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In re A&F Enterprises, Inc. II

United States District Court, Seventh Circuit

October 8, 2013

In re A&F ENTERPRISES, INC. II, et al., Debtors.

MEMORANDUM OPINION AND ORDER

VIRGINIA M. KENDALL, District Judge.

Appellant Debtors A&F Enterprises, Inc. II, et al., [1] ("Debtors") have moved this Court for an emergency stay of enforcement of an order of the Bankruptcy Court pending appeal, pursuant to Federal Rule of Bankruptcy Procedure 8005. For the reasons stated, Debtors' Motion to Stay is denied.

PROCEDURAL HISTORY

The Debtors are companies that operate franchised International House of Pancakes ("IHOP") restaurants. On February 28, 2013, (the "Petition Date") Debtors filed voluntary petitions for bankruptcy under Chapter 11 of the United States Bankruptcy Code. On August 5, 2013, the Bankruptcy Court entered an order determining that each of the Debtors' subleases for commercial real property on which the Debtors' franchise restaurants are located had been deemed rejected under 11 U.S.C. § 365(d)(4) effective as of June 28, 2013, 120 days following the Petition Date. [See Bankr. Dkt. #212]. On September 18, 2013, the Bankruptcy Court denied Debtors' motion to reconsider the August 5, 2013 order. On September 23, 2013, based on its ruling deeming the subleases to be rejected, the Bankruptcy Court entered an order determining that the Debtors' franchise agreements and equipment leases for the operation of the IHOP restaurants were deemed expired. On September 24, 2013, the Bankruptcy Court denied Debtors' emergency motion to stay enforcement of the orders deeming the subleases rejected and the franchise agreements expired. The Bankruptcy Court expressed the bases for its denial of a stay in a lengthy oral ruling.

STANDARD OF REVIEW

On a motion to stay an order of the Bankruptcy Court pending appeal pursuant to Bankruptcy Rule 8005, the movant bears a heavy burden to prevail. "In considering whether to grant a stay pending appeal under Bankruptcy Rule 8005, courts consider the following four factors: 1) whether the appellant is likely to succeed on the merits of the appeal; 2) whether the appellant will suffer irreparable injury absent a stay; 3) whether a stay would substantially harm other parties in the litigation; and 4) whether a stay is in the public interest." Matter of Forty-Eight Insulations, Inc., 115 F.3d 1294, 1300 (7th Cir. 1997). The factors mirror those for application for a preliminary injunction, in that the movant must make a preliminary showing on the first two factors before the court moves to balance the relative harms considering all four factors in what is known as the "sliding scale" approach. Id. at 1301. However, unlike a standard preliminary injunction, in the context of a request for a stay pending appeal the applicants must "make a stronger threshold showing of likelihood of success on the merits" to meet their initial burden. Id. (citing Michigan Coalition of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991)). The Debtors here must make "a substantial showing of likelihood of success, not merely the possibility of success, because they must convince the reviewing court that the lower court, after having the benefit of evaluating the relevant evidence, has committed reversible error." Id.

DISCUSSION

A. Likelihood of Success on the Merits

In order to succeed on the merits Debtors must convince this Court that Judge Cassling committed reversible error in determining that 11 U.S.C. §365(d)(4) should apply to the non-residential property subleases, rather than the usual 11 U.S.C. § 365(d)(2). In denying Debtors' motion for stay in the Bankruptcy Court, Judge Cassling determined that there was not a likelihood of success on the merits. And as he stated in his ruling denying the stay, "I honestly don't think it's a close question." Judge Cassling did not commit error in making that determination.

Section 365(d)(4) has a 120-day bright line rule for assuming or rejecting non-residential leases, with the option for one 90-day extension. See 11 U.S.C. 365(d)(4). It is undisputed that Debtors did not request the extension. It is also undisputed that the subleases are non-residential commercial leases, the type of contract specifically addressed in § 365(d)(4), while the franchise agreements are "executory contracts" governed by § 365(d)(2). Debtors argue that because the subleases are intimately connected with the franchise agreements and the equipment leases, courts should therefore interpret the contracts together as one contract and afford the Debtors the longer timeframe for assumption or rejection additional time under § 365(d)(2).

As an initial matter, this Court remains mindful that the Seventh Circuit has recently made clear that bankruptcy courts should follow the plain language of the Bankruptcy Code when that language is unambiguous. See Sunbeam Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372 (7th Cir. 2012). Addressing the interpretation of different subsections of § 365 than are at issue here, the Sunbeam court cautioned bankruptcy courts not to put equitable considerations above principles of statutory interpretation:

What the Bankruptcy Code provides, a judge cannot override by declaring that enforcement would be inequitable.' There are hundreds of bankruptcy judges, who have many different ideas about what is equitable in any given situation... Rights depend, however, on what the Code provides rather than on notions of equity. Recently the Supreme Court emphasized that arguments based on views about the purposes behind the Code, and wise public policy, cannot be used to supersede the Code's provisions. It remarked: The Bankruptcy code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction.' RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ U.S. ___, 132 S.Ct. 2065, 2073 (2012).

Sunbeam, 686 F.3d at 375-76. Debtors argue, however, that construing the contracts at issue here as a unified contract to be reviewed under § 365(d)(2) is appropriate, notwithstanding that such interpretation goes against the plain statutory language of § 365(d)(4), because, according to Debtors, every case that has reviewed this issue in the bankruptcy courts has viewed the intersection of franchise agreements and non-residential leases to be a unified issue and has applied § 365(d)(2).

There are several reasons that Debtors' position cannot stand. First, none of those cases to which Debtors cite are cases from this Circuit. This Court can consider those cases as persuasive authority, but in so doing cannot ignore this Circuit's cautionary language in Sunbeam regarding deviations from the statutory provisions of the Bankruptcy Code. Second, only one of the cases cited by Debtors, In re FPSDA I, LLC, 450 B.R. 392 (Bankr. EDNY 2011), was decided after the 2005 amendments to the Bankruptcy Code. The 2005 amendments changed § 365(d)(4) from a fixed period that could be extended indefinitely by the court for cause to the current structure with a strict fixed period that cannot be extended beyond 210 days without the consent of the lessor. See Pub. L. 109-8 § 404(a) (rewriting subparagraph (d)(4) of § 365). The ...


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