In re: RGN-GROUP HOLDINGS, LLC, et al.,

Summarized by Stephen Falanga , Walsh Pizzi O'Reilly Falanga LLP
1 year 11 months ago

Case Type:

Business

Case Status:

Reversed and Remanded

Citation:

22-3019 & 22-3020 (3rd Circuit, Mar 14,2024) Not Published

Tag(s):

Ruling:

In a non-precedential opinion, the Third Circuit held that, under Texas law, a landlord and tenant-assignee cannot amend a lease to increase the tenant-assignor’s liability under the lease unless tenant-assignor consents concluding that the Supreme Court of Texas would not bind an assignor to a contract amendment to which it did not assent.

Procedural context:

The Third Circuit reversed the decision of the District Court of Delaware that affirmed the lower Bankruptcy Court decision that found a corporate tenant that had assigned its lease for commercial space with landlord to an affiliate entity was liable for obligations under the lease arising from later amendments to the lease entered into between the landlord and the assignee affiliate tenant. The Third Circuit reversed and remanded to the District Court with instructions for the Bankruptcy Court to disallow the Landlord's claim in the tenant-assignor's bankruptcy case.

Facts:

Both the "Old Tenant" and "New Tenant " entities that were tenants with landlord at issue in this case were owned by Regus which offers short-term occupancy agreements to professionals and businesses that need office space. Pursuant to its rights under the lease at issue, Old Tenant assigned its interests in the subject lease to New Tenant which was a newly created corporate affiliate that was controlled by the Regus parent. The assignment was permitted under the lease without the Landlord's consent as it was between affiliated entities. Old Tenant nonetheless provided notice of the assignment to Landlord but did not request or receive a release for its obligations under the lease. Thereafter, the Landlord and New Tenant entered into a series of additional amendments which culminated in an amendment to the lease that extended the lease term for an additional 15 years and also moved the lease space from one building to an entirely different building. The New Tenant subsequently defaulted under the lease as amended as a result of decreasing office use occasioned by the Covid-19 pandemic. The Landlord filed a $30 million claim against Old Tenant in its bankruptcy case which was reduced to $6 million under 11 U.S.C. 502 which caps landlord damages claims. Old Tenant later objected to the claim arguing it was not liable to Landlord under the amended lease. After a trial, the Bankruptcy Court agreed with the Landlord that Old Tenant remained liable because “[u]nder Texas law, an assignor’s obligation will survive assignment” absent a release. he District Court affirmed for similar reasons. The Third Circuit reversed reasoning that if the Landlord wanted Old Tenant to be liable on the amended lease at the new location it could have required Old Tenant to agree to be bound by it or provide a guaranty. Landlord did not have to sign the amended lease at the new location without security or Landlord could have walked away. Without express assent, the Old Tenant could not be liable for the new obligations arising under the later amended lease. In dissent, Judge Roth focused on the lease language that provided the Old Tenant remained liable under the lease without exceptions for later amendments and that the Old Tenant could have sought a release when it assigned the lease but did not. Judge Roth reasoned that the majority’s decision "contravenes the text of the [l]ease, the expectations of the parties, and fundamental fairness" and cautioned about taking such a global and reductive approach to Texas law without clear guidance from Texas courts,

Judge(s):

JORDAN, ROTH and AMBRO, Circuit Judges

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