- 7th Cir., Case No. 15-2093, Decided March 11, 2016
- The judgment of the bankruptcy court was reversed, and the case remanded in order to determine: a) the value of the asset transferred (in the form of commercial leases that were terminated pre-bankruptcy), and b) whether the transferee has any defenses to the avoidance action claims.
- Procedural context:
- This was a direct appeal to the 7th Circuit by the creditor's committee, pursuant to 28 U.S.C. 158(d)(2)(A), from the bankruptcy court judge's determination that terminations of commercial leases were not 'transfers', be they preferential or fraudulent, within the meaning of 11 U.S.C. 547 and 11 U.S.C. 548 and therefore not avoidable.
- Great Lakes Quick Lube is the Chapter 11 debtor, and owned stores throughout the Midwest. It had a practice of buying stores and their accompanying leases, selling the store(s) to investors and then leasing the store from the new owners under a long-term contract. One such investor was T.D. Investments ("TD"), which owned and leased to the Debtor at least a couple of profitable locations, despite the Debtor's mounting financial losses at other locations. Nearly two months before the Debtor filed its bankruptcy petition, it terminated those two TD leases. The unsecured creditor's committee brought suit claiming that the termination was either a preferential or fraudulent transfer of the leases to TD. At trial it was shown that the stores were profitable and had a worth between $327,000 and $450,000 for the remaining life of their respective leases. TD claims the leases were abandoned, not transferred. However, the term "transfer" is defined broadly in the Bankruptcy Code to include "an interest in property". TD also countered that pursuant to 365(c)(3) "the trustee may not assume or assign any...unexpired lease of the debtor...if...such lease is of nonresidential real property and has been terminated under applicable non-bankruptcy law prior to the order for relief." The 7th Circuit determined that 365(c)(3) did not apply because it is only designed to prohibit a trustee from selling the lease to one who would occupy the property, and that would unduly interfere with commerce. The action here was not aimed at setting aside the transaction, but instead at realizing the value of the transfer for the benefit of its creditors.
- POSNER, FLAUM and WILLIAMS, Circuit Judges
Thelma McCoy v. USA
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