- In re Civic Partners Sioux City, LLC (Case No. 15-6024)
- The BAP reversed the bankruptcy court's order dismissing debtor's chapter 11 bankruptcy case and remanded for further proceedings consistent with this ruling.
- Procedural context:
- Debtor appealed the bankruptcy court's order dismissing its chapter 11 bankruptcy case.
- Debtor owned commercial real estate in Sioux City, Iowa (the "Property"). Northwest Bank (the "Bank") held a mortgage against the Property. Sioux City (the "City") also held a mortgage against the Property. Main Street Theatres, Inc. ("Main Street") leased and occupied the majority of the space in the Property. Main Street fell behind in its lease payments. This caused Debtor to fall behind on its loan payments to the Bank and the City. The parties mediated their dispute and entered into a settlement agreement (the "Agreement"). Under the Agreement, the Bank agreed to restructure Debtor's loan and the City agreed, among other things, to reduce the Property's tax assessment value. In return, Debtor agreed to enter into an amended lease with Main Street. Debtor and Main Street subsequently entered into an amended lease. Debtor's obligations under the amended lease were conditioned on Debtor's formalizing the agreements with the Bank and the City as provided for under the Agreement. In the event Debtor was unable to do so, the amended lease gave Debtor the right to declare the amended lease null and void. Debtor and the Bank were able to formalize their agreement. The Bank's obligations under that agreement were conditioned upon Debtor formalizing the agreement with the City and entering into an amended lease with Main Street as described in the Agreement. In the event Debtor was unable to do so, the restructured agreement with the Bank would be null and void. Debtor was unable to formalize the agreement with the City. In the meantime, the Bank commenced a state court lawsuit against Debtor. The City followed suit. Debtor subsequently notified Main Street it was terminating the amended lease and shortly thereafter filed a petition for relief under chapter 11. On Debtor's motion to determine whether the original lease or the amended lease controlled, the bankruptcy court concluded the amended lease was still in effect and controlled Debtor's relationship with Main Street. The bankruptcy court held Iowa rescission law prevented Debtor from terminating the amended lease without returning a $200,000 "restructuring payment" it had received from Main Street. Alternatively, the court held Debtor could not terminate the amended lease without the Bank's consent. Debtor appealed the bankruptcy court's orders, but because they were interlocutory the BAP dismissed the appeals. Debtor appealed the bankruptcy court's rulings to the Eighth Circuit. Although Debtor continued to contend that the amended lease was terminated, it filed a second amended plan of reorganization predicated on the amended lease, in compliance with the bankruptcy court's earlier ruling. The bankruptcy court denied confirmation of the plan, in large part because it concluded that the plan was not feasible. The Bank subsequently filed a motion to dismiss Debtor's bankruptcy case. After the Eight Circuit denied Debtor's appeals, the bankruptcy court took up the Bank's motion and dismissed Debtors bankruptcy case. The BAP stated that its review necessarily incudes a review of the bankruptcy court's interpretation of the amended lease, one of the rulings that led to its decision to dismiss the bankruptcy case. The BAP first concluded that the amended lease was clear and unambiguous in its providing that because Debtor was unable to enter into an agreement with the City, Debtor had the right to terminate the amended lease, reinstate the original lease, and apply the payments Main Street had made under the amended lease to Main Street's obligations under the original lease. The BAP stated that Debtor and Main Street were well within their rights to include such a provision in the amended lease, and that upon Debtor's exercise of such rights in a legal manner, the legal effect was to terminate the contract. It did not amount to a rescission of the amended lease, but amounted to the exercise of rights under the amended lease. The Bank, Main Street, and the City nevertheless argued that another provision of the amended lease required Debtor to return the $200,000 restructuring payment to Main Street before terminating the amended lease. In disagreeing with this argument, the BAP stated that this provision of the amended lease was also clear and unambiguous. Main Street was required make the restructuring payment under the amended lease, and the payment was not to be applied toward any other payments Main Street made under the amended lease. Nothing in the provision required Debtor to return the restructuring payment to Main Street before terminating the amended lease. Likewise, nothing in the amended lease prohibited Debtor from applying the restructuring payment to Main Street's obligations under the original lease. The Bank, Main Street, and the City also argued that Debtor had agreed in the assignment of rents Debtor had given the Bank that Debtor would not terminate the amended lease without the Bank's written consent, which was not given. While such failure to obtain the Bank's written consent may have been a default under the assignment of rents, the BAP noted that the Bank, Main Street, and the City did not identify any provision in either the amended lease or the assignment of rents that, in the event of a default under the assignment of rents, this would render ineffective Debtor's termination of the amended lease. The Bank, Main Street, and the City alternatively argued that the Bank was more than an "incidental beneficiary" of the amended lease. The BAP observed that under Iowa law, in order to have standing to assert a breach of contract, a party not privy to such contract must be regarded as a direct beneficiary. That is, he must be regarded as either a done beneficiary or a creditor beneficiary. One is a donor beneficiary if it appears from the terms of the promise in light of surrounding circumstances that the purpose of the promise in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor or to some performance neither due or supposed nor asserted to be due from the promise to the beneficiary. One is a creditor beneficiary if no purpose to make a gift appears from the terms of the promise in accompanying circumstances but performance of the promise will satisfy an actual or supposed or asserted duty of the promise to the beneficiary. The BAP found that the bankruptcy court's finding that the Bank was more than an incidental beneficiary was not clearly erroneous. The record did not support a finding that the Bank was a done beneficiary. Nothing in the amended lease or the surrounding circumstances suggested that either Debtor or Main Street intended to make a gift to the Bank. But the record did support a finding that the Bank was a creditor beneficiary, at lease to the extent of the $200,000 restructuring payment. Under the amended lease, Main Street promised to pay that sum to the Bank on account of Debtor. The Bank's status as a creditor beneficiary of the amended lease gave it standing to assert a breach of contract and the right to recover damages flowing from the breach. However, the Bank, Main Street, and the City have failed to identify any way in which Debtor breached the amended lease. Terminating it was not a breach. As previously discussed, the amended lease specifically gave Debtor the contractual right to terminate it. The BAP observed that in dismissing Debtor's bankruptcy case, the bankruptcy court was primarily concerned with the delay and lack of progress in the case and with Debtor's failure to confirm a plan. However, much of that delay and lack of progress was directly attributable to Debtor's unsuccessful attempts to appeal the bankruptcy court's rulings regarding the amended lease. Constrained by those rulings, Debtor was unable to propose a confirmable plan. Under the circumstances, the only way for Debtor to move the case along was to allow it to be dismissed and then to seek appellate review of the bankruptcy court's interlocutory rulings. Having reviewed de novo the amended lease, the BAP held that the original lease, not the amended lease, controls Debtor's relationship with Main Street. In keeping with its earlier rulings, the bankruptcy court did not consider the possibility that Debtor might be able to propose a confirmable plan predicated on the original lease. This is a relevant factor that should be given significant weight in determining whether to dismiss Debtor's chapter 11 case.
- Kressel, Schermer, and Nail
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