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Delaware Bankruptcy Court Denies Summary Judgment in Lease/Disguised Financing Agreement Dispute

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On April 20, 2012, Chief Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware (the “Court”) denied cross motions for summary judgment in a long-standing dispute between Montgomery Ward, LLC (the “Debtors”) and Dika-Ward over whether various agreements between the parties relating to the development of department stores were true leases capable of rejection under section 365 of the Bankruptcy Code or a disguised financing arrangement. In its analysis, the Court cited the well-established maxim that labeling a document a “lease” does not necessarily create a true lease under the Bankruptcy Code, but only a rebuttable presumption that the agreement is a true lease. The critical factor, according to the Court, is the “economic reality” of the agreement.

The Debtors and Dika-Ward both moved for summary judgment. Specifically, the Debtors contended that the agreements constituted a structured financing agreement, thereby limiting Dika-Ward’s recovery to its secured collateral and an unsecured deficiency claim. Dika-Ward, on the other hand, moved for summary judgment on the grounds that the agreements were leases, the rejection of which entitled Dika-Ward to damages under the Bankruptcy Code.

After a hearing on the cross motions, the Court found facts implying that Dika-Ward’s predecessor never intended to act as lessor, but rather to perform its end of the bargain and transfer the property back to the Debtors under a financing agreement. Dika-Ward’s motion for summary judgment was, therefore, denied. Likewise, the Court denied the Debtors’ cross motion for summary judgment because a material factual dispute exists as to whether the parties intended to finance the construction of the property or simply enter into a leaseback agreement.

A copy of the Court’s opinion can be found here.

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