Case Doc 388 Filed 07/08/13 Entered 07/08/13 17:28:28 Desc Main Document Page 1 of 11

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1 Document Page 1 of 11 UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION ) IN RE: ) ) Chapter 7 THE UPPER CRUST, LLC, et al. 1 ) Case No HJB Debtors ) (Jointly Administered) ) CARA DONNA PROVISION CO., INC. S REPLY TO: THE CHAPTER 7 TRUSTEE S OBJECTION TO MOTION OF CARA DONNA PROVISION CO., INC. FOR ORDERS ALLOWING REQUESTS FOR PAYMENT RELATIVE TO RENT DUE AND REJECTION DAMAGES ASSOCIATED WITH THE UPPER CRUST COMMISSARY SUBLEASE; AND THE CHAPTER 7 TRUSTEE S REQUEST FOR AN ORDER RETROACTIVELY APPROVING THE REJECTION OF THE SUBLEASE EFFECTIVE DECEMBER 31, 2012 Now comes Cara Donna Provision Co., Inc. ( Landlord ), by and through its undersigned attorney, and hereby respectfully submits its reply to (i) the Chapter 7 Trustee s Objection To Motion Of Cara Donna Provision Co., Inc. For Orders Allowing Requests For Payment Relative To Rent Due And Rejection Damages Associated With The Upper Crust Commissary Sublease 1 The Debtors in these substantively consolidated Chapter 7 cases are The Upper Crust, LLC, The Upper Crust - Back Bay, LLC (Case No ), The Upper Crust - Fenway, LLC (Case No ), The Upper Crust - Harvard Square, LLC (Case No ), The Upper Crust - Hingham, LLC (Case No ), The Upper Crust - Lexington, LLC (Case No ), The Upper Crust - State Street, LLC (Case No ), The Upper Crust - South End, LLC (Case No ), The Upper Crust - Pennsylvania Avenue, LLC (Case No ), The Upper Crust - DC, LLC (Case No ), The Upper Crust - Waltham, LLC (Case No ), The Upper Crust - Watertown, LLC (Case No ), The Upper Crust - Wellesley, LLC (Case No ), and JJB Hanson Management, Inc. (Case No ). -1-

2 Document Page 2 of 11 (the Trustee s Objection ) and (ii) the Chapter 7 Trustee s Request For An Order Retroactively Approving The Rejection Of The Sublease Effective December 31, 2012 (the Trustee s Request ). A. Reply To Chapter 7 Trustee s Argument That CDP s Assumption Argument Is Without Merit 1. The Chapter 7 Trustee argues that CDP s assumption argument is without merit on the basis of case law holding that the assumption of an executory contract or unexpired lease can not be implied, but requires court approval. See Trustee s Objection, Paragraphs 25 and 26. As support for his argument, the Trustee cites three cases: Mason v. Official Comm. Of Unsecured Creditors (In re FBI Dist. Corp), 330 F.3d 36 (1 st Cir. 2003), this Court s decision in In re Snowcrest Dev. Group, Inc., 200 B.R. 473 (Bankr. D. Mass. 1996), and this Court s decision in In re Dehon, Inc., 352 B.R. 546 (Bankr. D. Mass. 2006). As will be discussed below, FBI Dist. Corp and Snowcrest are inapposite while this Court s analysis in Dehon and the case law cited therein should be read as support CDP s assumption argument. 2. FBI Dist. Corp is inapposite as it stands for the proposition that a debtor-inpossession can not assume a pre-petition contract by virtue of its unilateral acts during the reorganization of a business. CDP s argument does not rely on the conduct of the debtor-inpossession or the Trustee for that matter during the reorganization of the business, but rather relies solely on motions filed with this Court by the Trustee and this Court s action on said motions. Quite simply, by citing and arguing FBI Dist. Corp, the Trustee totally misses the thrust of CDP s implied assumption argument. In FBI Dist. Corp, the court considered whether the company s president and chief merchandising officer s pre-petition employment contract with the company (debtor-in- -2-

3 Document Page 3 of 11 possession) had been assumed by virtue of the president s continued rendering of services postpetition and the company s (debtor-in-possession s) continued payment therefor pursuant to the terms of a pre-petition employment agreement. Neither the president, nor the debtor-in-possession sought to have the post-petition de facto assumption of the employment agreement approved by the court and subsequently the debtor-in-possession sought court approval of the rejection of the contract, which approval was granted. The president filed a request for payment of Chapter 11 administrative expenses wherein she sought to be paid the severance benefits provided for under the employment agreement. In denying the request for payment of severance benefits due under the employment agreement, the court noted that the president s argument amounted to a claim that the debtor in possession assumed the president s Employment Agreement by implication. Not surprisingly, the court ruled that an executory contract cannot be assumed by the unilateral acts of the debtor in possession during the reorganization of the business. CDP s assumption argument does not rely on the unilateral acts of either the debtor-in-possession or the Trustee during the Chapter 11 phase of the Upper Crust bankruptcy; rather it is based on the implied assumption of the Sublease that both logically, and as argued further below, necessarily had to have occurred, as a result of the Trustee s filing of the Sale Motion and this Court s granting of the Bid Procedures Order. The only implication that this Court needs to accept in order to rule favorably on CDP s assumption argument is that its approval of the Trustee s request for authority to sell the Sublease constituted an approval of the Trustee s assumption of the Sublease. 3. While moving somewhat closer to the thrust of CDP s argument, the Trustee s reliance on In re Snowcrest again misses the mark. In re Snowcrest addressed, in part, whether a real estate broker s pre-petition commission agreements with the debtor were impliedly assumed in -3-

4 Document Page 4 of 11 conjunction with the Court s post-petition approval of the sale contracts for six properties for which the broker had procured buyers pre-petition. The court rejected the broker s argument that the Court s approval of the sales contracts for the six properties under 11 U.S.C. 363 somehow constituted assumption of the broker s commission agreements. The court noted that [I]t is well established that a purchase and sale contract and an agreement to pay a commission constitute two separate agreements, even when they are contained in a single document. In essence, the court in Snowcrest ruled that the commission agreements could not have been impliedly assumed by virtue of the court s consideration of the debtor s sale motion as the sale motion related to the properties sales contracts and not the related commission agreements. The fatal flaw in the debtor s and broker s implied assumption argument in Snowcrest was that there was no notice or hearing on a motion to assume that dealt directly with the commission agreements, nor any court order thereon. CDP s assumption argument contains no such flaw; it deals with a pre-petition contract, i.e. the Sublease, that was specifically identified in and was the subject of the Trustee s duly noticed Sale Motion upon which a hearing was held and an order approving the sale procedures related to the public auction sale of the Sublease was entered by this Court (i.e. this Court s Bid Procedures Order). Again, the only implication that this Court needs to find in order to rule favorably on CDP s motion is that its approval of the Trustee s request for authority to sell the Sublease constituted approval of the Trustee s assumption of the Sublease. 4. At first blush, it would appear that the Trustee had successfully undone CDP s assumption argument given the fact that In re Dehon, Inc. actually addresses the issue before this Court, that is, can a sale order operate as an order approving the assumption and assignment of a debtor s contract. While this Court ruled in Dehon that the sale order in that case did not operate as -4-

5 Document Page 5 of 11 an order approving the assumption and assignment of the debtor s contract, of critical importance is the fact that this Court clearly limited its decision to the circumstances presented in Dehon, thereby leaving open the possibility that under the right circumstances a sale order could be interpreted to have approved the assumption of a pre-petition contract. As will be more fully discussed below, those circumstances exist in the case of the Bid Procedures Order entered by this Court relative to CDP s Sublease. 5. The defendants in Dehon attempted to argue by analogy the Ninth Circuit Court of Appeals decision in Chbat v. Tleel (In re Tleel), 876 F.2d 769 (9 th Cir. 1989) which held that a bankruptcy court s order permitting the sale of real property acquired under a land-sale contract and the formal actions taken in bankruptcy court by the debtor-in-possession acting as trustee, and later by the trustee, to obtain permission to sell the property free and clear of all liens and to obtain an order authorizing foreclosure constituted an adequate assumption of the land sale contract with sufficient notice. This Court found however that the facts of Tleel were readily distinguishable from the facts in Dehon, and therefore did not consider whether Tleel could be made consistent with First Circuit case law (citing, notably, FBI Dist. Corp. and Thinking Machs. v. Mellon Fin. Servs. Corp. (In re Thinking Machs.), 67 F.3d 1021, (1 st Cir. 1995)). This Court pointed out that unlike in Tleel, the sale motion in Dehon did not identify any contracts to be assumed, and most definitely did not identify the defendant s contracts. This Court concluded in Dehon that [U]nder these circumstances, the Sale Order itself could not be interpreted to have approved the assumption of the Defendants contracts. Here, however, as was the case in Tleel, the Sale Motion filed by the Trustee specifically identified the contracts to be sold including CDP s Sublease. -5-

6 Document Page 6 of Given that the circumstances underlying CDP s assumption argument are not distinguishable from the circumstances underlying the assumption by implication holding in Tleel, the issue remains, as this Court pointed out in Dehon, as to whether the result in Tleel can be made consistent with First Circuit case law. Clearly, this is possible if the only relevant case law consists of FBI Dist. Corp., In re Snowcrest and.in re Thinking Machs. For the reasons discussed above, the holdings of FBI Dist. Corp. and In re Snowcrest would not be inconsistent with a determination that a sale order could be interpreted to have approved the assumption of a pre-petition contract. FBI Dist. Corp. simply did not deal with the interpretation of a sale order and Snowcrest, like Tleel, failed to specifically identify the contract that would be assumed by a sale order. The holding in Thinking Machs. only deals with the issue of whether the rejection of a pre-petition contract is effective at the time of a court s approval of a motion to reject or whether the rejection can be considered retroactive to the date of the filing of the motion to reject. Clearly, a holding that a sale order can be interpreted to have approved the assumption of a pre-petition contract would not be inconsistent with the holding in Thinking Machs.. 7. While the Dehon decision provides support to CDP s assumption argument by way of a Tleel analogy argument, of far greater import is this Court s discussion of Dehon defendants argument that the sale order must have authorized the assumption of the defendant s contacts because, absent assumption, the debtor had no interest in the property to sell. See In re Dehon, Inc., 352 B.R. at 563. While this Court ruled that there was no assumption in Dehon due to the fact that the contracts in question had not been specifically identified in the sale motion and were subject to the buyer s option to assume in the approved sale agreement, this Court clearly recognized as a general matter of law that in order for a debtor or trustee to be able to assign enforceable rights to -6-

7 Document Page 7 of 11 a third party pursuant to 11 U.S.C. 363, the debtor or trustee must first secure enforceable rights against the non-debtor contracting party. This Court explained that without out an assumption of the contract the buyer may be purchasing an illusion: the executory contract will disappear on conclusion of the bankruptcy. Id., quoting In re Access Beyond Technologies, Inc., 237 B.R. 32, (Bankr.D.Del.1999). This the horse goes before the cart argument is exactly the argument that CDP is making in the instant Motion, that is, in order for the Trustee to be able to sell the Upper Crust leases, including CDP s Sublease, pursuant to Section 363, the same must first have been assets of the bankruptcy estate, otherwise the buyers at the Public Auction could possibly be purchasing an illusion. See CDP Administrative Claims Motion, Paragraph Unlike ordinary assets, an executory contract does not automatically become an asset of the bankruptcy estate. Unless and until rights under an executory contract are timely and affirmatively assumed by the trustee, they do not become part of the debtor s estate. In re Tleel, 876 F.2d at 771. Both the Trustee s Sale Motion and this Court s Bid Procedures Order refer to the Upper Crust leases as assets of the debtor s estate. Certainly the qualified bidders would have been surprised to learn that the Trustee had not secured enforceable rights against the non-debtor contracting parties when it conducted the Public Auction and they made their financially significant bids. 9. The Trustee s Sale Motion and this Court s Bid Procedures Order clearly contemplated a two step process for the assumption and assignment of the Upper Crust leases and the same can easily be characterized as implying the assumption of the Upper Crust leases by the Trustee prior to the Trustee conducting the Public Auction. The first and most important step in the Court approved mechanics dealt with providing notice to the non-debtor counter parties to the Upper -7-

8 Document Page 8 of 11 Crust leases of the proposed assumption and assignment of the leases and set a deadline of December 17, 2012 for said non-debtor counter parties to file objections to the assumption including objections to proposed cure amounts. Objections to the assignment of the assumed leases of course had to wait until the Public Auction had been concluded and successful bids were made for the Upper Crust leases. Importantly, the only objections that could be filed after the Objection Deadline approved by this Court were objections based on the adequacy of the assurances of future performance or the proposed use of the Location by the successful bidders and not objections relating to the proposed assumption by the Trustee. A non-debtor counter party was thereafter otherwise barred by this Court s Bid Procedures Order from objecting to the Trustee s assumption and assignment of its lease. If after December 17, 2012, a non-debtor counter party to one of the Upper Crust leases could not object to the Trustee s assignment to a successful bidder other than on account of objections based on the adequacy of a successful bidders assurances of future performance or proposed use, then how can it be said at that particular moment (i.e. the expiration of the Objection Deadline) that the Trustee had not already assumed the leases to be sold at the Public Auctions. Certainly the second step of the Court approved mechanics confirms this fact, as this step, scheduled to occur post Public Auction, anticipated nothing more than dealing with objections as to the adequacy of the assurances of future performance or the use of a location by a successful bidder and, the Court s formal approval of the assignment of those Upper Crust leases for which a successful bid had been received. The fact that there were no bids received for CDP s Sublease does not in any way obviate the fact that the CDP Sublease had been assumed by Trustee as at the expiration of the December 17, 2012 Objection Deadline such that the Trustee could be in a position to sell same at the Public Auction. -8-

9 Document Page 9 of Based on the additional arguments made above and on the basis of the arguments previously made in CDP s Administrative Expense Motion, CDP hereby reasserts its request for payment of the rent due under the Sublease for the months of December, January, February and March, said rent totaling in the aggregate the sum of $23, B. Reply To Chapter 7 Trustee s Request for the Issuance of an Order Retroactively Approving Rejection of Subject Lease As of December 31, 2012 Or, Alternatively, Deeming the Lease Rejected By Operation of Law Pursuant to 11 U.S.C. 365(d)(4) 11. The Trustee seeks to expand the equitable powers of a bankruptcy court so as to allow for the retroactive approval of the rejection of a non-residential lease, i.e. CDP s Sublease, pursuant to Bankruptcy Code Section 365 where the Trustee has never filed a motion specifically seeking rejection of such Sublease nor filed any other document with the Court even suggesting that the Trustee had sought to reject the Sublease. The Trustee clearly misreads the import of the First Circuit Court of Appeals decision in Thinking Machines. The First Circuit s decision unambiguously states... we rule that a bankruptcy court, when principles of equity do dictate, may approve a rejection of a nonresidential lease pursuant to section 365(a) retroactive to the motion filing date. See In re Thinking Machs. Corp., 67 F.3d at 1029 (emphasis added). It does not stand for the proposition that a bankruptcy court s equitable powers can be exercised to approve a retroactive rejection of a non-residential lease prior to the filing date of such a motion or that such powers can be exercised without such a motion ever having been filed. The Trustee s attempt to expand a bankruptcy court s equitable powers in reliance on footnote 9 of the Thinking Machines decision goes well beyond the unambiguous ruling stated above. Even the case to which footnote 9 relates, In re Joseph Speiss Co., 145 B.R. 597 (Bankr.N.D.Ill. 1992), refers to the exercise of a -9-

10 Document Page 10 of 11 bankruptcy court s equitable powers to retroactively approve the rejection of a non-residential lease to the date the trustee notices the motion requesting same. Id. Here, the Trustee has not filed a motion seeking approval of the rejection of the Sublease, nor has the Trustee filed any other document with the Court suggesting that it was seeking to reject the Sublease. The First Circuit s decision in Thinking Machines makes it perfectly clear that in order for a trustee to reject a nonresidential lease, the Trustee must first file a formal motion to that effect; the effective date of the approved rejection can, in the exercise of the equitable powers of the bankruptcy court ruling on such a motion, be made retroactive to the filing date of said motion. 12. The Trustee s equitable arguments therefore have no bearing on the issue of rejection of the Sublease as the Trustee never filed a formal motion seeking rejection. As previously pointed out in CDP s motion, [T]he trustee may sing all he wants, but it is the court that must call the tune. 13. Should this Court feel that it is in within the scope of its equitable powers to retroactively approve the rejection of the Sublease without the Trustee ever having filed a motion to approve such rejection, CDP would point out in response to the equitable arguments made by the Trustee that the issue of CDP s ability to relet the 55 Food Mart premises was raised by CDP s counsel following the Public Auctions. CDP s counsel was concerned that a prospective subtenant could call into question CDP s legal right to sublease the premises given that there was no Court order approving the rejection of the Sublease. The Trustee advised CDP s counsel that he didn t think it was necessary to file a formal motion seeking approval of the rejection of the Sublease and that CDP should be able to rely on the Trustee s informal notice of rejection. The Trustee stated that he would prefer to avoid the costs associated with filing a formal motion seeking approval of rejection of the sublease. -10-

11 Document Page 11 of CDP would also point out that notwithstanding the Trustee s delivery of the keys to the premises on December 31, 2012, CDP was unable to take over full possession of the Sublease premises due to estate assets being stored in the premises. While the Trustee s motion to abandon said assets was allowed on January 9, 2013, the secured lender that foreclosed on said assets did not finally remove same until sometime around the second or third week of February Thus CDP was not in a position to relet the Sublease premises any earlier than March 1, CDP objects to the Trustee s alternative request for an Order pursuant to 11 U.S.C. 365(d)(4) deeming the Sublease rejected as a matter of law on February 1, 2013 (120-days after the Petition Date) on the grounds that the Sublease was assumed as of December 17, Respectfully submitted this 8 th day of July, Cara Donna Provision Co., Inc. By its attorneys: /s/ Michael J. Powers, Esquire Michael J. Powers, BBO # Powers Law Offices, P.C. 470 Washington Street, Suite 29 Norwood, MA (781) powerslaw@norwoodlight.com -11-