interest rate of 2.5 percent above the yield on current seven-year U.S. Treasury notes and, at the end of the seven years, a balloon payment for the balance; but JWA is to have two years to raise the money for the balloon payment.

Five appeals are a lot in one case and three of them were filed before the case ended with the approval of the plan of reorganization. This proliferation of interlocutory appeals may seem to do extraordinary violence to the principle of finality, which governs appeals to the courts of appeals in (most) bankruptcy cases, as it does in other cases. Compare 28 U.S.C. § 158(d) with 28 U.S.C. § 1291. Yet, as we shall see, a decision by the Supreme Court handed down after the argument in this case establishes that at least the two appeals that challenged the automatic stay were within our appellate jurisdiction when filed. Connecticut National Bank v. Germain, --- U.S. ----, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). All five appeals are incontestably within that jurisdiction now, since once a final judgment is entered and appealed, the appellant can challenge any interlocutory order that the judgment has not made moot. Weir v. Propst, 915 F.2d 283, 286 (7th Cir.1990).

The automatic stay is an injunction. Here it not only stopped the foreclosure proceedings in their tracks; it wrested control over the building and the building rentals from the hands of the receiver. All four orders challenged by the first three appeals rebuffed Metropolitan's efforts to dissolve or modify this injunction by revesting the receiver with control over the rentals or, at the very least, blocking access to the rentals by the debtor in possession. Section 1292 of the Judicial Code makes orders granting or denying motions to grant, deny, modify, or dissolve preliminary injunctions appealable without regard to finality, 28 U.S.C. §...

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