Name of Assigned Judge Philip G. Reinhard Sitting Judge if Other or Magistrate Judge than Assigned Judge
For the reasons stated below, this matter is remanded to the bankruptcy court for a determination of which defects appellee is seeking to enforce existed pre-assumption and to enter an order enforcing the Sale Order by barring appellee from seeking to compel appellant to repair those defects. After the bankruptcy court makes this determination, appellee may proceed with its specific performance action to compel appellant to repair post-assumption defects. Remanded with instructions.
O[ For further details see text below.] Notices mailed by Judicial staff.
Appellant, Rockford Acquisitions, LLC n/k/a Rockford Products, LLC appeals from the bankruptcy court's order of October 24, 2011 denying enforcement of a November 15, 2007, order ("Sale Order") entered by the bankruptcy court (Cox, J.), approving an asset purchase agreement ("APA") and authorizing the sale of certain assets ("363 Sale") by a bankruptcy debtor, Rockford Products Corporation ("Debtor"), free and clear of all interests to appellant pursuant to 11 U.S.C. § 363 (b) & (f). The Sale Order also authorized the Debtor to assume (pursuant to 11 U.S.C. § 365), as tenant, an unexpired lease ("Lease") for certain real estate owned by appellee, Harrison Kishwaukee, LLC. (Appellee had purchased this real estate from Debtor and then leased it back to Debtor in December 2006.) After Debtor assumed the Lease pursuant to section 365, the Debtor's interest in the Lease was assigned by Debtor to appellant in conjunction with the 363 Sale of Debtor's assets to appellant pursuant to the APA. Appellant assumed the obligations of the Debtor under the Lease to the extent those obligations arose after the execution of the November 16, 2007, "Assumption and Assignment of Lease" document between Debtor and appellant.
The Lease contains a provision requiring the tenant to maintain the roof in good repair. On June 10, 2010, roughly two and one-half years after the assumption and assignment of the Lease, appellee made demand on appellant to repair the roof. Appellant refused. On December 3, 2010, appellee brought an action in state court seeking specific performance of appellant's obligation under the Lease to repair or replace the roof. Appellant asserted that the Sale Order barred appellee's action because the need for roof repairs predated the Sale Order and appellant's assumption of the lease and, therefore, the obligation to repair the pre-assumption roof damage was not assumed by appellant. The state court deferred ruling in favor of a decision by the bankruptcy court on the matter.
On September 6, 2011, appellant filed a motion with the bankruptcy court to enforce the Sale Order. In support of its motion, appellant submitted the affidavit ("Mowris Affidavit") of its president, Richard Mowris. The Mowris Affidavit states Mowris was employed by Debtor at the time it sold and leased back the subject property in December 2006. At that time, the roof leaked at numerous locations throughout the leased premises. No material roof repairs were made between 2006 and the 363 Sale to appellant in November 2007. The roof continued to leak at numerous locations at the time of the 363 Sale. Since late 2007, appellant has incurred over $615,000 in costs for the repair and improvement of the roof.
Appellee asserts it did not know of any needed roof repairs at the time of the December 2006 sale and lease back or at the time of the assumption and assignment of the Lease as part of the 363 Sale in November 2007. Appellee says it first learned of roof leaks in 2008.
At an October 24, 2011 hearing, the bankruptcy court (Barbosa, J.) found that appellee's efforts to get appellant to repair the roof did not violate the Sale Order. The bankruptcy court stated the "lease which [appellant] chose to assume has an ongoing obligation to maintain and repair the building and [appellee] has brought an action in State Court for specific performance to enforce that obligation. Had [appellee] been seeking damages for leakage before the assumption or that was caused by the condition of the building at the time of the assumption, that might have been barred by the sale order. However, all [appellee] seems to be doing is asserting a post-assumption breach of contract and seeks to enforce the ongoing obligations that [appellant] chose to assume. There may be a question of contract interpretation as to what the obligation to maintain and repair means and whether the steps [appellant] has already taken to repair the roof satisfy that obligation, but that is an issue for the State Court to decide. You can always argue that the provision only requires it to maintain the building in the state it was in at the time the lease was assumed. However, since [appellee] has made clear that it is only attempting to enforce post-assumption default and post-assumption obligations, it is the State Court and not this Court that has proper jurisdiction to decide that issue. This Court has jurisdiction to enforce the sale order, but from what has been presented here I don't see a violation of that order." Appellant filed timely notice of appeal from the bankruptcy court's order.
In December 2006, Rockford Products Corporation entered a sale and lease back transaction with appellee for certain real estate in Rockford, Illinois. Under the terms of the Lease, Rockford Products Corporation, as tenant, agreed to "be responsible for the repair and replacement of all broken windows, roof and roof drainage systems, and entrance doors." Lease ¶ 11.3. Paragraph 13.1 of the Lease, titled "Tenant Default," provides, for purposes relevant here, that if "Tenant fails to perform any of the other [other than the obligation to pay rent] covenants or conditions of this Lease which Tenant is required to observe and such failure shall continue for thirty (30) calendar days after written notice to Tenant . . . then Landlord may treat the occurrence . . . as a breach of this Lease by Tenant." On July 25, 2007, Rockford Products Corporation, as Debtor, filed for protection under Chapter 11 of the bankruptcy code.
On November 15, 2007, the bankruptcy court entered the Sale Order. The Sale Order authorized the Debtor to assume the Lease under 11 U.S.C. § 365 and assign its interest as tenant under the lease to appellant. The Sale Order provided that, as a non-debtor party to the assumed lease, appellee was barred from asserting any default existing as of the closing date against the Debtor or appellant. It also provided that appellee, by failing to object to the cure amount of $0.00 listed in Schedule 2 to the Sale Order was agreeing that $0.00 was the amount required to cure any defaults under the Lease at the time of assumption by Debtor and its subsequent assignment to appellant.
The APA between the Debtor and appellant, which the Sale Order approved, contained the representation by Debtor, as seller, that "neither Seller nor the lessor under the Lease is in breach or default under the Lease, and no event has occurred or circumstance exists which, with the delivery of notice, passage of time or both, would constitute such a breach or default." APA, ¶ 4.7(a). Appellee, consistent with its non-objection to the $0.00 cure amount, raised no objection to the bankruptcy court's approval of the APA with its representation that there was no breach or default under the Lease at the time the APA was approved by the Sale Order.
Appellant and appellee entered a first amendment to lease ("Amendment") effective with the assignment of the Debtor's interest in the Lease to appellant effective November 16, 2007. The Amendment provided that the "Lease, as herein amended, is hereby ratified and confirmed and shall remain in full force and effect." The ...