Section 365 Executory Contracts and Unexpired Leases

Monge v. Rojas, et al. (September 25, 2014)
Issues: Individual Debtors (as Plaintiffs), brought adversary proceeding against multiple Defendants. All secondary Defendants settled prior to and during trial; only primary Defendants remained. Most of Plaintiffs’ claims against remaining Defendants and Defendants’ counterclaims against Plaintiffs were based exclusively on state law causes of action, and some claims and counterclaims were based on the Bankruptcy Code. Prior to trial, all remaining parties consented to entry of a final judgment by the Bankruptcy Court. However, given the recent holdings of the Fifth Circuit regarding the constitutional authority of the Bankruptcy Court to enter a final judgment on state law claims even with consent of the parties, the Bankruptcy Court submitted 178 pages of Proposed Findings of Fact and Conclusions of Law to the District Court for review under 28 U.S.C. §157(c)(2) and Bankruptcy Rule 9033. Following review, the District Court largely adopted the Bankruptcy Court’s proposed findings and conclusions, and entered final judgment for Plaintiffs.
The disputes centered around four different residential properties and commercial property developments located in the States of New Mexico and Texas. In general, Plaintiffs sought turnover of and declaratory relief regarding certain real property in the possession of Defendants, and actual and exemplary damages based on breach of contract, fraud, breach of fiduciary duty, negligence, gross negligence, the Texas Deceptive Trade Practices Act, equitable theories under state law, and violation of the automatic stay. In general, the remaining Defendants asserted counterclaims and affirmative defenses based on the Texas Property Code, breach of contract, equitable theories under state law, statute of limitations, and section 365(i) of the Bankruptcy Code. The Bankruptcy Court conducted a six-day trial on the merits, which featured over 15 witnesses and thousands of documents. Holdings: The Bankruptcy Court proposed (and the District Court adopted) a judgment in favor of Plaintiffs and against the remaining Defendants for turnover of possession of one of the real properties, and actual damages, attorneys fees, and pre-judgment interest totaling about $1 million. In general, the Bankruptcy Court’s proposed findings and conclusions (1) awarded damages to Plaintiffs based on breach of contract and violation of the automatic stay; (2) determined that Plaintiffs were entitled to possession and turnover of certain real property held by Defendants; (3) found that the Texas Property Code did not apply to real property located in the State of New Mexico; (4) found that section 365(i) of the Bankruptcy Code did not apply to a lease/option which expired by its terms prior to Plaintiffs’ bankruptcy filing; (5) found that several of Plaintiffs’ causes of action relating to some of the properties were barred by the statute of limitations; (6) determined that the fraud-based claims of Plaintiffs should be denied; and (7) found that some of the damages sought by both Plaintiffs and Defendants were speculative.
In re Patriot Place/In re Three Legged Monkey (January 11, 2013)
Issues: Unusual factual setting in which one Chapter 11 Debtor (owner and lessor of shopping center) and a separate Chapter 11 debtor (owner of sports restaurant/bar and lessee in shopping center) litigated numerous issues, including: (1) Whether Debtor-lessee could assume a shopping center lease under §365 with Debtor-lessor in Debtor-lessee’s bankruptcy case; (2) Whether Debtor-lessee could confirm a competing Plan of Reorganization in Debtor-lessor’s bankruptcy case; (3) Whether Debtor-lessor could confirm its Plan of Reorganization in Debtor-lessor’s bankruptcy case that proposed the sale of a shopping center to the City of El Paso under §363(f) free and clear of the leasehold interest of Debtor-lessee. Holdings: (1) Debtor-lessee’s Motion to assume shopping center lease with Debtor-lessor was granted in Debtor-lessee’s bankruptcy case because Debtor-lessee complied with the requirements of §365(b), including: (a) cure of monetary defaults under the shopping center lease; (b) performance of incurable nonmonetary obligations under real property lease at the time of assumption; and (c) providing adequate assurance of future performance; (2) Confirmation of Debtor-lessee’s competing Plan of Reorganization in Debtor-lessor’s bankruptcy case was denied because such competing Plan: (a) was not currently feasible under §1129(a)(11); (b) litigation trust proposed in competing Plan was wasteful, not proposed in good faith, and did not provide adequate means for its implementation under §1129(a)(3), (5); and (c) deemed assumption of Debtor-lessor’s ground lease with the City of El Paso under the competing Plan was procedurally and substantively improper under the circumstances of the case; and (3) Confirmation of Debtor-lessor’s Plan of Reorganization in Debtor-lessor’s bankruptcy case was denied because such Plan: (a) did not satisfy any of the statutory conditions of §363(f) to permit the sale of the shopping center under the Plan free and clear of the leasehold interest of Debtor-lessee; and (b) contained undefined, non-consensual, non-debtor releases and exculpations prohibited by Fifth Circuit precedent.