Leases: The Debtor Tenant’s Right To “Assume” and To “Assign” Does Not Mean To “Assume and Assign”

In re Eastman Kodak Co., 495 B.R. 618 (Bankr. S.D.N.Y. 2013) –

The debtor assumed a ground lease prior to the deadline for assumption or rejection of non-residential real property leases.  It later sought to assign the lease in connection with a proposed sale.  The landlord objected on the basis that assumption and assignment must occur at the same time.

Since this was a non-residential real property lease and the debtor did not have the landlord’s consent for an extension, Section 365(d)(4) of the Bankruptcy Code required the debtor to assume or reject the lease within 210 days after the case was filed (120 days plus a 90-day extension granted by the court).  In moving to assume various leases, including the ground lease, the debtor stated that the leases were “critical to the Debtors’ ongoing business operations and will be an integral part of any plan of reorganization that the Debtors will ultimately propose in these cases.”  However, the motion also contained a proposed reservation of rights as follows:

Nothing included in or omitted from the Motion or this Order, nor as a result of any payment made pursuant to this Order, shall impair, prejudice, waive or otherwise affect the rights of the Debtors and their estates, subject to appropriate notice and a hearing and this Court’s approval unless otherwise agreed to by the parties, to assign any of the Assumed Leases pursuant to, and in accordance with, the requirements of section 365 of the Bankruptcy Code.

The landlord did not object or otherwise respond to the motion, and the court entered an order that granted the lease assumption motion with the reservation of rights.

The lease was for approximately 2,200 square feet of land that was retained by the debtor when it sold property to the landlord in order to permit the debtor to continuing operating a fire water pump.  The ground lease prohibited assignment or sublease without the prior consent of the landlord, which could be withheld in its sole discretion.  The lease had a term of 50 years, with $100 per month rent, as adjusted every five years based on the Consumer Price Index.  After the debtor decided to sell the utility operation related to the fire water pump, the ground lease was designated as a contract to be assigned in connection with the sale.

The court considered the interplay of (1) Section 365(f)(3) – which allows a debtor to assign executory contracts and leases notwithstanding prohibitions on assignment, (2) Section 365(d)(4) – which requires nonconsensual assumption to occur no later than 210 days after the petition date, and (3) Section 365(f)(2) – which allows a debtor to assign contracts and leases if they are assumed in accordance with Section 365 and the assignee provides adequate assurance of future performance. (It was agreed that the assignee provided adequate assurance.)

The question posed for the court was whether the assignment must occur at the same time as the assumption, and whether the assignment could occur outside the 210-day period.

The court went through its interpretation of the “plain meaning” of the statute, including use of the present tense of the verb “to assume,” references to “assume or assign,” and the lack of a deadline in the section on assignment (as opposed to the section on assumption of an agreement).  It also considered that the Congress was concerned with balancing the interests of landlords and debtor tenants.  Requiring assumption to occur by the deadline, but allowing assignment to occur at a later time provides reasonable protection to the landlord (by giving it certainty about the status of the lease) while maximizing the value to the debtor’s estate (by giving it an opportunity to avoid accruing administrative claims if a decision to assume turned out to be incorrect or if the reorganization failed).

The landlord asserted that allowing a subsequent assignment was unfair to landlords.  The court’s response:  “Even if it were unfair, “‘the disruption of non-debtors’ expectations of profitable business arrangements’ is ‘common in bankruptcy proceedings.’””

The landlord also argued that when the debtor assumed the lease, it became subject to all of its provisions, including the anti-assignment clause.  However, it cited no authority for that proposition, and the court concluded that assumption also included the benefits, and if the debtor was still in bankruptcy one of the benefits was the right to assign.

Consequently, the court approved the assignment of the ground lease to the purchaser subsequent to the assumption and outside the 210 day period.

Although it appears that the court would have reached the same conclusion even without the reservation of rights, it might be prudent for a debtor to include a similar reservation if there is any chance that circumstances might change and the debtor might wish to assign a lease after it was assumed.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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