Smith v. Hoboken RR, Warehouse SS Connecting Co., et al., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946), spawned an exception to enforceability of such clauses where there is (1) a strong public interest, and (2) lease forfeiture would totally frustrate reorganization. See Matter of Triangle Laboratories, 663 F.2d 463, 468-70 (3d Cir. 1981). Ipso facto or bankruptcy clauses under the prior Bankruptcy Act would terminate a contract or lease in the event of bankruptcy. Because they hamper rehabilitation efforts, they have been rendered unenforceable by the Code. House Rep. No. 95-595, 95th Cong., 1st Sess. 348 (1977); Senate Rep. No. 95-989, 95th Cong., 2d Sess. 59 (1978).
Both parties properly acknowledge that a debtor cannot assume an executory contract or a lease which was validly terminated prior to the institution of bankruptcy proceedings. In re Triangle Laboratories, Inc., 663 F.2d 463, 467-68 (3d Cir. 1981); In re Jolly, 574 F.2d 349 (6th Cir.), cert. denied, 439 U.S. 929, 99 S.Ct. 316, 58 L.Ed.2d 322 (1978); Robertson v. Langdon, 72 F.2d 148 (7th Cir. 1934). If the termination was not valid, however, the lease is property of the estate, and accordingly, the debtor-in-possession may assume or possibly extend the time in which to assume or reject the lease pursuant to the terms of 11 U.S.C. § 365. Although § 365 only refers to the trustee's power to assume or reject executory contracts or unexpired leases, § 1107 of the Code makes § 365 applicable to debtors-in-possession.
The filing of the chapter 11 petition cannot expand debtors' rights as against Amoco. Schokbeton Industries, Inc. v. Schokbeton Products Corp., 466 F.2d 171, 176-77 (5th Cir. 1972); see Kopelman v. Halvajian (In re Triangle Laboratories, Inc.), 663 F.2d 463, 467-68 (3d Cir. 1981). When the termination notice was sent, debtors only had a right to ninety days' worth of dealership contracts.
The debtor's motion for a new hearing or, alternatively, for an order vacating the March 6, 1985 order and the entry of a new order declaring that the lease was not terminated, is predicated on the ground that the termination letter of January 23, 1985 was ineffective because it was not directed to 139-5 Hillside Avenue, Jamaica, New York, the original address specified in the debtor's lease. It is settled law that a lease or license that was terminated before the filing of a bankruptcy petition is neither affected by the automatic stay under 11 U.S.C. § 362(a) nor may it be assumed by the debtor under 11 U.S.C. § 365. Moody v. Amoco Oil Co., 734 F.2d 1200, 1212 (7th Cir. 1984); Kopelman v. Halvajian (In re Triangle Laboratories, Inc.), 663 F.2d 463, 467-68 (3d Cir. 1981); In re GSVC Restaurant Corp., 3 B.R. 491, 494, 6 B.C.D. 134, 135 (Bkrtcy.S.D.N.Y.), aff'd, 10 B.R. 300, 6 B.C.D. 295 (S.D.N.Y. 1980). This point was stated in Triangle Laboratories, 663 F.2d at 467-68, as follows:
Therefore, "if the contract or lease has expired by its own terms or has been terminated prior to the commencement of the bankruptcy case, then there is nothing left for the [debtor] to assume or [reject]." Huffman, 171 B.R. at 653; Triangle Lab., Inc., 663 F.2d 463, 467 (3d Cir. 1981). Here, the Appellate Division's pre-petition decision to reinstate the warrant on February 25, 2003 was an unstayed final judgment on the petition date.
See, e.g., In re Coast Cities Truck Sales, Inc., 147 B.R. 674, 677 (D.N.J. 1992) (citingMatter of Triangle Laboratories, Inc., 663 F.2d 463, 467-8 (3d Cir. 1981)). In determining whether a contract or lease was terminated pre-petition, courts look to the status of the contract as of the date the petition was filed in bankruptcy.
11 U.S.C. § 541(a)(1). Where, upon commencement of the case, there is no interest of the debtor in a lease, none can thereafter be resurrected or created. Matter of Triangle Laboratories, Inc., 663 F.2d 463 (3d Cir. 1981). McDaniel v. Metropolis Towers Apartment Corp., 2002 WL 1065874 (D.N.J. 2002); In re Island Helicopters, Inc., 211 B.R. 453 (Bankr. E.D.N.Y. 1997).
The franchisee's contractual rights in a Franchise Agreement are generally considered property of the estate, except where said agreements have been effectively terminated prior to a debtor's filing. In re Varisco, 16 B.R. 634, 637 (Bankr.M.D.Fla. 1981); See also Triangle Laboratories, Inc., 663 F.2d 463, 467-68 (3d Cir. 1981); Schokebeton Industries, Inc. v. Schokebeton Products Corp., 466 F.2d 171, 176-77 (5th Cir. 1972); Matter of R.S. Pinellas Motel Partnership, 2 B.R. 113, 116-17 (Bankr.M.D.Fla. 1979). Any right created in the estate by a franchise agreement is subject to the automatic stay provisions of § 362 of the Bankruptcy Code. Further, franchise rights which become part of the estate may be viable executory contracts capable of assumption pursuant to § 365(b)(1) of the Code. Varisco, 16 B.R. at 637.
See, e.g., In re Triangle Laboratories, Inc., 663 F.2d 463, 467-68 (3d Cir. 1981); In re Maxwell, 40 B.R. 231, 236 (N.D.Ill. 1984); and In re Darwin, 22 B.R. 259, 263-64 (Bankr.E.D.N.Y. 1982). Further, it is clear that a lease which has been so terminated cannot be assumed, thus eviscerating the Debtor's motion before us. See, e.g., Maxwell, supra, 40 B.R. at 235-36; and In re Talley, 69 B.R. 219, 222-23 (Bankr.M.D.Tenn.
Thus, leases that state courts had determined to be at an end could suddenly be revived, and landlords would face continuing uncertainty whether a lease was in fact alive or dead. Such a result seems irrational and is not congruent with the general principles of bankruptcy law. See In re Triangle Laboratories, Inc., 663 F.2d 463, 468 (3d Cir. 1981) (citing In re Butchman, 4 B.R. 379, 381 (Bankr.S.D.N.Y. 1980) ("when a debtor's legal and equitable interests in property are terminated prior to the filing of the petition with the Bankruptcy Court that was intended to preserve the debtor's interest in such property, the Bankruptcy Court cannot then cultivate rights where none can grow"); Talley, 69 B.R. at 223. Hence we conclude that federal bankruptcy law draws no meaningful distinction between "expired" and "terminated" residential leases and does not provide greater federal protection for lessees under residential leases, the stated terms of which have not run, even though they have been otherwise terminated.