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Lease Guaranty Is Not an Executory Contract Capable of Being Rejected

On November 7, 2013, Judge Christopher Sontchi issued a Memorandum Order denying the Debtors’ motion to reject a lease guaranty agreement as an executory contract in bankruptcy case Furniture Brands International, Inc., Case No. 13-12329 (CSS), docket no. 601.  The Debtor, Furniture Brand International, Inc. (“FBN”), had sought to reject a Lease Guaranty that it had given to landlord, Lot 29, to induce Lot 29 to enter into enter into a lease with an affiliate debtor, Thomasville Retail, Inc. (the “Tenant”), but the Court concluded that, because Lot 29 had no continuing material obligations under the guarantee agreement, it was not an executory contract that could be rejected.

On September 9, 2013 (the “Petition Date”), the Debtors filed chapter 11 petitions in the District of Delaware.  On the Petition Date, the Debtors file a Motion seeking to reject the Guaranty, Lease and Sublease nunc pro tunc to the Petition Date.  Lot 29 objected to rejection of the Guaranty.  The Court heard argument and accepted written submissions on the issue of whether the Guarantee was an executory contract that the Debtors could reject.  Lot 29 argues that as of the Petition date, FBN had unperformed material duties under the Guaranty, including payment and performance of all obligations owed by the Tenant, but that it did not owe any material duties to FNB.   The Debtors acknowledged that FNB had material obligations under the Guaranty but argued that Lot 29 had many material obligations including (i) providing quiet enjoyment, repairs and maintenance and access to the premises; (ii) complying with a covenant of good faith and fair dealing and (iii) sending written notice of an event triggering obligations under the Guaranty.

In the Mem Op., the Court noted that the term ‘executory contract” is not defined in the Bankruptcy Code, but that the Third Circuit has held that “’[An executory contract is] a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to completer performance would constitute a material breach excusing performance of the other.’”  The Court then applied the test to the Guaranty to find that 1) in a conventional lease guaranty, like the Guaranty, the lessor’s consideration consists of execution of the lease with the tenant; 2) the Guaranty itself states that Lot 29’s material obligation is to enter the Lease with Tenant, which it had done prior to the Petition Date;  3) the obligations of quiet enjoyment and good faith and fair dealing were Lot 29’s obligations under the Lease not the Guaranty; and 4) FNB expressly waived any notice requirement under the Guaranty.  Based on this analysis, the Court denied the motion as it applied to the Guaranty.

A copy of the memorandum order can be found here.

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