Seventh Circuit Suggests That Longer Assumption/ Rejection Deadline Should Govern Integrated Franchise And Commercial Lease Agreements

It is broadly accepted that the abbreviated deadline for a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to assume or reject an unexpired lease of nonresidential real property with respect to which the debtor is the lessee does not apply to executory contracts or unexpired leases of residential real property or personal property. Less clear, however, is which deadline for assumption or rejection in the Bankruptcy Code applies to an "integrated" contract or group of "inseparable" agreements that includes both a commercial real estate lease and another type of contract or lease.

This was one of the thorny questions that the Seventh Circuit addressed, albeit obliquely, in A&F Enters., Inc. II v. Int'l House of Pancakes Franchising LLC (In re A&F Enters., Inc. II), 2014 BL 34222 (7th Cir. Feb. 7, 2014). In A&F Enterprises, the court of appeals examined, among other things, a franchisee-lessee's likelihood of success on a motion for a stay pending appeal of an order determining that its franchise agreement expired when a related nonresidential real property lease was deemed rejected pursuant to section 365(d)(4) of the Bankruptcy Code. In granting the stay, the Seventh Circuit wrote that "[t]here are powerful arguments in favor of" the franchisee's argument that the longer assumption or rejection deadline stated in section 365(d)(2) should apply to the related contracts.

ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES

Section 365(a) of the Bankruptcy Code authorizes a trustee or DIP, with court approval, to assume or reject most executory contracts and unexpired leases during the course of a bankruptcy case. If the debtor has defaulted under the contract or lease, assumption is subject to the conditions set forth in section 365(b) (e.g., cure of certain defaults and adequate assurance of future performance).

The general rule is that a trustee or DIP must assume or reject a contract or lease in its entirety. This rule prohibits the debtor from "cherry-picking," or accepting the benefits of a contract or lease without also assuming its burdens. However, some courts have recognized arguably an exception to this principle by allowing assumption or rejection of only part of a lease or contract if the court concludes that the document actually constitutes multiple, severable agreements under applicable nonbankruptcy law based upon the intent of the parties. See, e.g., In re Hawker Beechcraft, Inc., 2013 BL 156513 (Bankr. S.D.N.Y. June 13, 2013); In re Contract Research Solutions, Inc. , 2013 BL 117998 (Bankr. D. Del. May 1, 2013); In re Buffets Holdings, Inc. , 387 B.R. 115 (Bankr. D. Del. 2008). Courts have also ruled that related "inseparable" or "integrated" agreements must be assumed or rejected together rather than separately. See...