New Jersey Law Journal
VOL. 203 - NO 4
JANUARY 24, 2011
Bankruptcy Law
Does a Competing Plan Sponsor Have
the Right To Assume, Assign or Reject a
Debtor’s Executory Contracts?
By Scott Cargill and Beth Williams
A
recent decision issued by the U.S.
Bankruptcy Court for the District of
New Jersey addresses the issue of
whether the sponsor of a competing Chapter
11 plan may assume a debtor’s executory sale
contract, or whether this power may only be
exercised by a debtor.
The court, in In re Nickels Midway Pier, LLC (Bankr. D.N.J. May 21,
2010), held a creditor that sponsored
a competing plan of liquidation could
require the debtor’s estate, through a
confirmed plan, to assume or reject an
executory contract without violating
section 365(a) of the Bankruptcy Code.
The Nickels court adopted the reasoning
and result reached by the bankruptcy
court for the District of Kansas in In re
Dynamic Tooling Systems, Inc., the only
other published case analyzing this issue. These two decisions could have a
strong impact on potential objections
that may be raised in the context of competing plans.
Nickels Midway Pier, LLC (the
Cargill is a partner, and Williams
is an associate, in Lowenstein Sandler’s
bankruptcy, financial reorganization and
creditor’s rights department in the firm’s
Roseland office.
“Debtor”), owned an amusement pier
located on the boardwalk in Wildwood,
New Jersey. In 1999, the debtor and
Wild Waves, LLC, entered into a written
lease agreement that gave Wild Waves
permission to use a significant portion
of the debtor’s pier for constructing and
operating a water park, which was built
and operated by Wild Waves beginning
in 2000. Subsequently, Wild Waves sued
the debtor, asserting that the written
lease agreement was accompanied by
the debtor’s oral agreement (the “Sale
Agreement”) to sell the pier to Wild
Waves in January 2003. The debtor argued that there was no such sale agreement. The state court ruled in favor of
Wild Waves and determined that the oral
sale agreement was enforceable against
the debtor, and that the debtor had also
breached the terms of its written lease
agreement with Wild Waves.
The debtor filed for Chapter 11 in
December 2003. The debtor filed a plan
and disclosure statement on July 20,
2005, but never moved forward with its
proposed plan. In November 2009, Wild
Waves filed its own competing plan of
liquidation (the “Wild Waves Plan”).
The principal component of the Wild
Waves plan was that it required the debtor to transfer its real property assets to
Wild Waves, through the assumption of
ESTABLISHED 1878
the sale agreement, pursuant to section
1123(b)(2) and section 365 of the Bankruptcy Code. The debtor argued, among
other things, that Wild Waves could not
assume the sale agreement as provided
for in the Wild Waves plan because only
a trustee or debtor-in-possession (not a
third party) has the exclusive right to assume or reject executory contracts pursuant to section 1129(a)(1) of the Bankruptcy Code.
Section 541 of the Bankruptcy Code
provides a nonexhaustive list of all the
property that is considered property of
a debtor’s estate. Generally, property of
a debtor’s estate includes any and all legal or equitable interests of the debtor
in property as of the commencement of
the bankruptcy case. Bankruptcy Code
section 365 deals with executory contracts and unexpired leases. It states, in
relevant part, that “the trustee, subject to
the court’s approval, may assume or reject any executory contract or unexpired
lease of the debtor” (emphasis added).
Importantly, section 365 on its face does
not allow for the assumption or rejection
of executory contracts by any party other
than the trustee or debtor-in-possession.
Finally, section 1123(a)(5) states that a
plan must provide adequate means for
its implementation, which includes “retention by the debtor of all or any part of
the property of the estate.”
The bankruptcy court in Dynamic
Tooling, addressing a similar objection
to a competing plan, concluded that the
debtor’s executory contracts were estate
property under section 541 of the Bankruptcy Code. Because section 1123(a)
(5) requires that a plan provide for the
retention or transfer of property of the
Reprinted with permission from the JANUARY 24, 2011 edition of New Jersey Law Journal. © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
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NEW JERSEY LAW JOURNAL, JANUARY 24, 2011
estate, the Dynamic Tooling court held
that an estate representative could assume
or reject a debtor’s executory contracts.
The court reached this conclusion despite an apparent conflict between Bankruptcy Code sections 365 and 1123(b)
(2). Section 1123(b)(2) allows a plan to
provide for the assumption, rejection,
or assignment of executory contracts or
unexpired leases not previously rejected
by the debtor, so long as the assumption,
rejection, or assignment comports with
section 365. Thus, because section 365
allows for assumption or rejection of a
debtor’s executory contracts by a trustee
only, section 1123 arguably could be read
to prohibit assumption or rejection of a
debtor’s executory contracts by any party
other than a trustee or debtor-in-possession.
Both the Dynamic Tooling and
Nickels courts distinguished their cases
from the U.S. Supreme Court opinion in
Hartford Underwriters Insurance Co. v.
Union Planters Bank, N.A., where an administrative claimant sought to recover
payment of its claim by surcharging the
collateral of a secured lender pursuant
to Bankruptcy Code section 506(c). The
U.S. Supreme Court held that, under a
plain reading of the statutory provision,
only a trustee could surcharge collateral
under section 506(c).
The Dynamic Tooling court held
that, unlike the administrative claimant
that had asserted an independent right to
surcharge property under section 506(c)
in Hartford Underwriters, the nondebtor
plan proponent did not assert an indepen-
dent right to assume or reject the debtor’s
executory contracts, but rather sought to
have the estate representative (i.e., a plan
administrator) exercise the estate’s right
to assume or reject the debtor’s executory contracts.
Both the Nickels and Dynamic Tooling courts also supported their ruling on
policy arguments, finding that if a creditor-proponent of a competing plan could
not permit for an estate representative,
such as a plan administrator or liquidating trustee, to assume or reject a debtor’s
executory contracts, “the practical results
would be nonsensical.” The courts concluded that a creditor would be forced
to either depend upon the debtor (who
is supporting the competing plan) to reject or assume contracts, or the creditor
would have to seek the appointment of
a trustee to propose its alternative plan,
which would add considerable administrative burdens and expense. The courts
concluded that such a result would diminish the tactical value of a creditor’s
right to file an alternative to a debtor’s
plan.
Additionally, the Dynamic Tooling court noted that a court maintains
broad authority under Bankruptcy Code
section 1142(b) to direct the debtor and
“any other necessary party” to perform
any act necessary to consummate the
plan, presumably including having an
estate representative assume or reject
a debtor’s executory contracts under
a plan. The Nickels court held that because the Wild Waves plan gave the
plan administrator the right to assume
203 N.J.L.J. 189
the debtor’s executory contracts, Wild
Waves was not seeking to assert an independent right to assume or reject the
sale agreement, but instead was seeking
to transfer estate property in accordance
with section 1123(a)(5) of the Bankruptcy Code. The court went on to note that
in light of Congress’s intent to allow any
party in interest to file a plan under section 1121(c) of the Bankruptcy Code, it
was essential that a plan proponent have
the power to deal with executory contracts within the plan even though the
nondebtor proponent would not have
a right to do so outside of the section
1123 context. Thus, the court held that
the Wild Waves plan did not violate section 1129(a)(1) and the plan administrator could assume the sale agreement.
Ultimately, however, the court did not
confirm the Wild Waves plan for reasons
independent of the sale agreement.
The Nickels and Dynamic Tooling
opinions provide guidance to creditors
considering filing competing plans in a
debtor’s bankruptcy case. Both courts
made a critical distinction from the plain
meaning interpretation of Hartford Underwriters and found that the plan provisions of the Bankruptcy Code allow for
a third-party plan sponsor to assume and
reject debtor contracts, notwithstanding
the mandates of section 365. Although
not yet considered by an appellate court,
these opinions will likely provide creditors considering sponsoring a competing
plan more confidence in utilizing the significant powers that a trustee enjoys to
assume or reject executory contracts.