Opinion
No. 11-03-12960 MR, Adversary No. 03-1279 M
December 2, 2003
David T. Thuma, Albuquerque, NM, for The Melodie Corporation
Paul M. Fish, Albuquerque, NM, for The Burger King Corporation
Paul J. Battista, Miami, Florida, for The Burger King Corporation
Bennett M Sigmond, Denver, CO, for Citicorp Leasing
Rose Little, Albuquerque, NM, for Citicorp Leasing
MEMORANDUM
THIS MATTER is before the Court on cross motions for summary judgment. Plaintiff, The Burger King Corporation, a Florida corporation (" BKC"), is represented by Modrall Sperling Roehl Harris Sisk, P. A. (Paul M. Fish), and Defendant, The Melodie Corporation, a New Mexico corporation (" Melodie"), is represented by Jacobvitz, Thuma Walker, P. C. (David T. Thuma). The Court heard argument on the cross motions for summary judgment on November 4, 2003, at which time the Court took the matter under advisement. Citicorp Leasing, Inc. (" Citicorp"), by its attorneys Jones Keller, P. C. (Bennett M. Sigmond) and Little Dranttel, P. C. (Rose M. R. Little), filed a Response and Memorandum Brief in Opposition to Creditor Burger King Corporation's Motion for Summary Judgment (" Citicorp Memorandum"), but because Citicorp is not a party to this adversary proceeding, the Court will not consider the Citicorp Memorandum in ruling on the cross motions for summary judgment.
At issue is whether 11 U.S.C. § 108 or 11 U.S.C. § 365 controls the time within which a chapter 11 debtor can cure a pre-petition default under an executory contract. After considering the arguments of counsel, the relevant case law and applicable code sections, and being otherwise sufficiently informed, the Court is persuaded that § 108 does not apply to executory contracts and that § 365, specifically governing executory contracts, allows the debtor until plan confirmation to assume or reject an unexpired executory contract, which implicitly allows a chapter 11 debtor-in-possession until plan confirmation to cure a pre-petition default under an executory contract.
All future references are to Title 11 of the United States Code unless otherwise noted.
STIPULATED FACTS
The parties submitted a Stipulation of Facts for purposes of resolving the cross-motions for summary judgment which included the following stipulated facts:
1. Melodie filed its bankruptcy petition on April 14, 2003.
2. As of the petition date Melodie was a franchisee of BKC pursuant to various Franchise Agreements and related documents (together, "Franchise Agreements").
3. Melodie is operating several restaurants using the name Burger King.
4. Pre-petition Melodie defaulted under the Franchise Agreements.
5. BKC gave notice of default to Melodie on May 3, 2002.
6. BKC granted Melodie fifteen extensions of the notice of default.
7. Pursuant to the fifteenth extension of the notice of default, the cure period was extended to April 15, 2003.
8. The fifteenth extension of the notice of default also provided that the Franchise Agreement for Store # 3906 would expire on April 15, 2003. That provision constituted an amendment to the Franchise Agreement for Store # 3906, and was not contingent on a cure or other action by any party.
DISCUSSION
The two code sections implicated by the parties' dispute are § 108 and § 365. Section § 108 governs "extensions of time" and provides:
[I]f applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor . . . may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of —
In chapter 11 cases the debtor-in-possession enjoys the same rights as a trustee. 11 U.S.C. § 1107(a) (". . . a debtor in possession shall have all the rights . . . of a trustee . . .").
In chapter 11 cases the debtor-in-possession enjoys the same rights as a trustee. 11 U.S.C. § 1107(a) (". . . a debtor in possession shall have all the rights . . . of a trustee . . .").
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
11 U.S.C. § 108(b) (emphasis added).
Section 365 governs "executory contracts and unexpired leases" and provides:
If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee —
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
Section 365 provides further that
In a case under chapter 9, 11, 12, or 13 of this title, the trustee may assume or reject an executory contract . . . at any time before confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.
BKC asserts that the Franchise Agreements automatically terminated without further notice pursuant to the terms of the notice of default, as extended by the fifteenth extension, on April 15, 2003, with no further action required on the part of BKC, and that pursuant to § 108(b), Melodie had until June 13, 2003 to cure the default. Melodie counters that § 365 provides for assumption or rejection of an executory contract until confirmation, allowing a debtor-in-possession until confirmation to cure a pre-petition default of an executory contract.
The Tenth Circuit has not expressly ruled on the question of whether § 108 or § 365 controls the time period within which a chapter 11 debtor-in-possession can cure a pre-petition default of an executory contract. Courts considering this issue are split. Counties Contracting Const. Co. v. Constitution Life Ins. Co., 855 F.2d 1054 (3rd Cir. 1988), is the primary case BKC cites for the proposition that § 108, not § 365 controls. Moody v. Amoco Oil Co., 734 F.2d 1200 (7th Cir. 1984), upon which Melodie relies, reached the opposite conclusion. The Court will consider each case in turn.
Neither BKC nor Melodie cite cases from the Tenth Circuit that are directly on point. Trigg v. United States (In re Trigg), 630 F.2d 1370 (10th Cir. 1980), cited by BKC, was decided under the former Bankruptcy Act, and is, therefore, not controlling authority for cases decided under the Bankruptcy Code. In Trigg, the Tenth Circuit determined that the filing debtor's bankruptcy petition did not stay the automatic termination of certain oil and gas leases by their own terms. Id. at 1373. In re Durability, Inc., 212 F.3d 551, 559 (10th Cir. 2000) involved an insurance policy that the bankruptcy court determined had been terminated pre-petition. Although the Tenth Circuit applied § 108(b) to find that if the insurance policy had not been terminated pre-petition, the post-petition payment received within 60 days of the filing of the petition would have prevented termination of the policy, the Tenth Circuit did not address whether § 365 would have afforded the debtor more than the 60 days provided under § 108(b). Id. Autoskill Inc. v. Nat'l Educ. Support Systems, Inc., 994 F.2d 1476, 1484 (10th Cir. 1993), the Tenth Circuit noted that § 108(b) is very broad, and held that § 108(b) applied to the time period for filing a notice of appeal. Again, it did not address whether § 365 applied. Gen. American Transp. Corp. v. Martin (In re Mid Region Petroleum, Inc.), 1 F.3d 1130, 1132 and n. 3 (10th Cir. 1993), a Tenth Circuit case cited by Melodie, merely acknowledges that § 365 allows for the assumption of executory contracts at any time prior to confirmation, provided that at the time of assumption, the trustee cures, or provides adequate assurance that the trustee will promptly cure a default. Mid Region Petroleum did not consider whether § 108(b) limits the time to cure to 60 days.
Counties involved a life insurance policy for which the debtor failed to timely pay the premiums. Counties, 855 F.2d at 1056. The policy contained a 31-day grace period for payment of the premium, in accordance with applicable state law. Id. Before the expiration of the statutory grace period, the debtor filed its chapter 11 petition for bankruptcy. Id. The Third Circuit held that § 108(b) extended the time within which the debtor could pay the past due premium 60 days after the date of the petition. Id. at 1060. The Counties court rejected the argument that § 365 afforded the debtor any time beyond the 60-day period proscribed by § 108(b). Id. at 1061. In reaching its decision, the Counties court first considered whether the insurance policy was an executory contract, but determined that whether the policy was executory was not necessary to its ultimate conclusion, stating that "Section 365 requires action by the debtor which concededly was not taken here." Id. at 1060. The Counties court reasoned that in order to assume an executory contract under § 365, the debtor must first take some action to cure within the 60-day period under § 108(b). Id. at 1061. In other words, because the debtor took no action within the 60-day period, the executory contract expired, and "Once the contract is no longer in existence, the right to assume it [under § 365] is extinguished." Id.
The reasoning in Counties improperly imports the 60-day limitation of § 108(b) into the requirements for assumption or rejection of executory contracts outlined in § 365 in an attempt to harmonize the two code sections. Counties, and at least one court following the reasoning of Counties, conclude that a debtor may only assume a defaulted contract if the debtor-in-possession first cures within the time period proscribed by 108(b). Counties, 855 F.2d at 1060; In re Delex Management, 155 B.R. 161, 168 (Bankr. W. D. Mich. 1993). As summarized by the bankruptcy court in Delex Management:
To assume an executory contract, which is in default as of the filing date and is subject to the running of a redemption period, a two-step process may be utilized. First, the prepetition statutory default must be cured within the § 108(b) time limitation. Second, the debtor may then have additional time to determine whether to assume or reject the contract under § 365.
In re Delex Management, 155 B.R. 161, 168 (Bankr. W. D. Mich. 1993) (emphasis in original).
To require a debtor-in-possession to cure a defaulted executory contract within 60 days in accordance with § 108(b) before assuming the executory contract under § 365 imposes an additional requirement on the debtor-in-possession not contained within § 365. Section 365 states that the trustee can assume at any time prior to confirmation, provided that the trustee either cures or provides adequate assurance that a default will be promptly cured. 11 U.S.C. § 365(b)(1) and (d)(2). Nothing in § 365 requires a chapter 11 debtor-in-possession to cure a default of an executory contract within 60 days. Cases finding that § 108 controls reason that requiring a debtor-in-possession to take some action within 60 days gives meaning to both code sections. See, e. g., Delex, 151 B.R. at 168-169. But the better approach is to determine at the outset whether the contract at issue is executory.
Moody takes this approach. At issue in Moody were certain dealership contracts for the retail sale of petroleum, and a "jobbership" contract for wholesale petroleum operations. The Moody court first determined that the dealership contracts were terminated prior to the filing of the bankruptcy, and could therefore not be assumed under § 365. The creditor sent its notice of termination of the dealership contracts prior to the petition date, and no further action was required under the notice of termination for the dealership contracts to terminate except "the passage of time." Moody, 734 F.2d at 1212. Because the Moody court found that the dealership contracts terminated pre-petition (even though the termination date contained in the notice was subsequent to the petition date), § 365 could not be used to resuscitate the contracts. Id. at 1214. In contrast, the " jobbership" contract could be assumed under § 365 because, unlike the termination notice for the dealership contracts, the termination notice for the "jobbership" contract contained a right to cure, and the debtor filed for bankruptcy before the expiration of the cure period. Moody, 734 F.2d at 1215. In other words, because the "jobbership" contract remained executory as of the petition date, § 365 operated to afford the debtor until confirmation to assume it. Id. The Moody court rejected the creditor's argument (and the bankruptcy court's holding) that 108(b) limits the debtor's right to cure the default to sixty days from the date of the petition, finding that § 108(b) "does not apply to curing defaults in executory contracts." Id. Rather, § 365, which provides that the debtor may assume or reject an executory contract at any time prior to confirmation, and provides further, that any default must be cured at the time of the assumption, "specifically governs the time for curing defaults in executory contracts, and thus, it controls here." Id.
BKC argues that the Moody court improperly makes a "jump in logic" that because § 365(b)(1)(A) requires a debtor to cure any defaults in order to assume a contract and § 365(d)(2) allows a debtor to assume or reject an executory contract at any time prior to confirmation, that § 365 grants an extension of time to cure at any time prior to confirmation. BKC contends further that because nothing in § 365 specifically grants an extension of time to cure a default, and § 108 does, § 108 should control. This Court disagrees.
Section § 365 specifically governs executory contracts, while § 108, though it contains a specific time period, is the more general statute. See In re Circle K Corp., 127 F.3d 904, 909 n. 4 (9th Cir. 1997)(" The curing of defaults in an executory contract or unexpired lease is governed by section 365, not by the more restrictive extension-of-time provisions of section 108(b).") (citing Moody); In re Waldon Ridge Dev., LLC, 292 B.R. 58, 66 (Bankr. D. N.J. 2003) (noting that "[o]ther courts have consistently recognized that the specific assumption and assignment provisions of § 365 prevail over the general provisions of § 108.") (citations omitted); In re Masterworks, Inc., 100 B.R. 149, 152 (Bankr. D. Conn. 1989) (concluding that "§ 365(d)(2) which specifically governs the cure of defaults in executory contracts, should govern rather than § 108(b), which generally governs post-petition extensions of time to cure defaults.") (citations omitted); Edwin C. Levy Co., Inc. v. McLouth Steel Corp. (In re McLouth Steel Corp.), 20 B.R. 688, 690 (Bankr. E. D. Mich. 1982) (concluding that § 365 is the more specific code section relating to executory contracts). Again, the determinative factor is whether the contract at issue is executory, which will trigger the operation of § 365.
Here, the parties concede that the Franchise Agreements (with the exception of the agreement for Store # 3906) are executory. Once it is determined that the contract is executory, § 365, which specifically governs executory contracts, governs whether the contract can be assumed. As noted by the bankruptcy court in McLouth Steel, "Section 108(b) cannot be applied [to an executory contract] without causing irreconcilable conflict because § 365 allows for the assumption or rejection of an executory contract at any time before confirmation of the plan and for the curing of default upon assumption of the contract." McLouth Steel, 20 B.R. at 690-691. In contrast, if a contract is not executory, either by its nature or because it has already terminated, § 108 may come into play. See In re Henke, 84 B.R. 693, 696 (Bankr. D. Mont. 1988) (" If the Contract for Deed is not executory, under § 108(b) the Debtor-buyer's right to cure a default under the agreement is extended for a period of sixty (60) days from the petition date, and thereafter, without cure, the contract rights in the property terminate.").
The parties agree that the Franchise Agreement for Store #3906 has been terminated.
Concluding that § 365, rather than § 108 determines the time within which a chapter 11 debtor can cure a defaulted executory contract is also consistent with the Bankruptcy Code's goal of rehabilitating financially distressed debtors. See Moody, 734 F.2d at 1216. The Bankruptcy Code gives greater flexibility to chapter 11 debtors in possession. Id.; see also Masterworks, 100 B.R. at 152 (discussing several advantages granted under the Bankruptcy Code to chapter 11 debtors). By contrast, § 365(d)(1) provides that in chapter 7 proceedings, an executory contract that is not assumed or rejected within 60 days is automatically deemed rejected. 11 U.S.C. § 365(d)(1). A chapter 11 debtor-in-possession is afforded time to determine whether assumption or rejection of an executory contract will result in the best prospect for reorganization of its distressed business.
In addition, holding that § 365 controls does not leave a creditor without other options. As BKC has done, a creditor can file a motion to compel a debtor in possession to either assume or reject an executory contract pursuant to § 365(d)(2). See Moody, 734 F.2d at 1216 (noting that "A party who cannot afford the uncertainty . . . may request the bankruptcy court to order the debtor to decide whether to assume or reject the contract within a specified period.").
CONCLUSION
As determined above, the threshold question to determine whether § 108 or § 365 applies is whether the contract at issue is executory. Once it is determined that the contract is executory, § 365 controls. See Moody, 734 F.2d at 1215 (" We hold . . . that section 108(b) does not apply to curing defaults in executory contracts."). Implicit within the meaning of the assumption and cure provisions of § 365 is the ability of the debtor-in-possession to cure a pre-petition default of an executory contract at any time prior to confirmation. Id. This period may be longer than the 60-day limit contained in § 108, because, once it is determined that the contract is executory, § 108 does not apply. In sum, with the exception of the Franchise Agreement for Store # 3906, which the parties agree is terminated, the Franchise Agreements are executory contracts that Melodie may either assume or reject in accordance with § 365, by curing all pre-petition defaults at any time prior to confirmation.
An appropriate order consistent with this Memorandum will be entered.