Delaware Decision Reminds Landlords to “Speak Now or Forever Hold Their Peace”

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Contributed by Andrea Saavedra

A recent decision rendered by Judge Sontchi In re Goody’s Family Clothing, Inc., Case No. 08-11133 (CSS) (Bankr. D. Del. Dec. 1, 2010) and In re Goody’s LLC, Case No. 09-10124 (CSS) (Bankr. D. Del. Dec. 1, 2010) serves as an important reminder that landlords whose leases are sought to be assumed and assigned must be careful to assert their rights before it’s too late.

In August of 2008, Goody’s Family Clothing, Inc. (Goody’s I), whose chapter 11 case was pending in the Delaware bankruptcy court, filed its plan of reorganization providing for the assumption and assignment of three leases (a headquarters lease, a distribution center lease, and a lease of vacant space) to a predecessor in interest of Goody’s LLC (Goody’s II).  In connection with the requested assumption and assignment, Goody’s I provided a proposed cure amount on its cure notice and established a deadline by which its landlord was required to object to the proposed amount.  The cure amount included unpaid rents, but did not include amounts owed by Goody’s I for 2008 property taxes under each of the three leases sought to be assumed and assigned.

On the same day that Goody’s I filed its cure motion, its landlord received the 2008 property tax bill and forwarded it to Goody’s I for processing.  The landlord, however, did not object to the proposed cure amount, and the court subsequently entered an order approving the cure amounts proposed by the debtor.  Immediately thereafter, the debtor’s plan became effective.  The landlord also did not file an administrative expense claim for the 2008 property taxes by the debtor’s administrative bar date, which took place following the plan’s effective date.

In January 2009, Goody’s II filed for chapter 11 protection.  In its bankruptcy case, Goody’s II assumed the headquarters lease and, in connection with the assumption, conceded that it was responsible for the 2008 property taxes relating to the headquarters lease.  Goody’s II then terminated the lease of vacant space and rejected the distribution center lease.  Ostensibly left “holding the bag,” the landlord filed motions to compel payment of the 2008 property taxes for lease of vacant space and the headquarters lease in the Goody’s Family Clothing case and in the Goody’s LLC case.  In each case, the landlord asserted that it was entitled to an administrative expense claim on account of the 2008 property taxes.  Although the plan administrator for Goody’s I disclaimed any liability for the taxes (citing, among other things, the landlord’s failure to object to the cure payment), Goody’s II conceded liability for the taxes on the two remaining leases.  Goody’s II, however, argued that they were to be paid as unsecured claims because, as to Goody’s II, they arose prepetition.

Filing his opinion in each of the Goody’s chapter 11 cases, Judge Sontchi, concluded that, as to Goody’s I, the landlord was out of luck.  He found that, although the 2008 property taxes were administrative expenses of Goody’s I, the landlord had failed to object to the proposed cure amount (which did not contain the tax amount) and the cure order had “wiped away” any existing defaults under the leases (whether pre- or postpetition).  Therefore, the court concluded, the landlord had no claim against Goody’s I for the taxes.

Theoretically, that decision should have been dispositive for Goody’s II too.  After all, once all of the defaults under the leases (including the nonpayment of the 2008 property taxes) were cured by Goody’s I, Goody’s II, as the eventual assignee of the leases, likewise, should not have been found liable on the 2008 property taxes.  But, for some reason not explained in the court’s decision, Goody’s II conceded (in two different instances) that it was liable for the 2008 property taxes.  Questioning, but ultimately accepting, the concession made by Goody’s II, the court agreed with Goody’s II and held that, because the 2008 property taxes became due prior to its bankruptcy filing, those obligations constituted unsecured claims in Goody’s II’s estate.

Although landlords might erroneously assume that the Goody’s decision gives them a glimmer of hope if they are ever faced with a similar situation, it appears that the court allowed the landlord to retain an unsecured claim against Goody’s II precisely because Goody’s II conceded liability.  Had Goody’s II disclaimed any liability for the 2008 property taxes, it might have prevailed, leaving the landlord to suffer the full consequences of its failure to object to the cure amount when it had the chance.  Landlords should monitor assumption proceedings carefully, and if there is any doubt as to a proposed cure amount, they must raise the issue before it is too late.