Benchnotes Apr 2000
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<h3>Lease Use Restrictions</h3>
<p>In <i><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rickel Home Centers Inc.,</a></i><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 240 B.R. 826 (Bankr. D. Del. 1999)</a>, District Chief Judge Farnan
addressed a number of issues related to assignment of leases. The leases in question had "use restrictions"
that limited their use to home centers or home improvement centers. One owner agreed that these use
restrictions may be "overlooked" for the purposes of an initial assignment, but argued that it would be
inappropriate to "excise" these provisions from the leases and that they should be applicable to future
assigns or sublets. However, the other landlord took a more aggressive position and held that the use
restrictions should be enforced as against the initial assignee and any subsequent assignees. The
uncontested testimony was that the type of home improvement center operated by the debtor was
"obsolete" or was struggling to remain in existence. The court held that the landlords were relying on
§365(b)(3)(C), which provides that the assumption or rejection of leases is subject to all the provisions
of the relevant leases. However, the court noted that §365(b)(3) is not meant to be read in isolation, but
must be read in conjunction with §365(f). Commentators that have addressed this issue have held that
§365(f) not only renders unenforceable lease provisions that prohibit assignments, but also prohibits
enforcement of lease provisions that are "so restrictive that they constitute <i>de facto</i> anti-assignment
provisions." The court held that the provisions in question were<i> de facto</i> anti-assignment clauses, given
that the market for such centers was non-existent or in dire straits. Such use restrictions would make it
impossible for the debtor to assign the leases, and accordingly Judge Farnan held that it was appropriate
to permanently strike those restrictive provisions from the leases in question.
</p><h3>Bank Reporting Waiver</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Service Merchandise Co.,</i> 240 B.R. 894 (Bankr. M.D. Tenn. 1999)</a>, the debtors sought a
waiver of the §345 deposit requirements and reporting guidelines. The motion was opposed by the U.S.
Trustee. It was initially granted by the bankruptcy judge, but remanded on appeal by the district court
for clarification. Apparently, "cause" had not been addressed by any reported decisions in the context of
§345. Thus, writing on a relatively clean slate, Chief Bankruptcy Judge <b>George C. Paine</b> listed several
factors that should be considered in determining if cause exists for release from the strictures of §345(d).
These include (1) the sophistication of the debtor's business, (2) the size of the debtor's business
operation, (3) the amount of investments involved, (4) the bank ratings (Moody's and Standard & Poor's)
of the financial institutions where the debtor-in-possession's funds are held, (5) the complexity of the
case, (6) whether a safeguard is in place within the debtor's own business of ensuring the safety of the
funds, (7) the debtor's ability to reorganize in the face of the failure of one or more of the financial
institutions, (8) the benefit to the debtor, (9) the harm, if any, to the estate, and (10) the reasonableness
of the debtor's request for relief from §345(d) requirements in light of the overall circumstances of the
case. Analyzing those factors, the court found that cause existed for the waiver of the investment, deposit
and reporting requirements in this "mega-case." The court also waived the debtors' banks' obligations
to provide financial information directly to the U.S. Trustee, with the proviso that the debtors were not
permitted to maintain funds in excess of $100,000 per account in any bank with a demand deposit rating
of less than Moody's P-3 and Standard and Poor's A-. Further, the U.S. Trustee was not required to
monitor the demand deposit ratings of the financial institutions holding funds of the debtors.
</p><h3>Aggregate Trustee Fees</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rodriguez,</i> 240 B.R. 912 (Bankr. D. Colo. 1999)</a>, Chief Bankruptcy Judge <b>Charles E.
Matheson</b> addressed the issue of the appropriate fees to be paid to the chapter 7 trustee where a case is
converted to chapter 13 prior to any disbursements by the chapter 7 trustee. The court held that the chapter
7 trustee would not be denied reasonable fees for his services, but that the aggregate of the reasonable fees
allowed to the chapter 7 trustee, together with any reasonable fees allowed to the chapter 13 trustee, could
not exceed the statutory cap on aggregate trustee fees.
</p><h3>Lease Rejection Pre-petition</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Edgewater Cove Associates L.P.,</i> 241 B.R. 273 (Bankr. D. Conn. 1999)</a>, Bankruptcy Judge
Robert L. Krechevsky addressed the issue of when a claim arises on a guarantee and whether such a claim
comes within core or non-core jurisdiction. The debtor-landlord filed bankruptcy on June 9, 1999. The
tenant had filed bankruptcy in 1995 (pre-petition for the Edgewater debtor) but did not obtain an order
rejecting the lease until June 8, 1999 (post-petition for the Edgewater debtor). The guarantor argued that
the effective date of rejection related back to the date immediately prior to the tenant's bankruptcy filing,
thus prior to Edgewater's filing. Relying on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Orion Pictures Corp.,</i> 4 F.3d 1095 (2nd Cir. 1993)</a>, the
guarantor argued that the claim on the guarantee was a pre-petition state law claim, which was non-core
and never gave the bankruptcy court jurisdiction. Distinguishing <i>Marathon</i> and <i>Orion,</i> the bankruptcy court
held that the debtor had no cause of action against the guarantor when it filed its chapter 11 petition because
the lease had not been rejected. The fact that the rejection related back to a pre-petition period did not create
a pre-petition state law cause of action. Thus, the court had jurisdiction.
</p><h3>Government Property Condemnation and §362</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re PMI - DVW Real Estate Holdings L.L.P.,</i> 240 B.R. 24 (Bankr. D. Ariz. 1999)</a>, Bankruptcy
Judge Robert G. Mooreman addressed Maricopa County's motion for relief from stay to allow it to
condemn chapter 11 property as part of a proposed road realignment, through the exercise of the county's
eminent domain power. The court found that, while the condemnation action was based on
non-bankruptcy Arizona law, the matter involved property of the bankruptcy estate. The county's goal
was to remove property or assets from the bankruptcy estate. Thus, the condemnation was a core
proceeding, and the bankruptcy court had jurisdiction pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §157(b)</a> to hear and
determine the condemnation matter. The court then went on to address whether §362(b)'s police power
exception applied to the condemnation proceeding. The debtor unsuccessfully argued that Congress had
amended the Bankruptcy Code in such a way as to only include enforcement of violations of the
Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical
Weapons within the police and regulatory exception to the automatic stay. The court found that Congress
merely expanded and/or redefined the previous police and regulatory power exceptions to include any
organization exercising authority under the Convention prohibiting chemical weapons. The court also
found that this amendment effectively overruled the Ninth Circuit's decision in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Motors Inc. v.
Hawaii Auto Dealers Association,</i> 997 F.2d 581 (9th Cir. 1993)</a>. In <i>Hillis,</i> the Ninth Circuit had
essentially held that there was no governmental police or regulatory power exception to §362(a)(3),
which restricts the ability to exercise control over property of the estate. The court held that because the
amended statute also includes an exception to §362(a)(3), which restricts the police and regulatory power
exception, the statute applies to acts by the government to obtain possession of property of the
bankruptcy estate or to exercise control over bankruptcy estate property. Recognizing that the U.S.
Supreme Court in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Houston Authority v. Midkiff,</i> 467 U.S. 229 (1984)</a>, had held that the
public-use requirement of eminent domain is "coterminous" with the government's police powers, the
court held that the two powers were not necessarily identical. The court then held that the exercise of the
condemnation power under the facts in question did not establish that there was a valid exercise of police
and regulatory power, and thus continuation of the condemnation action would be a violation of the
automatic stay.
</p><h3>Section 727 Involves All Creditors</h3>
<p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re de Armond,</i> 240 B.R. 51 (Bankr. C.D. Cal. 1999)</a>, Bankruptcy Judge <b>Samuel L. Bufford</b> was
asked to approve a proposed settlement of a non-dischargeability action (§523) and denial of discharge
action (§727). The court noted that there were three approaches to settling §§727 and 523 claims. The
first approach, as illustrated by <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Moore,</i> 50 B.R. 661 (Bankr. E.D. Tenn. 1985)</a>, takes the position
that it is never appropriate for a court to approve the settlement of an objection to a debtor's discharge.
A second and quite different approach is found in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Margolin,</i> 135 B.R. 671 (Bankr. D. Colo. 1992)</a>,
where the court approved the settlement of a §523 claim and dismissal of a §727 claim, since the trustee
and the creditor body were properly noticed and there was no objection to the settlement or dismissal.
The majority view, found in a third line of cases, holds that any settlement of a §727 claim is limited to
those circumstances where the terms of the settlement are fair and equitable and in the best interest of
the estate. <i>See</i> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bates,</i> 211 B.R. 338 (Bankr. D. Minn. 1997)</a>. Relying on <i>Bates</i> and similar cases,
the court found that a creditor who files a §727 proceeding becomes a fiduciary of the other creditors.
When the fiduciary duty conflicts with the parties' own interests under §523, "the fiduciary duties take
priority." Under the facts of this case, the court held that, while it is possible for a creditor to settle a §727
claim, the settlement of any claim involving §727 belongs to all creditors. Thus, a creditor who joins and
subsequently settles a §523 action with a §727 action must contribute all funds to the general creditor
body, with no funds being allocated to the §523 action.
</p><h3>Miscellaneous</h3>
<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rogers,</i> 239 B.R. 883 (Bankr. E.D. Tex. 1999)</a> (outline of new procedures for dealing with
claims of secured creditors in a "late confirmation" district);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Handel,</i> 240 B.R. 798 (1st Cir. Bankr. 1999)</a> (BAP permitted immediate appeal of bankruptcy
court's decision on venue because appeal involved controlling question of law as to which there was a
substantial ground for difference of opinion, and immediate appeal would materially advance litigation
by preventing a waste of time and resources if the bankruptcy case was allowed to go forward in the
improper venue);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bircher,</i> 241 B.R. 11 (Bankr. S.D. Iowa 1999)</a> (capital gain from sale of a portion of the
debtor's farm was "farm income" for purposes of chapter 12 eligibility requirements);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Shaw Steel Inc. v. Morris,</i> 240 B.R. 553 (N.D. Ill. 1990)</a> (where a creditor had notice of the
debtor's alleged dishonesty, it could not reasonable rely upon the debtor's written representations
regarding its financial condition made in an affidavit submitted under oath without prior investigation
of such statements);
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Raytech Corp.,</i> 241 B.R. 785 (D. Conn. 1999)</a> (district court did not abuse its discretion by
either application of an incorrect legal standard or by clearly erroneous findings of fact when it
compensated counsel at the full hourly rate for non-productive time expended traveling); and
</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Verdi,</i> 241 B.R. 851 (Bankr. E.D. Pa. 1999)</a> (chapter 7 trustee has standing to file a motion
to reconvert a case from chapter 13 back to chapter 7).
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