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In re Bourbon Saloon, Inc.

United States District Court, E.D. Louisiana

March 18, 2015




Before the Court is The Absinthe Bar, L.L.C.'s ("A-Bar") appeal from the United States Bankruptcy Court's October 11, 2013 order denying A-Bar's motion for lease rejection of 400 Bourbon Street. Also before the Court is Bourbon Saloon, Inc.'s ("BSI" or "debtor") cross-appeal from the Bankruptcy Court's October 11, 2013 order granting A-Bar fourteen days to file a statement of attorney's fees and costs incurred by it after December 31, 2012. Also before the Court is BSI's "Motion to Dismiss Cross-Appeal without Prejudice."[1] Considering the briefs filed by the parties, the statements made at oral argument, the record and the applicable law, for the reasons that follow, the Court will affirm the Bankruptcy Court's order and deny BSI's "Motion to Dismiss Cross-Appeal without Prejudice.".

I. Background

A. The Lease of 400 Bourbon Street

On July 24, 1997, BSI entered a lease with A-Bar of 400 Bourbon Street for a term of twenty years, which is set to expire on October 31, 2017.[2] On May 12, 2010, A-Bar filed an eviction proceeding against BSI in state court for its defaults under the repair and maintenance provisions of the lease.[3] On August 19, 2010, the state court entered a Consent Judgment obligating BSI to make all repairs to the building specified by David K. Rester, Esq. and Farr & Huston Architects.[4]

B. The Chapter 11 Petition and Motion to Assume the Lease

On May 12, 2011, BSI filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[5] On August 10, 2011, BSI filed a motion to assume the lease of 400 Bourbon Street pursuant to 11 U.S.C. § 365.[6] On August 23, 2011, A-Bar filed an opposition to BSI's motion to assume the lease, arguing that there were monetary and nonmonetary defaults on the lease.[7] Because the parties did not agree as to the scope, cost or allocation of financial responsibilities for work to cure the maintenance and repair defaults, the Bankruptcy Court approved the hiring of Danny Shaw (the "Referee") to determine the disputed issues of the scope of work, payment responsibilities and adequacy of the work.[8] On March 26, 2012, the Bankruptcy Court confirmed BSI's Amended Chapter 11 Plan of Reorganization.[9]

C. The May 15, 2012 Agreed Order

On May 15, 2012, the Bankruptcy Court entered an Agreed Order on a Motion to Assume Lease (the "Agreed Order").[10] The Agreed Order noted that BSI was in default under the lease on certain of its non-monetary obligations.[11]The parties did not dispute that defaults existed concerning the maintenance obligation with respect to conditions cited in:

1) the pre-petition August 19, 2010 Consent Judgment;
2) the Vieux Carre Commission (VCC') citations dated June 11, 2011, September 1, 2011, and February 16, 2012; and
3) the April 4, 2012 letters from the New Orleans Department of Safety and Permits (Building Inspection Division) and Department of Safety and Permits (Zoning Administration Division).[12]

The Agreed Order stated: "IT IS ORDERED that the Reorganized Debtor's assumption of the lease of the premises at 400 Bourbon is approved, subject to the terms of this Order, which provide Absinthe Bar with adequate assurance of cure as required by Section 365 of the Bankruptcy Code."[13] It further ordered BSI to "immediately commence work on those undisputed maintenance defaults listed in the Consent Judgment, the VCC and Department of Safety and Permits citations, and any other citations extant."[14] It provided that when a maintenance item was determined to be the responsibility of BSI, BSI would pay the resulting contractor obligations as provided in the construction contract and no liens would be permitted to be filed against the property.[15] It set a December 31, 2012 deadline for cure of all maintenance and repair defaults.[16] Finally, it ordered that the Bankruptcy Court maintained jurisdiction to review decisions by the Referee and to enforce the terms of the Agreed Order.[17]

D. The Motion to Reject the Lease

After the December 31, 2012 deadline for completing the repairs to the building passed and BSI had not completed the work agreed to in the Agreed Order, A-Bar filed a motion with the Bankruptcy Court requesting that it reject the lease.[18] On January 24, 2013, the Bankruptcy Court issued an order setting both the motion for lease rejection and the motion to assume the lease for hearing.[19] The Bankruptcy Judge set a deadline of February 28, 2013, for BSI to complete any and all maintenance and cure issues remaining due.[20] Prior to the hearing, the Referee filed a report finding that BSI had "substantially performed those items previously found to be its responsibility, with the exception of the following items:... 1) exterior masonry; 2) windows; 3) men's closet on first floor; 4) condenser platform in courtyard; and 5) structural engineer certifications of structural integrity of various building elements and repair efforts."[21]

E. The October 11, 2013 Order

The Bankruptcy Court conducted a hearing on March 26-27, 2013, and issued an Order on October 11, 2013.[22] First, the Bankruptcy Judge evaluated each of the unfinished repairs identified by the Referee.[23] He concluded that the evidence presented at trial established that the leak in the men's bathroom, condenser platform and windows were fixed following the Referee's last inspection.[24] The Bankruptcy Judge found the masonry work performed was adequate because it was accepted by the Vieux Carre Commission ("VCC").[25] Finally, he noted that the parties agreed that any issues regarding the structural engineer certification of structural integrity were resolved.[26]

Turning to the legal issues presented, the Bankruptcy Judge found that the lease was assumed by BSI and the assumption was approved by the Agreed Order.[27] He noted that the Agreed Order specifically stated that it approved the assumption of the lease.[28] Accordingly, he found the lease was assumed at the time that court approval of the Agreed Order was obtained.[29]

The Bankruptcy Judge also found that BSI had adequately cured its non-monetary defaults on the lease.[30] Evaluating this issue, the Bankruptcy Judge stated:

Once the lease assumption is approved the court is then concerned with whether the nonmonetary defaults existing as of the date of the assumption have been cured or can be cured within a reasonable time. There is no hard and fast rule and the time table set by the parties by agreement or in a court order is subject to the court's discretion as to whether the cure efforts of the debtor - particularly as to non-monetary defaults - are substantial enough to deny A-Bar its sought after relief, cancellation of the long term lease.[31]

The Bankruptcy Judge opined that much of A-Bar's evidence showed that the substantial cure of the defaults was not completed by either the December 31, 2012 deadline or the February 28, 2013 deadline, but BSI continued to make repairs.[32] He noted that BSI had set aside $30, 000 to $40, 000 for future repairs, which he opined demonstrated "that whatever failures or delays the debtor may be responsible for in the past, it is now making a good faith effort to comply with the lease obligations concerning the maintenance and repair of the building."[33] He noted that the December 31, 2012 deadline was only six and a half months after the parties agreed upon and the Bankruptcy Court approved the assumption of the lease.[34] He opined that "the process for getting permits to perform the required work on a building in the French Quarter is very lengthy."[35] "In light of the fact that [BSI had] spent over $300, 000 to make repairs and ha[d] set aside another $30 - $40, 000, " the Bankruptcy Judge found it was "not unreasonable to allow the debtor to complete any remaining repairs after that December 31, 2012 date and thereby allow the debtor to complete the plan of reorganization."[36]

The Bankruptcy Judge found that A-Bar, as the owner of the building, was "setting high standards for the repairs it expects the debtor to make under the terms of the lease and adhering to its stringent position that failure to meet that standard gives it the right to dissolve the lease."[37] He noted that A-Bar would stand to gain substantially if allowed to evict BSI, but "the effect on the reorganized debtor and the creditors would be a devastating failure of the plan."[38] He found that "the terms of the lease called only for good repair and condition, not the perfection that A-Bar insists upon."[39] He noted that the standard for repair called for by the VCC was high, and found it significant that the demands of the VCC had been satisfied.[40]

The Bankruptcy Judge cited Louisiana Civil Code Article 2014, which states: "A contract may not be dissolved when the obligor has rendered a substantial part of the performance and the part not rendered does not substantially impair the interest of the obligee."[41] He also cited Louisiana Fourth Circuit Court of Appeals caselaw stating, "The trial court has discretion to decline dissolution where it finds that the breach of the lease is not major or where the breach was not the fault of the lessor or where the lessor was in good faith."[42] The Bankruptcy Judge found that BSI had rendered a substantial part of the performance required by the Agreed Order as it had spent over $300, 000 making repairs to the building, performed the work to the satisfaction of the VCC, cleared all outstanding VCC complaints against the building and satisfied the City of New Orleans Safety and Permits violation letter.[43] He also found that A-Bar's primary interest was dissolving the lease, and "[a]ny other interests of A-Bar are not substantially impaired if the debtor continues to pay the rent and make all repairs called for by the lease."[44] Finally, he noted that under the lease, A-Bar could make the repairs and invoice BSI for the costs.[45]

The Bankruptcy Judge noted that Section 365(b)(1)(B) of the Bankruptcy Code requires that the debtor compensate the nondebtor "for any actual pecuniary loss resulting from default."[46] He found that A-Bar incurred damages of attorney's fees and costs for litigation related to the defaults that remained as of the December 31, 2012 cure deadline set forth in the Agreed Order.[47] He noted that Section 365(b)(1)(B) does not create an independent right to an attorney fees award, but it "recognizes a landlord's right to compensation for actual pecuniary losses resulting from debtor's default under an unexpired lease assumption."[48] He found that attorney fees qualify as "actual pecuniary losses" when state law would recognize them as such.[49] He noted that the lease provided for attorney fees incurred by the lessor to enforce or defend any of the lessor's rights or remedies.[50]

The Bankruptcy Judge noted that attorney fees would be first priority administrative expenses under 11 U.S.C. § 503, "if the actual and necessary damages: 1) occur post-petition; and 2) arose as a result of actions taken by the trustee (the debtor in possession in this case) that benefitted the estate."[51] He found that the first element was satisfied because "A-Bar incurred attorney's fees and costs as a result of the post-petition litigation brought after the December 31, 2012 deadline to force the debtor to finish remedying the nonmonetary defaults under the lease that was assumed by the Agreed Order."[52] The Bankruptcy Judge found that the second element was met because the lease assumption was an action taken by BSI to benefit the estate.[53] Accordingly, he found that attorney fees would be first priority administrative expenses and requested that A-Bar file, within fourteen days, a statement of attorney's fees and costs incurred by it after December 31, 2012.[54]

On October 22, 2013, A-Bar filed a timely Notice of Appeal.[55] On November 4, 2013, BSI timely filed a cross-appeal.[56] A-Bar filed an appellate brief on March 21, 2014, [57] and BSI filed an appellate brief on April 4, 2014.[58] A-Bar and BSI both filed reply briefs on May 2, 2014.[59] On June 19, 2014, BSI filed a "Motion to Dismiss Cross-Appeal without Prejudice."[60] A-Bar filed an objection to the motion on July 3, 2014.[61] The Court conducted oral argument on July 23, 2014.[62]

II. Issues Raised on Appeal

A. A-Bar's Appellate Brief

1. Assumption of the Lease

A-Bar argues that the lease of 400 Bourbon could not have been assumed by the parties' Agreed Order because the Agreed Order only addressed cure, one of three requirements for lease assumption of defaulted leases under 11 U.S.C. § 365(b)(1).[63] It asserts that the "starting point" for assumptions of defaulted leases is "clearly prohibitory" because Section 365(b) provides that a defaulted lease "may not [be] assume[d]" unless all of the requirements are met.[64] A-Bar quotes Fifth Circuit caselaw stating, "Strict adherence to the Code provisions governing assumption of contracts might appear overly simplistic, but... the requirements... provide necessary safeguards to parties forced to maintain contractual relations with a reorganizing debtor."[65] It argues that the Bankruptcy Judge "has held that absent the fulfilment of all assumption requirements, it may not approve lease assumption even in an uncontested matter."[66]

A-Bar argues that the Bankruptcy Judge should not have interpreted the Agreed Order as a lease assumption agreement because it was not an affirmative agreement on all three Section 365(b)(1) requirements.[67] It asserts that BSI "bore the burden of showing that each of the three lease assumption requirements were satisfied."[68] It argues that the three requirements for assumption of a defaulted lease "are statutory prerequisites."[69]

2. Waiver

A-Bar contends that the Bankruptcy Judge's ruling "appears to hold that the party opposing assumption (here, A-Bar) was required every step of the way to force the debtor to make good on its § 365(b)(1)(A), (B), and (C) obligations."[70] It argues that "[t]he notion that A-Bar even for a moment waived its right to oppose lease assumption isn't legally or factually supportable, primarily because waiver simply doesn't belong in bankruptcy lease assumption."[71] A-Bar contends that under Louisiana law, the Bankruptcy Judge could not find that it waived its "right" to attorney's fees and an adequate assurance of future performance without proof of "(1) actual intent to relinquish it, or (2) conduct so inconsistent with the intent to enforce the right that it induces a reasonable belief that it relinquished the right."[72] A-Bar asserts that its eviction of BSI was interrupted by the bankruptcy proceeding, and it "consistently maintained a costly opposition to BSI's lease assumption."[73] Accordingly, A-Bar argues that the Agreed Order "can't be interpreted to show that A-Bar somehow waived its right to demand what the Bankruptcy Code requires where it entered into a contract so clearly aimed at only one aspect of lease assumption."[74] It contends that such an interpretation would produce absurd results in violation Louisiana Civil Code article 2046.[75]

A-Bar contends that the Agreed Order was simply "the parties contractual definition of how BSI could accomplish § 365(b)(1)(A) cure."[76] It asserts that the Agreed Order required BSI to: "1) immediately commence on undisputed defaults; 2) participate in referee process to resolve disputes on still-disputed defaults; and 3) have all repairs accomplished by December 31, 2012."[77 ...

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