Shangra-La, Inc., In re

• Decision Date: 19 January 1999
• Docket Number: D,No. 98-1497,SHANGRA-L,INCORPORATE,98-1497
• Citation: 167 F.3d 843
• Parties: , Bankr. L. Rep. P 77,879, 11 Fourth Cir. & D.C. Bankr. 159 In re:ebtor. Three Sisters Partners, L.L.C., Creditor-Appellant, v. Holmes P. Harden, Trustee-in-bankruptcy, Appellee, and Marjorie K. Lynch, Bankruptcy Administrator-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 843

167 F.3d 843

33 Bankr.Ct.Dec. 999, Bankr. L. Rep. P 77,879,

11 Fourth Cir. & D.C. Bankr. 159

In re: SHANGRA-LA, INCORPORATED, Debtor.

Three Sisters Partners, L.L.C., Creditor-Appellant, v. Holmes P. Harden, Trustee-in-bankruptcy, Appellee, and Marjorie K. Lynch, Bankruptcy Administrator-Appellee.

No. 98-1497.

United States Court of Appeals, Fourth Circuit.

Argued Oct. 28, 1998.

Decided Jan. 19, 1999.

ARGUED: Peter Joseph Sarda, Wallace, Creech & Sarda, L.L.P., Raleigh, NC, for Appellant. William Peak Janvier, Merritt, Wooten & Janvier, P.A., Raleigh, NC, for Appellee Harden; John Gregory Rhyne, Staff Attorney, Bankruptcy Administrator's Office for the Eastern District of North Carolina, Wilson, NC, for Appellee Lynch.

Before MURNAGHAN and WILLIAMS, Circuit Judges, and BLAKE, United States District Judge for the District of Maryland, sitting by designation.

Reversed and remanded by published opinion. Judge WILLIAMS wrote the opinion, in which Judge MURNAGHAN and Judge BLAKE joined.

OPINION

WILLIAMS, Circuit Judge:

Three Sisters Partners, L.L.C. (Three Sisters) appeals the district court's affirmance of the bankruptcy court's order denying in toto its request for postpetition attorneys' fees arising from Three Sisters's involvement in its commercial tenant's bankruptcy case. For the reasons stated herein, we reverse and remand for further proceedings consistent with this opinion.

I.

Three Sisters entered into a long-term commercial lease with Shangra-La, Inc. (Shangra-La) on June 14, 1995. The lease concerned a warehouse located at 427 Dawson Street in downtown Raleigh, North Carolina, in which Shangra-La intended to operate a night club. The lease had an initial term of five years and granted Shangra-La three options to renew the lease for additional five-year periods. Shangra-La also was granted the option to purchase the property within the first forty-eight months of the lease for $700,000.

Paragraph 21 of the lease agreement governed "Default." Default under the lease was triggered by certain occurrences including: "[t]he failure of [lessee] to pay when due any rent or any other sum for which the [lessee] becomes liable or obligated to pay under the [l]ease;" and "[t]he failure of [lessee] to perform timely any acts required of it in the performance of the [l]ease or otherwise to comply with any term or provision [t]hereof." (J.A. at 19.) Upon default the lease further provided:

22.4 In the event the LESSOR shall employ an attorney to collect any sum due under the Lease or enforce any obligation of the LESSEE hereunder, the LESSEE shall be liable for reasonable attorneys' fees in the amount of fifteen percent (15%) or the maximum percentage allowed thereunder of the outstanding balance due under the Lease pursuant to N.C.G.S. § 6-21.2 now in effect or as amended. The outstanding balance due under the Lease shall be any rent owed to the LESSOR along with any other sum or sums which become due to the LESSOR under any provision of the Lease.

(J.A. at 20-21.)

Unfortunately, during the spring and summer of 1996, Shangra-La experienced some financial difficulties and was not able to meet its obligations under the lease. Contractors who had performed interior improvements in the warehouse filed mechanics' liens on the property. Three Sisters considered these liens to be defaults under the lease agreement and began to pursue the state law remedy of summary ejectment in September 1996; however, Three Sisters continued to negotiate a settlement with Shangra-La that would have enabled Shangra-La to maintain its leasehold interest in the property. By October 1996, however, negotiations were drawing to a close. Shangra-La did not pay the October rent when due. As a result, ThreeSisters sent a letter stating that it was terminating the lease, requesting that Shangra-La voluntarily relinquish the property, and demanding reimbursement for attorneys' fees in the amount of $2,223.

Shangra-La did not voluntarily surrender the premises, and Three Sisters pursued its ejectment action in the Wake County district court. The magistrate ordered Shangra-La's eviction. Shangra-La appealed that state court ruling. Shortly thereafter, on November 13, 1996 and before the state appeal could be heard, Shangra-La filed a voluntary petition for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of North Carolina.

As the Shangra-La matter progressed through the bankruptcy court, Three Sisters actively participated in the case. On November 22, 1996, Three Sisters filed its first motion for relief from the automatic stay imposed by 11 U.S.C.A. § 362(a) (West Supp.1998) on the ground that Shangra-La's interest in the property terminated by operation of state law prior to the filing of the bankruptcy petition. See 11 U.S.C.A. § 365(c)(3) (West Supp.1998) (providing that the Trustee may not assume a lease of nonresidential real property when the lease has been terminated under applicable nonbankruptcy law prior to the order for relief). The bankruptcy court denied that motion.

On January 9, 1997, the Trustee in bankruptcy gave notice that he intended to assume the Three Sisters lease under the terms of § 365 of the Bankruptcy Code. 11 U.S.C.A. § 365 (West Supp.1998). Three Sisters objected to the assumption of the lease on January 22, 1997. Before ruling on the objection, the bankruptcy court held the assumption proceedings in abeyance pending plan confirmation. Three plans of reorganization were proposed: one by each of two competing subgroups of Shangra-La shareholders and one by Three Sisters. Three Sisters also filed objections to each of the shareholder plans.

The bankruptcy court confirmed one of the two shareholder plans by an order dated May 13, 1997. The confirmed plan called for the assumption of the Three Sisters lease and included provisions to cure any remaining defaults under the lease. The plan also provided that Three Sisters would be provided with adequate assurances of future performance. The confirmed plan was never effectuated, however, because the plan proponent was not able to obtain adequate capital to pay necessary start-up costs.

As a result, upon motion from Shangra-La's Trustee, the bankruptcy court converted the case from a Chapter 11 reorganization to a Chapter 7 liquidation. After the conversion, the Trustee moved for an extension of time in which to make a decision to assume or assign the Three Sisters lease under § 365(d)(3) of the Bankruptcy Code. Three Sisters objected to the motion to extend time, and once again moved for relief from the automatic stay. As its ground for relief from the automatic stay, Three Sisters reiterated its earlier position that the Trustee could not assume or assign the leasehold interest because the lease had been terminated prior to Shangra-La's Chapter 11 filing. See 11 U.S.C.A. § 365(c)(3). The bankruptcy court granted the Trustee's motion to extend time to assume or assign the lease and denied Three Sisters's motion for relief from the automatic stay. On September 5, 1997, the bankruptcy court issued an order granting the Trustee's request to assume the lease.

Next, Three Sisters's attorneys applied for reimbursement of attorneys' fees and expenses incurred related to the Shangra-La lease, a total of $42,733.09. The application stated no legal theory for the recovery of the fees and expenses. The trustee objected to the fee request. After a hearing on the attorneys' fee question, the bankruptcy court determined that Three Sisters's attorneys were entitled to $5,416. Specifically, the bankruptcy court determined that under 11 U.S.C.A. § 365(b)(1)(B), the attorneys were entitled to fees related to the default of the lease. Thus, the bankruptcy court concluded that the Three Sisters's attorneys were entitled to recover for collection efforts related to all prepetition defaults, including the letter-writing and negotiations related to the mechanics' liens and the work in state court pursuing ejectment. The bankruptcy court determined, however, that the actions taken by Three Sisters during the bankruptcy case were not recoverable under 11 U.S.C.A. § 365(b)(1)(B) because Three Sisters had litigated issues particular to bankruptcy law. Additionally, the district court determined that the attorneys' expenses and fees were not administrative expenses recoverable under 11 U.S.C.A. § 503, because Three Sisters had not made a substantial contribution to the bankruptcy case. Three Sisters later filed a motion for rehearing in the bankruptcy court that was denied.

Three Sisters appealed to the district court. The district court affirmed the ruling of the bankruptcy court without opinion. Three Sisters filed a timely notice of appeal.

II.

Before us, Three Sisters attacks the bankruptcy court's order denying it the $37,317.09 of postpetition fees and expenses incurred during the progress of Shangra-La's bankruptcy ¹ on the ground that the fees are recoverable under § 365 of the Bankruptcy Code. ²

We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court. See Cook Group v. C.R. Bard, Inc., 149 F.3d 249, 251-52 (4th Cir.1998).

A.

Section 365 of the Bankruptcy Code governs "Executory Contracts and Unexpired Leases," and provides:

If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee--

(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;

(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and

(C) provides adequate assurance of future performance under such...