A&F Enterprises, Inc. II, et al. v. IHOP Franchising LLC, et al. (In re A&F Enterprises, Inc. II, et al.)

Summarized by George Spathis , Horwood Marcus & Berk Chartered
12 years 3 weeks ago

Citation:

In the United States Circuit Court for the Seventh Circuit, Case No. 13-3192

Tag(s):

Ruling:

The Seventh Circuit reversed the District Court's denial of a stay pending appeal of bankruptcy court's order deeming certain leases rejected and agreements expired . The stay pending appeal on the merits to the District Courts was warranted because the appellant met the standards set forth in In re Forty–Eight Insulations, Inc., 115 F.3d 1294, 1300 (7th Cir. 1997), which requires a showing akin to a litigant seeking a preliminary injunction. As the Court noted: " Stays, like preliminary injunctions, are necessary to mitigate the damage that can be done during the interim period before a legal issue is finally resolved on its merits. The goal is to minimize the costs of error." The Court concluded that there was a likelihood that A&F would succeed on the merits, noting the vagaries in the interplay between the subsections of Rule 365(d), and other bankruptcy courts that had previously held that more stringent time limits for assumption set forth in § 365(d)(4) do not apply to a commercial property lease that is tightly connected to a comprehensive franchise arrangement. The Court emphasized, however, that that issue was not yet before it, and that its decision to reverse the denial of the stay was based instead on the balance of threatened harms between the parties. Because A&F faced the real threat that it would lose its franchises with no assurance that they would be reinstated if they prevailed, the balance of harms tipped decidedly in favor of A&F.

Procedural context:

The bankruptcy court ordered that certain commercial property leases were deemed rejected, and ancillary franchise agreements and equipment leases were expired. Debtor appealed the bankruptcy court's decision to the district court, and sought a stay pending appeal. The district court denied the requested stay. Debtor appealed the district court's denial of the stay to the Seventh Circuit, and sought and obtained an emergency stay while its appeal was pending.

Facts:

Chapter 11 Debtor, A&F Enterprises, Inc. II. (“A&F”) operates International House of Pancakes restaurants (“IHOPs”) in the Midwest pursuant to franchise agreements and ancillary building and equipment leases with IHOP FRANCHISING LLC ("IFL") . Although Chapter 11 debtors generally may assume or reject executory contracts any time before confirmation of a plan pursuant to 11 U.S.C. § 365(d)(2), IFL argued to the bankruptcy court that A&F's failure to commercial property leases had to be assumed or rejected within the more specific time period of § 365(d)(4), which requires assumption within 120 days (unless the court grants an extension of up to 90-days). A&F argued that because the because the leases were ancillary to the franchise arrangement, the more generous limits under § 365(d)(2) should apply. The bankruptcy court, however, applied the more specific requirements of § 365(d)(4) to the leases, thereby deeming them rejected, and pursuant to and by way of cross-default provisions in the various agreements, also deemed the franchise agreements and equipment leases expired. Debtor appealed the bankruptcy court's decision to the district court, and sought a stay pending appeal, first from the bankruptcy court and then from the district court. Both bankruptcy court and the district court denied the requested stay.

Judge(s):

Before WOOD, Chief Judge, and FLAUM and SYKES, Circuit Judges.

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