Oct. 25 -- A group of Chapter 11 debtors operating franchised International House of Pancakes (“IHOP”) restaurants were denied the stay of an order deeming the debtors' subleases rejected Oct. 8 by the U.S. District Court for the Northern District of Illinois (In re A&F Enters., Inc. II, 2013 BL 279511, N.D. Ill., No. 1:13-cv-07020, 10/8/13).
Judge Virginia M. Kendall found that the debtors were unlikely to succeed on the merits of their appeal because the bankruptcy court correctly applied the time period of Section 365(d)(4) of the Bankruptcy Code to the debtors' subleases and that the debtors were not entitled to the longer time period of Section 365(d)(2) to assume the subleases.
The debtors filed a motion to reconsider the Aug. 5 order, which was subsequently denied by the bankruptcy court. The bankruptcy court also entered an order on Sept. 23, 2013, deeming the franchise agreements and equipment leases expired based on the rejection of the subleases. The debtors filed a emergency motion to stay the enforcement of the orders, which the bankruptcy court denied in an oral ruling. The debtors appealed to the district court, and moved for a stay of the bankruptcy court's orders pending the appeal.
IHOP filed an opposition to the debtors' emergency motion for a stay pending the appeal. IHOP argued that the bankruptcy court had correctly rejected the subleases and denied the stay. IHOP also argued that the debtors had cited no case law to support “a stay pending appeal that would require a trademark owner to allow the use of its marks pending appeal.” IHOP argued that the debtors' continued use of the IHOP trademark was harming the value of the brand.
“Customer complaints and inspections of [d]ebtors' restaurants -- including during the bankruptcy -- have revealed roaches, moldy produce, and improperly refrigerated and prepared food, among other serious issues,” IHOP said.
Furthermore, the court said that the debtors must make a preliminary showing of the first two factors before the court can move on to balance the relative harms when considering all four factors.
Section 365(d)(4) allows a debtor 120 days to assume or reject non-residential property leases, with an option for a 90-day extension, which the debtors did not seek. The court rejected the debtors' argument that the subleases should be construed as part of the franchise agreements.
The court said that Seventh Circuit precedent favors following “the plain language of the Bankruptcy Code when that language is unambiguous.” The court said that the cases cited by the debtors in support of their argument were outside the Seventh Circuit, and all but one of them were decided prior to the 2005 amendments to the Bankruptcy Code.
The 2005 amendments changed Section 365(d)(4) from a time period that could be indefinitely extended by the court for cause to the stricter 120-day time period with the option for a 90-day extension. The court said that this amendment “cautions against permitting an equitable end-run around the 210-day period by relying instead on [Section] 365(d)(2).” Therefore, the court found that the debtors were not likely to succeed on the merits.
“Debtors' second argument, that the companies will lose their franchises and therefore their business, also has no merit,” the court said. “[I]n the context of commercial disputes, the loss of franchises is a commercial loss that can be compensated with monetary damages.”
Finally, the court found that the public interest would not be served by granting the stay. The court said that public policy favors following Congress's intent in strictly limiting the time period for assuming commercial leases as well as protecting trademark holders from the involuntary use of their trademarks. Accordingly, the debtors' motion for a stay pending appeal was denied.
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