Pursuant to a provision of the Bankruptcy Code familiar to readers of Weil’s Bankruptcy Blog (see our prior post, To Assume or Not to Assume, that Is the Question: What Act Constitutes “Assumption” Under Section 365(d)(4) of the Bankruptcy Code?), the United States District Court for the District of Delaware recently affirmed a bankruptcy court’s decision deeming an unexpired lease of nonresidential real property automatically terminated when it was not timely assumed and directing the immediate surrender of possession of the leased premises. In In re Scarborough-St. James Corporation, the district court found that there was no need to determine whether a debtor’s timely and unequivocal statement to a landlord of its intent to assume an unexpired lease of nonresidential real property would satisfy section 365(d)(4) of the Bankruptcy Code because the debtor failed to satisfy such standard.
Relevant Statutory Provisions
Pursuant to section 365(a) of the Bankruptcy Code, a debtor in possession, “subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a). This provision is modified by section 365(d)(4) of the Bankruptcy Code, which provides that:
[A]n unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the [debtor] shall immediately surrender that nonresidential property to the lessor, if the [debtor] does not assume or reject the unexpired lease by the earlier of— (i) the date that is 120 days after the date of the order for relief; or (ii) the date of the entry of an order confirming a plan.
11 U.S.C. § 365(d)(4)(A). Section 365(d)(4) further provides that a bankruptcy court “may extend the period determined under subparagraph (A), prior to the expiration of the 120-day period, for 90 days on the motion of the [debtor] or lessor for cause.” 11 U.S.C. § 365(d)(4)(B)(i) (emphasis added)
On March 19, 2015, Scarborough-St. James Corporation (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. On the same day, the Debtor filed its schedules of assets and liabilities, which listed an unexpired lease of nonresidential real property relating to a shopping center located in Richmond, Michigan.
On April 7, 2015, the landlord under the lease (the “Landlord”) filed a motion seeking relief from the automatic stay to proceed with a pending Michigan state court action that sought a judgment of immediate possession of the leased premises and an eviction order. The bankruptcy court granted relief from the automatic stay, which permitted the Landlord to proceed with the state court action.
On July 29, 2015, the Landlord filed a motion for an order deeming the lease terminated pursuant to section 365(d)(4) of the Bankruptcy Code and directing the Debtor to immediately surrender possession of the leased premises to the Landlord (the “Surrender Motion”). Pursuant to the Surrender Motion, the Landlord asserted that, based on the Debtor’s failure to assume or reject the lease or to move for an extension of the 120-day deadline prescribed by section 365(d)(4) of the Bankruptcy Code, the lease was deemed rejected as a matter of law on July 17, 2015.
In response, the Debtor filed an opposition to the Surrender Motion arguing, among other things, that the bankruptcy court should grant the Debtor another opportunity to file a motion to assume the lease because in “similar factual situations,” courts have held that a motion to assume a lease can be filed after the 120-day period has expired “so long as the Debtor makes it clear that it intends to assume the lease during that prescribed period.” In support of this argument, the Debtor cited In re The Casual Male Corp., which found that section 365(d)(4) of the Bankruptcy Code requires “only timely and unequivocal statements to the lessor of intention to assume.” In re The Casual Male Corp., 120 B.R. 256, 260 (Bankr. D. Mass. 1990). Accordingly, the Debtor argued that it made its intent to assume the lease clear from the outset of its chapter 11 case, pending resolution of the issues in the Michigan state court action, and that such intent satisfied the statute.
Analysis of the Bankruptcy Court and District Court
On August 27, 2015, the bankruptcy court granted the Surrender Motion and rejected the Debtor’s argument that it had satisfied section 365(d)(4) of the Bankruptcy Code and the standard set forth in Casual Male. Although the bankruptcy court declined to decide whether it was in agreement with the holding in Casual Male, it found that the Debtor nevertheless failed to meet the standard set forth in that case by providing evidence of a timely and unequivocal statement of its intent to assume the lease. Specifically, the bankruptcy court found that there was no evidence that the Debtor itself, as opposed to its counsel, ever made statements to the Landlord that it wanted to unequivocally assume the lease. Additionally, the bankruptcy court noted that the Debtor’s intent to assume the lease was always contingent on the outcome of the Michigan state court litigation, the timing of which was uncertain.
Thereafter, the Debtor appealed the bankruptcy court’s approval of the Surrender Motion to the district court.
On appeal, it was undisputed that no motion to assume the lease was filed before the expiration of the 120-day period, no motion for an extension of the deadline was made, and no plan had been confirmed in the Debtor’s chapter 11 case. Therefore, the district court had to determine whether the Debtor satisfied the requirements of section 365(d)(4) of the Bankruptcy Code despite its failure to file a motion to prevent automatic rejection of the lease.
Based on the findings of the bankruptcy court, the district court found that even if the bankruptcy court had agreed with the holding in Casual Male, the Debtor failed to satisfy the timely and unequivocal statement standard simply because there was no evidence in the record of the Debtor’s timely and unequivocal statement to the Landlord of the Debtor’s intent to assume the lease. Accordingly, the district court stated that no decision needed to be made as to whether Casual Male correctly states the law and held that the bankruptcy court correctly concluded that the Debtor had not satisfied the requirements of section 365(d)(4) of the Bankruptcy Code. Thus, the lease was deemed rejected and the Debtor was directed to immediately surrender possession of the leased premises.
Although the district court declined to determine whether the timely and unequivocal statement standard set forth in Casual Male is sufficient under section 365(d)(4) of the Bankruptcy Code, the district court provided some guidance on what would be required to satisfy this standard. First, statements to a landlord should be made by the debtor and not by the debtor’s counsel. Second, a debtor’s intention to assume an unexpired lease should not be contingent. Accordingly, when seeking to assume an unexpired lease of nonresidential real property to prevent deemed rejection, a debtor should proceed by motion if possible. Otherwise, debtors are cautioned to act timely in providing clear notice directly to the landlord of their unconditional intention to assume an unexpired lease.