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Leases as Assets of the Estate

7th Circuit Court Seal

In re: Great Lakes Quick Lube, LP
7th Circuit Federal Court of Appeals
No. 15-2093 Decided Mar. 11, 2016

In this case the value of unexpired commercial leases was put to the test. When a popular auto-repair/oil-change franchise went into Chapter 11, its unsecured creditors sought to recoup the value of 2 unexpired leases it relinquished just before filing. The 7th Circuit analyzed the issue under 2 provisions of the Bankruptcy Code and ultimately decided that the terminated leases were an asset of the Estate and that letting them go was tantamount to an improper pre-filing transfer.

Factual Background

Great Lakes Quick Lube LP (Great Lakes) owned oil change and automotive repair stores throughout the Midwest. Its business model included selling stores to shareholders and leasing them back. One such arrangement was made with T.D. Investments I, LLP (TDI), which leased 2 stores to Great Lakes. But in 2012, under mounting financial pressure, Great Lakes terminated its TDI leases.

Adversary Case in Bankruptcy

Ultimately, Great Lakes sought Chapter 11 Bankruptcy protection less than 60 days after terminating the TDI leases. The Estate’s Unsecured Creditors’ Committee filed an Adversary action contending that those lease terminations amounted to either a preferential or fraudulent transfer by Great Lakes to TDI, and that the value of those leases should be disgorged to the Bankruptcy Estate. The Bankruptcy Court denied relief to the Unsecured Creditors’ Committee because, in its analysis, termination of the TDI leases was not a “transfer” at all – much less a preferential or fraudulent transfer.

7th Circuit Court of Appeals

Before the 7th Circuit Court of Appeals, TDI first argued that the disputed leases had been abandoned, not transferred,so that the creditors of the Estate had no valid avoidance claims. The 7th Circuit disagreed, pointing out that the Bankruptcy Code defines a “transfer” to include any disposition of property or “an interest in property.” 11 U.S.C. §101(54)(D). Under that analysis, the leases represented the Estate’s interest in going concerns that would have resulted in revenue.

Next, TDI argued that pursuant to 11 U.S.C. §365(c)(3) a Trustee in Bankruptcy was not entitled to assume or assign an unexpired nonresidential lease of the Debtor. This would leave the decision to the Debtor alone. But, while the Bankruptcy Court found that section applicable to this case, the 7th Circuit did not, and instead it confirmed that the value of the leases in dispute could be recouped on behalf of the Estate.

Conclusion

The 7th Circuit reversed and remanded the matter back to the Bankruptcy Court.

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