Matter of UL Radio Corp.

• Decision Date: 19 April 1982
• Docket Number: Bankruptcy No. 81 B 11067.
• Citation: 19 BR 537
• Parties: In the Matter of U.L. RADIO CORP., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

19 B.R. 537 (1982)

In the Matter of U.L. RADIO CORP., Debtor.

Bankruptcy No. 81 B 11067.

United States Bankruptcy Court, S.D. New York.

April 19, 1982.

Ressler & Taub, New York City, for debtor.

Chadbourne, Parke, Whiteside & Wolff, New York City, for Rockwell International Credit Corp.

Epstein, Reiss & Goodman, New York City, for Proposed Assignee.

Finkel, Goldstein & Berzow, New York City, for Jemrock Realty Co.

MEMORANDUM & ORDER

JOHN J. GALGAY, Bankruptcy Judge.

Debtor, U.L. Radio Corp., has moved for an order, pursuant to Bankruptcy Code section 365(f), authorizing it to assume its lease ("Lease") with Jemrock Realty Company ("Jemrock"), the landlord, and authorizing U.L. Radio to assign the Lease to Just Heaven Restaurant, Ltd. ("Just Heaven"). U.L. Radio operates the leasehold as a television sales and service store. Just Heaven, the prospective assignee, will operate the premises as a small bistro. Jemrock opposes such an assignment, citing a use clause in the Lease which provides that the lessee shall use the premises only for television service and sale of electrical appliances. Jemrock asserts that the assignment of the Lease to Just Heaven would unlawfully modify the Lease by violating the use clause. Such modification, Jemrock avers, is not permitted under section 365 without the landlord's consent, which consent Jemrock withholds.

After a hearing, the Court ordered the parties to submit proposed findings of fact and conclusions of law hereinafter "Findings and Conclusions". The Court has considered all the papers submitted by the parties, the oral arguments and the applicable law and legislative history. The Court grants debtor's motion to assume and assign the Lease to Just Heaven.

I. Background

On September 17, 1979, the debtor entered into the Lease with Jemrock for a store located at 2656 Broadway, New York, New York. The store is located in a building which is also occupied by a grocery store, a Chinese restaurant, a liquor store, and 170 apartments. The term of the Lease is for ten years. The rent required to be paid is as follows: $9600 per year from November 1, 1979, to October 31, 1982; $10,800 from November 1, 1982, to October 31, 1985; and $12000 from November 1, 1985 to October 31, 1989. Paragraph 43 of the Rider to the Lease provides that the tenant may assign the Lease with the written consent of the Landlord, which consent is not to be unreasonably withheld.

On May 20, 1981, the debtor filed an original petition under Chapter 11 of the Bankruptcy Code and continues to operate its business as debtor in possession. No creditors' committee has been formed. The debtor intends to propose a liquidation plan of reorganization. The debtor is current in the payment of rent and related charges required by the terms of the Lease and is not in default of any of the Lease terms.

In furtherance of its intention to liquidate all of its assets and to propose a plan of reorganization, the debtor, subject to the approval of this Court, entered into an assignment of the Lease to Just Heaven. The proposed assignment provides, inter alia, that Just Heaven will pay to the Debtor as consideration for the assignment as follows: for the period commencing three months after this Court's approval of the assignment to October 31, 1988, the sum of $2000 per month. Such payments will fund a plan paying unsecured creditors 100 percent of their claims. Rockwell International, the largest creditor, recommends the assignment.

The president of Just Heaven has executed a personal guarantee for the payment of rent in favor of the landlord for the first two years of the assignment, together with a statement that her net worth exceeds $50,000.

The Lease provides in paragraph 45 of the rider to the Lease that "any noise emanating from said premises shall be deemed a breach of the terms and conditions of this Lease." Just Heaven has allocated $20,000 for construction, including soundproofing. David Humpal St. James, Vice President and Secretary as well as a director and a shareholder of Just Heaven, is a noted interior designer including the design of commercial restaurants. His design work has involved soundproofing. See Affidavit of David Humpal St. James.

II. Issues

Two issues confront this Court:

(1) Have the provisions of section 365, regarding assumption and assignment of leases, been satisfied?

(2) Can deviation from a use clause prevent the assignment of a lease, when the assumption and assignment otherwise comport with the requirements of section 365?

III. Assumption and Assignment Under Section 365

Code section 365 governs the assumption and assignment of executory contracts, providing broad authority to a trustee or debtor in possession¹ to assume and assign an unexpired lease. 11 U.S.C. § 365(a); see Report of the Committee on the Judiciary, Bankruptcy Law Revision, H.R.Rep.No.95-595, 95th Cong., 1st Sess. 347 (1977) hereinafter "House Report"; Report of the Committee on the Judiciary, Bankruptcy Reform, S.Rep.No.95-989, 95th Cong., 2d Sess. 58 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787 hereinafter "Senate Report"; In re Lafayette Radio Electronics Corp., 9 B.R. 993, 997 (Bkrtcy.E.D.N.Y.1981); 2 Collier on Bankruptcy ¶ 365.01 (15th ed. 1981). The aim of this statutory authority to assume a lease is to "assist in the debtor's rehabilitation or liquidation." House Report at 348, U.S.Code Cong. & Admin.News 1978, p. 6304; Senate Report at 59, U.S. Code Cong. & Admin.News 1978, p. 5845.

Assignment of a lease, which is at issue here, must comply with section 365(f), which states:

(f)(1) Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.

(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law that terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or obligation under such contract or lease on account of an assignment of such contract or lease, such contract, lease right, or obligation may not be terminated or modified under such provision because of the assumption or assignment of such contract or lease by the trustee.

Subsection (f)(1) "partially invalidates restrictions on assignment of contracts or leases by the trustee to a third party." House Report at 349, U.S.Code Cong. & Admin.News 1978, p. 6305; Senate Report at 59, U.S.Code Cong. & Admin.News, p. 5845; see Fogel, Executory Contracts and Unexpired Leases in the Bankruptcy Code, 64 Minn.L.Rev. 341, 360 (1980) hereinafter "Executory Contracts". Subsection (f)(2) "imposes two restrictions on assignment by the trustee: (1) he must first assume the contract or lease, subject to all the restrictions found in the section; and (2) adequate assurance of future performance must be provided to the other contracting party." House Report at 349, U.S.Code Cong. & Admin.News 1978, p. 6305; Senate Report at 59, U.S.Code Cong. & Admin.News 1978, p. 5845.² Finally, subsection (f)(3) "invalidates contractual provisions that permit termination or modification in the event of an assignment, as contrary to the policy of this subsection." House Report at 349, U.S. Code Cong. & Admin.News 1978, p. 6305; Senate Report at 59, U.S.Code Cong. & Admin.News 1978, p. 5845.

A. Requirements of Assumption

The first requirement of assignment under section 365(f)(2) is proper assumption under section 365. 11 U.S.C. § 365(f)(2)(A). The broad authority of a trustee or debtor in possession to assume is limited in Code section 365 by subsections (b), (c), and (d). House Report at 347; Senate Report at 58.

Section 365(b)(1) and (2) prescribe conditions to assumption of a lease if a default has occurred. "Subsection (b) requires the debtor to cure any default in the . . . lease and to provide adequate assurance of future performance . . . before he may assume." House Report at 347, U.S.Code Cong. & Admin.News 1978, p. 6304; Senate Report at 58, U.S.Code Cong. & Admin.News 1978, p. 5844; 2 Collier on Bankruptcy ¶ 365.04 (15th ed. 1981). No default exists under the Lease before this Court; therefore, the subsection (b) requirements for assignment are not applicable.

Section 365(c) prohibits a debtor from assuming a lease if applicable nonbankruptcy law "independent of any language in the contract or Lease itself" excuses the other party from giving performance to or receiving performance from someone other than the debtor. House Report at 348, U.S.Code Cong. & Admin.News 1978, p. 6304; Senate Report at 59, U.S.Code Cong. & Admin. News 1978, p. 5845. Such "nondelegable"³ and, therefore, non-assumable contracts and leases include those for unique personal services, as well as those to extend credit, to make loans, and to issue securities. The Lease before this Court does not fall under the prohibition of section 365(c). See In re Taylor Manufacturing, Inc., 6 B.R. 370 (Bkrtcy.N.D.Ga.1980).

Section 365(d) sets time limits on the assumption of unexpired leases. The time requirements of subsection (d) have been met and are not at issue.

B. Adequate Assurance of Future Performance

The second requirement of assignment under section 365(f)(2) is adequate assurance of future performance ("adequate assurance"). 11 U.S.C. § 365(f)(2)(B). Adequate assurance also appears in section 365(b) as a requirement of assumption...