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State Law Enforceability of Post-Confirmation Settlement Agreement Not Dispositive; Bankruptcy Court Considers Bankruptcy Rule 9019 Standard

In re Filene’s Basement, LLC, No. 11-13511 (KJC), 2014 WL 1713416 (Bankr. D. Del. Apr. 29, 2014)

On April 29, 2014, the Honorable Kevin J. Carey issued another Memorandum in connection with the on-going disputes in the bankruptcy proceedings of reorganized Filene’s Basement, LLC and its affiliated reorganized debtors (collectively, the “Reorganized Debtors”) regarding a lease of non-residential real property located in Secaucus, New Jersey (the “Lease”). Unlike Judge Carey’s prior decisions that determined a claim to percentage rent under the Lease (an analysis of which may be found here), the issues presented to His Honor in this most recent dispute included the question of whether a settlement agreement (the “Settlement”) presented by the Reorganized Debtors for court approval under Bankruptcy Rule 9019 but later withdrawn in the face of a higher and better offer could be enforced by the jilted counterparty (“Hartz”).

The Settlement provided for the assumption and assignment to Hartz of the Reorganized Debtors’ interests in the Lease (the “Leasehold Interests”) as well as the resolution of a long-standing cure dispute between the parties.  Following the filing of the settlement motion, however, the Reorganized Debtors negotiated what they determined to be a higher and better offer for the Leasehold Interests from ASG Equities Secaucus LLC (“ASG”).  The Reorganized Debtors withdrew the Hartz settlement motion and, in its place, filed a motion to assume and assign the Leasehold Interests to ASG.  Hartz then sought to enforce the Settlement.

The parties’ arguments centered on the enforceability of the Settlement under applicable state law.  On one hand, Hartz asserted that the parties entered into a binding agreement pursuant New Jersey state law under the particular facts presented.  Accordingly, Hartz urged the Court to prohibit the Reorganized Debtors from reneging on the Settlement.  On the other hand, the Reorganized Debtors argued that court approval was an unsatisfied condition of the Settlement, precluding the formation of an enforceable contract, and that in light of the ASG offer, they could no longer support the Settlement.  While the Court acknowledged the unsettled law in the Third Circuit regarding the enforceability of contracts pending bankruptcy court approval, it avoided having to decide such an issue.  While the confirmed plan gave the Reorganized Debtors the right to dispose of property and compromise claims without Bankruptcy Court approval, both parties conditioned the Settlement on court approval (a point not addressed by Hartz in its motion to enforce the Settlement) and the Settlement sought the resolution of pre-confirmation disputes and requested certain relief requiring a notice and hearing.  Accordingly, the Court determined that its approval under Bankruptcy Rule 9019 was required and that, because the ASG offer would provide greater benefits and was preferred by the stakeholders, it would not provide it.

In addition to the foregoing, Judge Carey’s Memorandum includes two points worthy of highlighting for their practical takeaways.  The first is Judge Carey’s conclusion that the Lease should not be deemed rejected given that a motion to assume was filed prior to the expiration of the deadline under section 365(d)(4) of the Bankruptcy Code – regardless that an order approving the assumption was not entered prior to the deadline.  The second is Judge Carey’s decision to grant a waiver of the stays under Bankruptcy Rules 6004(h) and 6006(d) but to reduce such waiver to 7-days in order to balance the interest of the Reorganized Debtors to close the ASG transaction quickly and eliminate uncertainty, with the competing interest of Hartz to appeal the Bankruptcy Court’s decision and request a stay from the District Court.