Restructuring

Contributed by David G. Litvack
In a case of first impression, Judge Gropper of the United States Bankruptcy Court for the Southern District of New York recently held that a debtor in possession that has timely assumed a real property lease can, after the expiration of the lease assumption or rejection deadline under section 365(d)(4) of the Bankruptcy Code, subsequently assign that lease under section 365(f)(3) notwithstanding an anti-assignment provision contained therein.
On January 19, 2012, Kodak and certain of its affiliates filed voluntary chapter 11 cases.  Prior to the expiration of its period under section 365(d)(4) to assume nonresidential real property leases,
Kodak filed a motion to approve assumption of certain real property leases, including a ground lease that contained an anti-assignment clause.  Notably, the order granting the assumption motion contained a reservation of rights that preserved Kodak’s ability to assign the leases in accordance with section 365 of the Bankruptcy Code.
Approximately ten months later, Kodak sought bankruptcy court approval to assign the assumed ground lease.  The lessor objected, arguing that a nonconsensual assignment of a lease must occur simultaneously with assumption and that such assignment must occur within the 210-day period under section 365(d)(4).  Kodak asserted that the assignment of a lease can take place anytime during a bankruptcy case, even after an assumption has occurred.  Surprisingly, this was an issue of first impression before the court.
Judge Gropper based his analysis upon the plain meaning of the relevant statutes.  Section 365(f) of the Bankruptcy Code, which allows a debtor to assign an executory contract or unexpired lease despite the presence of an anti-assignment clause, requires that a contract or lease be assumed in accordance with section 365 and that adequate assurance of future performance be established by the proposed assignee.  The key questions for the Kodak court were “whether the assumption and assignment must occur at the same time” and whether assignment could occur after the 210-day period has expired.
The court rejected the lessor’s argument that the language of section 365(f)(2) requires that assumption and assignment of a lease occur simultaneously.  Although the statute uses the present tense of the verb “to assume,” the court held that there is no authority that this present tense usage requires a simultaneous assumption and assignment.  The court also found it significant that the language of section 365(d)(4) only contains a deadline to assume or reject a lease, yet fails to contain a deadline for assigning a lease.  From an equitable standpoint, the court noted that “[c]onstruction of the Code to permit the assignment of a previously assumed commercial lease outside the deadline for assumption reasonably balances the goal of providing protection to landlords and the goal of maximizing the value of a debtor’s estate.”
Finally, the court rejected the lessor’s contention that Kodak assumed the lease cum onere –  including the “burden” of the anti-assignment clause.  The court observed that the lessor failed to cite any authority for this argument and that a debtor in possession retains the right to assign a contract with an anti-assignment clause so long as a debtor has not exited bankruptcy protection at the time of the assignment.
Although this decision may appear to give debtors more flexibility in dealing with nonresidential leases, its utility appears limited.  Unless a debtor is on the verge of assigning an unexpired lease and is running up against the assumption and rejection deadline, it may not wish to assume a lease unless it believes that such lease is critical to its business or it wishes to take the chance that it may assign such lease for a profit at a later date.  Moreover, even if a lease assignment deal is close to completion, a debtor would need to factor in the possibility of the deal ultimately failing to close and the ensuing effect of section 503(b)(7), which gives a lessor an administrative expense for two years of rent if a nonresidential real property lease is assumed and subsequently rejected.  Although the court based its decision upon the clear statutory language of section 365, to maximize the possibility of success of an “assume then assign” strategy, a debtor would be wise to include language reserving its rights to assign contracts and leases in the proposed order to the debtor’s assumption motion.  Although the Kodak court did not determine the enforceability of such a reservation, in overruling the lessor’s assignment objection, the court did note that the lessor failed to object to the proposed form of order containing the reservation.