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Full title: Objection to confirmation of plan (RE: related document(s)700 Chapter 11 plan) filed by Creditor STORE Master Funding III, LLC. (Ward, J) (Entered: 03/11/2021)
Document posted on Mar 9, 2021 in the bankruptcy, 14 pages and 1 tables.
Bankrupt11 Summary (Automatically Generated)
In accordance with Article V of the Plan, on the Effective Date, all Executory Contracts and Unexpired Leases of the Debtors listed on the Assumed Executory Contract and Unexpired Lease List or that were previously assumed or assumed and assigned by the Debtors are deemed to be Assumed Executory Contracts or Unexpired Leases, in accordance with the provisions and requirements of sections 365 and 1123 of the Bankruptcy Code.The Plan provides: Assumption or assumption and assignment of any Executory Contract or Unexpired Lease pursuant to the Plan or otherwise and full satisfaction of any applicable Cure Claim shall result in the full release and satisfaction of any Claims, Cure Claims, or defaults, whether monetary or nonmonetary, including defaults of provisions restricting the change in control or ownership interest composition or other bankruptcy-related defaults, arising under any Assumed Executory Contract or Unexpired Landlord proposes that the language be replaced with the following more robust language to ensure the appropriate protections of Landlord’s rights under the Lease: Notwithstanding anything to the contrary in the Plan, with respect to any assumed Unexpired Lease of non-residential real property, the Debtors, shall remain liable for all obligations arising under the Unexpired Lease that were not otherwise required to be asserted as a cure cost, including: (1) for amounts owed or accruing under such Unexpired Lease that are unbilled or not yet due as of the Cure Objection Deadline regardless of when such amounts or obligations accrued, on account of common area maintenance, insurance, taxes, and similar charges; (2) any regular or periodic adjustment or reconciliation of charges under such Unexpired Lease that are not due or have not been determined as of the Cure Objection Deadline; (3) any percentage rent that comes due under such Unexpired Lease; (4) post-assumption obligations under such Unexpired Lease; and (5) any obligations to indemnify the non-Debtor counterparty under such Unexpired Lease for any claims of third parties pursuant to the terms of the Unexpired Lease, which are not known or liquidated by the time of the Cure Objection Deadline (and therefore not payable as a cure cost pursuant to Bankruptcy Code § 365(b)(1)(a)).Rather, Debtors must modify this language to preserve Landlord’s right to assert any right of setoff or recoupment that such counterparty may have under applicable bankruptcy or non-bankruptcy law, including, but not limited to, the ability, if any, of such counterparties to setoff or recoup a security deposit held pursuant to the terms of their unexpired lease with the Debtors.
List of Tables
Page 1IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re: Chapter 11 STUDIO MOVIE GRILL HOLDINGS, LLC Case No.: 20-32633-SGJ et al., (Jointly Administered) Debtors. Objection Deadline: March 10, 2021, 4:00 p.m. (CT) Hearing Date: March 16, 2021 at 9:30 a.m. (CT) Related to Docket No. 700 LIMITED OBJECTION OF STORE MASTER FUNDING III, LLC TO DEBTORS’ SECOND AMENDED JOINT PLAN OF REORGANIZATION FOR STUDIO MOVIE GRILL HOLDINGS, LLC AND JOINTLY ADMINISTERED DEBTORS STORE Master Funding III, LLC (the “Landlord”) hereby files this limited objection (the “Objection”) to the Second Amended Plan of Reorganization for Studio Movie Grill Holdings, LLC and Jointly Administered Debtors dated March 5, 2021 [Docket No. 700] (the “Plan”)1 and in support of this Objection respectfully represents as follows: BACKGROUND FACTS 1. On October 23, 2020 (the “Petition Date”), the Debtors each commenced a case by filing a petition for relief under chapter 11 of title 11 of the United States Code. The Debtors’ cases have been jointly consolidated for administrative purposes only (the “Chapter 11 Cases”). The Debtors continue to operate their businesses and manage their properties as debtors 1 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan.
Page 2and debtors-in-possession pursuant to 11 U.S.C. §§ 1107(a) and 1108.2 No trustee or examiner has been appointed in the Chapter 11 Cases. 2. The Debtors lease retail space (the “Premises”) from the Landlord pursuant to that certain Third Amended and Restated Lease Agreement dated September 27, 2019 (as amended, the “Lease”) at the location (the “Premises”) set forth on the attached Schedule A. 3. The Lease is a lease “of real property in a shopping center” as that term is used in Section 365(b)(3). See In re Joshua Slocum, Ltd., 922 F.2d 1081, 1086-87 (3d Cir. 1990). 4. On November 5, 2020, the Debtors filed a motion (the “Motion”) seeking inter alia, approval of various bidding procedures and sale of its assets (the “Bidding and Sale Procedures”) [Docket No. 133] to govern the Sale of substantially all of the Debtors’ Assets (the “Sale”). 5. On December 11, 2020, the Court entered an order approving the procedures to govern the Sale in accordance with the Motion [Docket No. 335] (the “Bidding Procedures Order”). 6. As required by the Bidding Procedures Order, on January 13, 2021, Landlord previously filed the Limited Objection of STORE Master Funding III, LLC to Debtors’ Amended Notice of Executory Contracts and Unexpired Leases Which May Be Assumed and Assigned Pursuant to Section 365 of the Bankruptcy Code, in Connection with the Sale of Substantially All of the Debtors’ Assets and the Proposed Cure Amounts With Respect Thereto [Docket No. 468] (the “Cure Objection”). This Objection supplements the Cure Objection and hereby incorporates by reference the Cure Objection as though fully set forth herein. 2 Unless otherwise specified, all statutory references to “Section” are to 11 U.S.C. §§ 101 et seq. (the “Bankruptcy Code”).
Page 37. On March 5, 2021, Debtors filed the Plan. The Plan contemplates the assumption or assumption and assignment of certain executory contracts or unexpired leased, including the Lease. In accordance with Article V of the Plan, on the Effective Date, all Executory Contracts and Unexpired Leases of the Debtors listed on the Assumed Executory Contract and Unexpired Lease List or that were previously assumed or assumed and assigned by the Debtors are deemed to be Assumed Executory Contracts or Unexpired Leases, in accordance with the provisions and requirements of sections 365 and 1123 of the Bankruptcy Code. Plan at Article V.A. 8. Landlord does not object to the Debtors’ efforts to confirm a plan of reorganization, and fully supports the Debtors’ reorganization efforts. Landlord files this Objection to ensure that the Plan, as drafted, does not improperly modify the Landlord’s rights under its Lease and the Bankruptcy Code. Landlord, through counsel, will work with Debtors’ counsel to resolve these issues in advance of Plan Confirmation and are optimistic that the outstanding items will be resolved by language in the Confirmation Order or additional modifications to the Plan. However, as of the filing of this Objection, no agreement has been reached and the form of Confirmation Order is not yet available. To the extent the parties have an opportunity to resolve the issues raised herein in advance of the Confirmation Hearing, Landlord will be prepared to withdraw this Objection as to any issues so resolved. ARGUMENT I. Any Exit Financing Must Preserve and Protect the Rights of Landlord. 9. The Plan provides: On the Effective, and effective as of the date of entry of the Final DIP Order, each Reorganized Debtor that is a lessee under an Unexpired Lease of nonresidential real property shall execute a leasehold mortgage with the Exit Agent, and, absent a timely
Page 4objection and showing by the Confirmation Objection Deadline by the applicable lessor counterparty that such leasehold mortgage is expressly prohibited under such lease and cannot be cured or resolved by consent or other process under such lease, or would cause a default under the landlord’s financing agreement existing as of the date of entry of the Final DIP Order, each lessor counterparty to such Unexpired Lease of nonresidential real property shall be deemed to consent to the grant of such leasehold mortgage to the Exit Agent. Plan at Art. IV, 14 (emphasis added). 10. The Plan thus places a burden on landlords to object to the lessee’s grant of a leasehold mortgage on such lessee’s lease, regardless of whether the underlying lease contains a provision prohibiting lessee from granting a leasehold mortgage. 11. Landlord has no objection to exit financing in general, so long as it does not seek liens on the Lease, or access to the Premises, in violation of the Leases or applicable state law. These rights were specifically limited during these cases in the orders approving the Debtors’ financing, and there is no authority to expand those rights as part of the Debtors’ exit financing. 12. The Lease prohibits or limits the Debtors’ right to assign the Lease and any right to pledge an interest in the Lease. Provisions that prohibit, limit, or otherwise restrict the Debtors’ ability to encumber leases are critical to Landlord’s ability to (a) control its properties, (b) preserve clear title to its Lease, (c) comply with its own financing and investment requirements, and (d) effectively market its properties. Even where a lease may permit liens, such rights may be subordinate to Landlord’s own financing, or may be subject to the satisfaction of certain conditions or express Landlord consent. Provisions that prohibit or restrict the Debtors’ assignability of the Lease are enforceable under state law, and there is no authority for the Debtors to use the Bankruptcy Code, or the Plan confirmation process, to gain rights that are not otherwise available to them under state law or the Lease. Landlord therefore objects and
Page 5expressly reserves its rights to object to any pledge of a leasehold mortgage on the Lease that is contrary to the terms of the Lease or applicable law. II. Adequate Assurance of Future Performance 13. Pursuant to Section 365(f)(2)(B) of the Bankruptcy Code Debtors may only assume and assign the Landlord’s Lease if “adequate assurance of future performance by the assignee of such . . . lease is provided, . . . .” As set forth in Section 365(b)(3), adequate assurance of future performance in the shopping center context includes, inter alia, adequate assurance: (A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; * * * (C) that assumption and assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as radius, location, use or exclusivity provision, and will not breach any such provision contained in any other lease, . . . relating to the shopping center; . . . . 14. The burden of proof on adequate assurance issues is with the Debtors. See In re Lafayette Radio Elecs. Corp., 12 B.R. 302, 312 (Bankr. E.D.N.Y. 1991). 15. As of the date of this Objection, the Plan Supplement identifies the Lease as a lease to be assumed subject to documentation of an agreed lease amendment, but the Debtors have not served any notice identifying any potential assignee of the Lease. 16. To date, though Landlord’s counsel submitted a timely written request pursuant to the Bid Procedures Order, Debtors have not provided any adequate assurance
Page 6information to Landlord. Landlord demands strict proof of any potential assignee’s ability to provide adequate assurance of future performance prior to or at the Confirmation Hearing. 17. Further, since the Debtors’ stores are located in shopping centers, Debtors and any assignee must meet the heightened requirements of adequate assurance that the Bankruptcy Code contemplates in the case of such assignments. The Bankruptcy Code requires more than the basic adequate assurance of future performance of the leases under Section 365(b)(1)(C). In re Sun TV and Appliances, Inc., 234 B.R. 356, 359 (Bankr. D. Del. 1999). In order to assume and assign shopping center leases, Debtors must satisfy the heightened requirements set forth in 11 U.S.C. § 365(b)(3)(A) – (D). See Joshua Slocum, 922 F.2d at 1086; see also L.R.S.C. Co. v. Rickel Home Centers, Inc. (In re Rickel Home Centers, Inc.), 209 F. 3d 291, 299 (3d Cir. 2000). The heightened adequate assurance requirements include the following: The source of rent and assurance that the financial condition and operating performance of the proposed assignee and its guarantors, if any, must be similar to the financial condition and operating performance of the debtor and its guarantor(s), if any, as of the time the debtor became the lessee. See 11 U.S.C. § 365(b)(3)(A); That any percentage rent due under the lease will not decline substantially. See 11 U.S.C. § 365(b)(3)(B); That assumption and assignment of the lease is subject to all provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach of any such provision in any other lease, financing agreement, or master agreement relating to such shopping center. See 11 U.S.C. § 365(b)(3)(C); and That assumption and assignment of the lease will not disrupt the tenant mix or balance in the shopping center. See 11 U.S.C. § 365(b)(3)(D). III. The Plan Seeks to Modify Landlord’s Rights Under the Lease 18. The Plan cannot cut off Debtors’ obligations to cure all defaults under the Lease, including adjustment amounts that are not yet due or indemnification obligations arising under Lease that are being assumed pursuant to the Plan. A debtor assumes its leases cum onere,
Page 7or subject to existing burdens. In re Washington Capital Aviation & Leasing, 156 B.R. 167,172 (Banks. E.D. Va. 1993). While the Debtors must pay all outstanding balances due under the Lease as cure at the time of assumption, the Debtors assume, and must honor, other obligations under the Lease, regardless of when they arise. The Debtors cannot avoid these obligations through releases or waivers in their Plan. 19. In addition to rent and related monthly charges, the Debtors bear responsibility for other charges under the Lease that may not yet be known or which may not yet have been reconciled and/or adjusted from the pre-assumption periods. For instance, the Debtors occupy retail space pursuant to triple-net leases, where they typically pay rent and related lease charges in advance for each month. Moreover, certain charges may be paid in arrears, and cannot be calculated (in some cases) until a year or more after year-end. These accrued but unbilled charges are not yet due under the Lease, and they do not create a current default or payment obligation that is part of the cure payment required to assume the Lease. Nevertheless, Debtors remain responsible for all accrued or accruing charges under the Lease, and must pay such charges when they come due under the Lease. The Debtors cannot assume the Lease pursuant to the Plan, and then try to use the Plan or confirmation order to release their obligation to pay these accrued or accruing, but unbilled, charges that come due under the Lease in the ordinary course. 20. The Lease also contains provisions that require the Debtors to indemnify Landlord with respect to various claims, which claims may not become known until after the assumption of the Lease (i.e. personal injury claims at the Premises and damage to property by the Debtors or their agents). Any assumption of the Lease must be subject to the terms of the Lease, including the continuation of all indemnification obligations, regardless of when they
Page 8arose.3 Nothing in the Plan or confirmation order should act as a waiver or release of any indemnity or other rights that exist under the Lease. 21. The Plan provides: Assumption or assumption and assignment of any Executory Contract or Unexpired Lease pursuant to the Plan or otherwise and full satisfaction of any applicable Cure Claim shall result in the full release and satisfaction of any Claims, Cure Claims, or defaults, whether monetary or nonmonetary, including defaults of provisions restricting the change in control or ownership interest composition or other bankruptcy-related defaults, arising under any Assumed Executory Contract or Unexpired Lease at any time before the effective date of assumption Plan at Article V.C. This provision is in direct opposition to Landlord’s rights under the Lease. Landlord proposes that the language be replaced with the following more robust language to ensure the appropriate protections of Landlord’s rights under the Lease: Notwithstanding anything to the contrary in the Plan, with respect to any assumed Unexpired Lease of non-residential real property, the Debtors, shall remain liable for all obligations arising under the Unexpired Lease that were not otherwise required to be asserted as a cure cost, including: (1) for amounts owed or accruing under such Unexpired Lease that are unbilled or not yet due as of the Cure Objection Deadline regardless of when such amounts or obligations accrued, on account of common area maintenance, insurance, taxes, and similar charges; (2) any regular or periodic adjustment or reconciliation of charges under such Unexpired Lease that are not due or have not been determined as of the Cure Objection Deadline; (3) any percentage rent that comes due under such Unexpired Lease; (4) post-assumption obligations under such Unexpired Lease; and (5) any obligations to indemnify the non-Debtor counterparty under such Unexpired Lease for any claims of third parties pursuant to the terms of the Unexpired Lease, which are not known or liquidated by the time of the Cure Objection Deadline (and therefore not payable as a cure cost pursuant to Bankruptcy Code § 365(b)(1)(a)). Other than with respect to cure amounts fixed in connection with this Plan, all rights of the parties 3 Any ability to assume the Lease is subject to the protections provided by Section 365(b) and (f). Therefore, any assumption must be in accordance with all provisions of the Lease.
Page 9to any assumed Unexpired Lease of non-residential real property to dispute amounts due thereunder are preserved. IV. The Plan Improperly Purports to Limit Landlord’s Setoff and Recoupment Rights under Applicable Law and the Lease 22. The Plan purports to deny a creditor’s right to recoup any Claim “unless such Holder actually has performed such recoupment and provided notice thereof in writing to the Debtors on or before the Confirmation Date.” Plan, Art. VII, I. 23. As noted above, a debtor assumes its leases cum onere, or subject to existing burdens. In re Washington Capital Aviation & Leasing, 156 B.R. at 172. Debtors assume, and must honor, other obligations under the Lease, and cannot modify applicable rights of setoff or recoupment under the Plan. Under the Lease and applicable state law, Landlord is permitted to setoff and recoupment in numerous circumstances, including in the event of overpayment or in the event of a receipt of insurance proceeds. There is no basis for Landlord’s rights to be limited as currently set forth in the Plan. Rather, Debtors must modify this language to preserve Landlord’s right to assert any right of setoff or recoupment that such counterparty may have under applicable bankruptcy or non-bankruptcy law, including, but not limited to, the ability, if any, of such counterparties to setoff or recoup a security deposit held pursuant to the terms of their unexpired lease with the Debtors. V. Improper Non-Debtor Releases 24. The Plan purports to provide releases to non-debtor third parties, which is contrary to both the Bankruptcy Code and Fifth Circuit precedent. See In Bank of New York Trust Co. v. Official Unsecured Creditor Comm. (In re Pacific Lumber), 584 F.3d 229 (5th Cir. 2009). Notwithstanding the Plan’s affirmative opt-out procedures, the grant of non-debtor releases is improper in this case.
Page 1025. Landlord hereby opts out of and objects to the Debtors’ attempt to release non-debtor third parties. VI. The Plan Improperly Seeks to Disallow Certain Claims Without Proper Notice 26. Article II.A.1 seeks to automatically disallow Administrative Claims determined by the Debtors to be untimely filed, and Article V.B of the Plan similarly seeks to automatically disallow any rejection damages claims the Debtors’ believe to be filed after the applicable bar date. This automatic disallowance of Claims provides no notice or opportunity for an affected claimant to oppose and be heard on the disallowance of their claim, and indeed, no notice to claimant that their Claim has been disallowed. 27. Rule 3007(a) of the Federal Rules of Bankruptcy Procedure requires that “[a] objection to the allowance of a claim and a notice of objection that substantially conforms to the appropriate Official Form shall be filed and served at least 30 days before any scheduled hearing on the objection or any deadline for the claimant to request a hearing.” Fed. R. Bankr. P. 3007(a)(1). Rule 3007(e) enumerates additional requirements that must be met for filing an omnibus objection to more than one claim, including that such an objection state in a conspicuous place that claimants receiving the objection should locate their names and claims in the objection, list claimants alphabetically and provide a cross-reference to claim numbers, state the grounds of the objection to each claim, state in the title the identity of the objector and the grounds for the objections, and contain objections to no more than 100 claims. 28. The Plan fails to satisfy any of these requirements to constitute a valid claim objection and provide affected claimants with sufficient notice and an opportunity to respond. As an initial matter, many Landlords do not yet know whether their Leases will be assumed or rejected, so they do not know if this language will even apply to their claims. The
Page 11Plan does not comport with the Official Form for a claim objection, nor does it meet the requirements to constitute an omnibus objection to claims. 29. For these reasons, this provision is inappropriate and should be removed from the Plan. VII. Reservation of Rights 30. Landlord reserve its rights to raise further or other objections to the Plan, the Plan Supplement or any amendments thereto, and in response to any amended Plan or proposed Confirmation Order subsequently filed by the Debtors, including at the Confirmation hearing. Landlord also reserves the right to assert Rejection Claims, and other claims for rejected Leases as applicable. VIII. Joinder in Objection Raised by Other Landlords 31. To the extent consistent with the objections expressed herein, Landlord also join in the objections of other shopping center lessors to the Debtors’ proposed relief. WHEREFORE, Landlord respectfully requests that the Court enter an order consistent with the foregoing objections; and for such other and further relief as may be just and proper under all of the circumstances. Respectfully submitted, Dated: March 10, 2021 /s/ Eric M. Van Horn Eric M. Van Horn Texas Bar No. 24051465 SPENCER FANE LLP 2200 Ross Avenue, Suite 4800 West Dallas, TX 75201 Telephone: 214.750.3610 Facsimile: 214.750.3612 E-mail: firstname.lastname@example.org
Page 12and Craig Solomon Ganz (pro hac vice) Michael A. DiGiacomo (pro hac vice) BALLARD SPAHR LLP 1 East Washington Street, Suite 2300 Phoenix, AZ 85004-2555 Telephone: 602.798.5400 Facsimile: 602.798.5595 E-mail: email@example.com firstname.lastname@example.org Attorneys for STORE Master Funding III, LLC
Page 13CERTIFICATE OF SERVICE I certify that on March 10, 2021 a true and correct copy of the foregoing document was served via the Court’s Electronic Case Filing (ECF) system on all parties registered to receive electronic service in these cases and by e-mail upon the parties’ counsel listed below. /s/ Eric M. Van Horn Eric M. Van Horn Debtors Law Offices of Frank J. Wright Attn: Frank J. Wright, Esq. and Jeffery M. Veteto, Esq. 2323 Ross Avenue, Suite 730, Dallas, Texas 75201 E-mail: email@example.com and firstname.lastname@example.org Agent Vinson & Elkins LLP Attn: William L. Wallander, Esq. and Bradley R. Foxman, Esq., 2001 Ross Ave., Suite 3900, Dallas, Texas 75201 E-mail: email@example.com and firstname.lastname@example.org Official Committee of Unsecured Creditors Pachulski Stang Ziehl & Jones LLP Attn: Jeffrey Pomerantz, Esq., Robert Feinstein, Esq., and Steven Golden, Esq. 780 Third Avenue, 34th Floor, New York, NY 10017 E-mail: email@example.com, firstname.lastname@example.org, and email@example.com Official Committee of Unsecured Creditors Norton Rose Fulbright US LLP Attn: Ryan Manns, Esq. 2200 Ross Avenue, Suite 3600, Dallas, TX 75201 E-mail: firstname.lastname@example.org Crestline Jones Day Attn: John E. Mazey, Esq., Michael C. Schneidereit, Esq., and Nicholas J. Morin, Esq. 250 Vesey Street, New York, New York 10281 E-mail: email@example.com, firstname.lastname@example.org, and email@example.com Office of the United States Trustee Attn: Meredyth Kippes 1100 Commerce Street, Room 976 Dallas, Texas 75201 Meredyth.A.Kippes@usdoj.gov
Page 14SCHEDULE A
|STORE Master Funding III, LLC||None||None|
|Store No. Unknown||Houston, Pearland||8440 S Sam Houston
Pkwy E., Houston, TX
|Store No. Unknown||Northpoint, Georgia||7730 North Point Pkwy,
Alpharetta, GA 30022