U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

The Debtor Is Not Obligated To Pay Prepetition Lease Obligations Billed Postpetition Where The Invoice For Such Obligations Arrived Much Later Than Contemplated By The Lease

Where A Landlord Sells Property After A Lease Is Rejected, The Lease Is Deemed Terminated Under Virginia Common Law And The Landlord Is Not Entitled To Future Rent Or A Claim For The Period After The Sale

A Fiduciary Relationship Did Not Exist Between A Cellular Phone Provider And A Provider Of Equipment Insurance; Equipment Insurance Premiums Collected By A Cellular Phone Provider Were Property Of The Estate

Where A Counterparty To A Retirement Agreement Retires Prepetition, The Agreement Is No Longer Executory And, Thus, Cannot Be Assumed; A Retirement Agreement That Does Not Provide For The Payment Of "Medical, Surgical, or Hospital Care Benefits, or Benefits In The Event Of Sickness, Accident, Disability Or Death," Is Not Subject To Section 1114 of the Bankruptcy Code

A Debtor/Loan Servicer That Holds Bare Legal Title To Foreclosed Properties Prior To The Petition Date Cannot Utilize Section 544(a)(3) To "Avoid" Equitable Interests In Such Properties; Instead, The Debtor's Interest In Such Properties Becomes Property Of The Estate Under Section 541(a)(1), Subject To All Equitable Interests Under Section 541(d)

Subordination Provisions Of An Indenture Will Be Enforced According To The Intent Of The Parties After Analyzing The Provisions As A Whole; Based On The Parties' Intent, An "X-Clause" Did Not Allow For Distributions Of Stock To Subordinated Note Holders Until Senior Note Holders Were Paid In Full

NOTABLE BENCH RULING

Master Loan Purchase and Servicing Agreements Are Severable Agreements; A Debtor May Sell Its Servicing Rights To A Third Party With or Without Lender Consent

U.S. BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

The Debtor Is Not Obligated To Pay Prepetition Lease Obligations Billed Postpetition Where The Invoice For Such Obligations Arrived Much Later Than Contemplated By The Lease

In re Pac-West Telecomm, Inc., 377 B.R. 119 (Bankr. D. Del. Oct. 5, 2007) (Shannon, J.)

A landlord filed a motion to compel payment of certain lease obligations pursuant to section 365(d)(3) of the Bankruptcy Code. After the motion was filed, the debtor agreed to pay certain amounts as administrative expenses, but disputed that other amounts were entitled to priority. The landlord argued that because the obligations were billed postpetition, the Montgomery Ward decision mandated payment postpetition. In opposition, the debtor argued that the obligations arose well before the petition date. More specifically, the debtor contended that the landlord had failed to bill the debtor on a monthly basis for certain electricity charges, which was inconsistent with the lease parties' intent and their course of dealing. The bankruptcy court held that the obligations arose prepetition because the landlord was required under the lease to bill the debtor on a monthly basis. The court was not persuaded by the landlord's uncontested claim that delay was the result of a system malfunction. Because the invoice for the electricity charges arose much later than contemplated by the lease, the billing date did not apply. As a result, the debtor was not obligated to pay the invoice as a postpetition expense.

For the charges that the debtor agreed to pay after the motion was filed, the the debtor moved to extend the period within which it was required to perform certain obligations, nunc pro tunc, to avoid liability for associated late charges. In support of the request, the debtor argued that its review of the lease and landlord bills was delayed by unspecified circumstances and exigencies that arose during the first 60 days of the case. As a result, the debtor was unable to pay such obligations during such sixty-day period. The bankruptcy court rejected this argument because the debtor failed to cite any legal precedent to support its request or cite to a specific circumstance - other than the mere fact that it was in bankruptcy, which cannot constitute "cause" to extend the deadline - for its delay.

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In re FLYi, Inc., 377 B.R. 140 (Bankr. D. Del. Oct. 17, 2007) (Walrath, C.J.)

The distribution trust objected to the claim of a landlord on the basis that the landlord had sold the underlying premises, thereby eliminating any claim for future rent and/or rejection damages. Under Virginia common law, a landlord has three options upon breach by a tenant: (i) re-enter the premises with the limited intent to re-let; (ii) refuse to re-enter and sue for damages under the lease; or (iii) re-enter the premises and terminate the lease. Although, the bankruptcy court acknowledged that parties are free to "contract around" the common law, the court held that an attempt to contract around common law principles must be strictly construed. In reviewing the lease, the court strictly construed the relevant provisions and found that the lease did not contradict common law; as a result, the parties did not "contract around" the common law, and principles of common law applied. Because Virginia common law recognizes that a sale of premises is an exercise of sufficient dominion over the premises to constitute acceptance of abandonment by a tenant, the lease at issue was terminated and no further rent was due from the debtor's estate. Accordingly, the bankruptcy court sustained the objection.

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Asurion Ins. Servs., Inc. v. Amp'd Mobile, Inc. (In re Amp'd Mobile, Inc.), 377 B.R. 478 (Bankr. D. Del. Nov. 9, 2007) (Shannon, J.)

In connection with obtaining new customers for its cellular service, the debtor offered its customers an opportunity to purchase equipment insurance. To provide coverage, the debtor entered into a service agreement with a third party insurer and under that agreement, the debtor billed and collected the monthly insurance premiums from its customers and remitted those payments to the insurer on a monthly basis.

After the debtor filed for bankruptcy, the insurer brought an action alleging breach of fiduciary duty claims. In the action, the insurer requested imposition of a constructive trust and an injunction that would require the debtor to turnover all premiums received. The insurer argued that its agreement with the debtor placed the debtor in a "conduit" role, giving the debtor no interest in or right to the premiums received. Rather, the insurer argued that the debtor was obligated to collect and pass on to the insurer the premium funds it collected. The debtor argued that the agreement did not give rise to a fiduciary relationship, but instead gave rise to a debtor-creditor one, making the premiums received property of its estate under section 541 of the Bankruptcy Code.

The bankruptcy court determined that the premiums were property of the estate because the court found that the parties did not intend for a fiduciary relationship to exist. Instead, the court determined that the parties had a debtor-creditor relationship. In reaching this conclusion, the court determined that the contractual and business relationship between the debtor and the insurer lacked indicia supporting an inference of a fiduciary or trust relationship, including: clear and express language in the service agreement that a fiduciary relationship existed or that the debtor had no interest in or right to the premiums received; segregation of the premiums received; and a history of the debtor remitting only premiums received as opposed to remitting funds regardless of whether any were collected. Likewise, the Court rejected the insurer's "conduit" argument because not only was the Debtor under no obligation to segregate the premiums received but, more importantly, it was obligated to remit funds to the insurer irrespective of whether it collected any premiums.

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In re Exide Tech., Inc., 378 B.R. 762 (Bankr. D. Del. Dec. 5, 2007) (Carey, J.)

The counterparty to a retirement agreement moved to enforce the terms of the debtor's confirmed plan, pursuant to which the debtor assumed nearly all executory employment and severance agreements and policies, and all compensation and benefit plans, policies nad programs. The agreement provided for the debtor to remit annual payments to the movant (a retired executive) for a ten year period following his retirement, which occurred well-before the petition date. The debtor opposed the motion and argued that the agreement was not executory, and even if it was executory, the agreement was rejected under the plan. The bankruptcy court concluded that the agreement was not executory because both parties to the agreement did not have unperformed obligations. Although the debtor had unperformed payment obligations to the movant, the movant had no further obligations and had already retired. Accordingly, the agreement was not executory.

The movant also contended that the agreement provided for "retiree" benefits, which the debtor could not terminate or modify by virtue of section 1114 of the Bankruptcy Code. Because the payments were not for "medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability or death", the court concluded that the agreement did not provide for retiree benefits. Accordingly, section 1114 of the Bankruptcy Code was inapplicable.

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Mortgage Lenders Network USA, Inc. v. Wells Fargo Bank, N.A. (In re Mortgage Lenders Network USA, Inc.), 380 B.R. 131 (Bankr. D. Del. Dec. 11, 2007) (Walsh, J.)

The debtor brought a declaratory judgment action seeking a determination that it held legal and equitable title to properties that had been foreclosed upon prepetition. Prior to the petition date, the debtor acted as loan servicer for various loans owned by trusts for which Wells Fargo served as trustee (the "Trustee"). After various borrowers defaulted, the debtor initiated foreclosure proceedings and, ultimately, foreclosed on various properties. Following the foreclosure proceedings, the deeds were titled in the debtor's name. As of the petition date, the debtor was listed as the owner of record and held deeds for twenty-six foreclosed properties.

The debtor alleged that, by virtue of its status as bona fide purchaser under section 544)a)(3) of the Bankruptcy Code, it "avoided" the Trustee's unrecorded ownership interests. As such, the debtor argued that the property became property of the debtor's estate under section 541(a)(3) of the Bankruptcy Code, which provides that property of the estate includes property recovered post-petition through avoidance actions. Accordingly, even assuming the Trustee had an equitable interest in the foreclosed properties, the Trustee argued that section 541(d) of the Bankruptcy Code, which protects equitable interests, was inapplicable.

In response, the Trustee argued that its interests had not been avoided post-petition, and thus, section 541(a)(3) is inapplicable. Instead, Wells Fargo argued that only bare legal title to the properties became property of the estate under sections 541(a)1). As such, Trustee's equitable interest was protected under section 541(d).

The bankruptcy court concluded that the debtor was not seeking to avoid an interest in property. Instead, the debtor was "exercising the right of a hypothetical bona fide purchaser of real property to defeat an unrecorded ownership interest arising out of an express trust[,]" which is not a power provided for in section 544(a)(3). Because the debtor held bare legal title to the properties as of the petition date, the debtor's interest in such properties became property of the estate under section 541(a)(1). Here, under the loan servicing documents, an express trust was created and it was clear that (1) the debtor held legal title and (2) the Trustee had an equitable interest in the properties. Accordingly, although the debtor's estate included legal title to the properties, section 541(d) protected the Trust's equitable interest in such properties.

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Kurak v. Dura Automotive Sys., Inc. (In re Dura Automotive Sys., Inc.), 379 B.R. 257 (Bankr. D. Del. Dec. 7, 2007) (Carey, J.)

In conjunction with confirmation of the debtor's plan, holders of subordinated notes initiated an adversary proceeding to determine whether the proposed plan improperly excluded them from distributions thereunder. The primary issue in dispute was whether the "x-clause" – a provision typically found in a subordination agreement that provides an agreed upon exception to the general rule that senior debt must be paid in full before subordinated debt receives anything – in the subordinated notes indenture and applicable provisions of the Bankruptcy Code entitled the subordinated note holders to distributions under the plan. Or, did the subordination provisions of the subordinated notes indenture require payment of the subordinated note holders' distributions to the senior note holders?

The subordinated note holders conceded that the x-clause did not permit the subordinated note holders to receive debt securities, unless such securities contained complete subordination provisions, before the senior note holders were paid in full. Instead, the subordinated note holders argued that, under the language utilized in the indenture, the same limitation was not placed on equity securities. This argument was premised on the manner in which "Equity Interests" was drafted in the indenture. The senior note holders and the debtor argued that the limitation imposed on debt securities applied equally to equity securities.

Following three circuit court of appeals' decisions, the bankruptcy court concluded that the limitation imposed on debt securities applied equally to equity securities. In reaching this conclusion, the bankruptcy court analyzed the contract as a whole to determine the parties' intent, rather than relying on a purely grammatical and semantical argument, which clearly favored the subordinated note holders. Accordingly, the court concluded that the junior note holders were not entitled to receive any distribution under the plan, whether through payment of cash, debt or equity securities, or otherwise, until the senior note holders were paid in full. Because the senior note holders were projected to receive far less than payment in full, even considering any distributions that would have gone to the subordinated note holders but for the subordination provisions, the subordinated note holders were not entitled to any distributions under the plan.

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NOTABLE BENCH RULING

Master Loan Purchase and Servicing Agreements Are Severable Agreements; A Debtor May Sell Its Servicing Rights To A Third Party With or Without Lender Consent

In re American Home Mortgage Holdings, Inc., Ch. 11 Case No. 07-11047 (Bankr. D. Del. Oct. 23, 2007) (Sontchi, J.) (Transcript Opinion)

The debtors filed a motion to sell their loan servicing platform and argued that the servicing debtor's rights under master Mortgage Loan Purchase and Servicing Agreements ("MLPSAs") were severable from the non-servicing debtor's obligations thereunder, such that the servicing rights could be sold to a third party without assuming the non-servicing obligations. Various investors objected and argued that the MLPSAs were integrated contracts that could only be assumed and assigned (under section 365) or sold (under section 363) cum onere. Following the reasoning of the Eleventh Circuit Court of Appeals in In re Gardinier, Inc., the bankruptcy court concluded that the MLPSAs were severable into a loan sale and warranty agreement and a loan servicing agreement because: (i) the nature and purpose of each agreement was different; (ii) the consideration supporting each agreement was separate and distinct; and (iii) the obligations of the two debtor parties were not interrelated. With respect to the last conclusion, the bankruptcy court found that the only possible basis for concluding that the servicer's and seller's obligations under the MLPSA were interrelated would be (i) provisions requiring the servicer to indemnify the investor from breaches by the seller and (ii) payment "waterfall" provisions subordinating the servicer's right to collect its servicing fee to the investor's collection of certain amounts due from the seller. However, these indemnity and waterfall provisions constituted "classic" cross-default clauses because, if enforced, they would lead to the modification of the servicing debtor's rights based on the non-servicing debtor's breach of the MLPSAs. As such, under the well-established "cross-default rule," the indemnity and waterfall provisions did not, without more, integrate the loan sale and loan servicing portions of the MLPSAs so as to require the agreements to be assumed and assigned in toto. Rather, because the loan sale and loan servicing portions of the MLPSA were not "economically interdependent," the bankruptcy court found that the clauses were de facto anti-assignment provisions and were unenforceable under sections 365(f) and 363(l). Accordingly, the sale of the debtor's servicing platform was approved.

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