Legal Updates /

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


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.

Scroll to top