In re Delaware Sports Complex, LLC, Case No. 17-11175 (KG) Bankr. D. Del. 8-21-17
Summary by William J. Amann, Esq. BRAUCHER & AMANN, PLLC, Manchester, NH
Bankruptcy (the figurative, Time-Out) Doesn't Cure Commercial Lease Deficiencies. Whether a non-residential lease was terminated before the debtor’s bankruptcy filing and whether the city’s interest as landlord may be subordinated to the lien of the post-petition lender if required under the debtor’s financing agreement.
Three men had a vision to develop a sports complex in Middleton, Delaware. They formed a limited liability company called, fittingly, Delaware Sports Complex, LLC (hereinafter “DSC”).
DSC was eager to develop the 170 acre sports complex, perhaps too eager, because it entered into a Lease one (1) year before the LLC had been legally created. However, the Lease contained a term wherein DSC represented and warranted that it was a duly formed and created Delaware LLC.
The Lease provided an Early Termination clause, which the Town asserted in its notice of default. But the Debtor, even if there was a default, had an opportunity to cure the default. Pursuant to the Lease, the default must remain for thirty (30) days after the Debtor receives the default notice and after the expiration of those thirty (30) days, if the default is of “a nature that it cannot be cured within such thirty (30) day period,” then as long as the Debtor is “proceeding to cure [the default] in good faith,” the default is deemed not to continue. (emphasis mine).
The Town of Middleton cried foul and issued a notice of default of terms of the Lease to DSC and then commenced a summary possession action against DSC. The Town’s notice of default was premised upon: (1) DSC not being listed with the State of Delaware’s Secretary of State’s Office; (2) DSC’s failure to provide certain bonding and; (3) DSC’s failure to execute a Recoupment Agreement with the Town and State’s Department of Transportation. The Debtor had until March 8, 2017 to cure the alleged defaults.
First, the Debtor cured the formation issue by filing its Certificate of Formation on February 28, 2017.
Second, as to the second, alleged default, the bonding requirement, the Court found that the Debtor cured the default through his letters of credit commitment which equaled the Town’s bonding request and that the Debtor acted in good faith and received no help from the Town. Therefore, the Debtor did was found not to have defaulted on the bonding requirement.
Third, the so-called Recoupment issue, basically required the Debtor to “promptly observe and comply with all present and future laws, ordinances, requirements, order, directive, rules and regulations of the Federal, State and local governments and all other governmental authorities affecting the Property or appurtenances thereto or any part thereof. . . .”. In other words, Delaware was requiring that the Debtor either complete and submit a sull traffic impact study or participate in a Recoupment Agreement. Both choices would cost the Debtor in excess of $2,000,000.
But DSC called a figurative time-out by filing Chapter 11 in May 2017.
ISSUE ONE: Whether the Lease was terminated before Debtor’s bankruptcy filing. In other words, whether the Lease was void ab initio because Debtor did not exist when it executed the Lease.
ISSUE TWO: Whether the Town’s interest as landlord may be subordinated to the lien of the post-petition lender if required under the Debtor’s financing agreement.
HOLDING ON ISSUE ONE: No. DSC’s certificate of formation was not filed until after the Town sent its notice of Lease default. However, the Court found that DSC could enter into the Lease even though it was not legally created at that time. The Court ruled that when an agent contracts for a non-existent principal which is subsequently formed, the principal may assume the contract. Boulden v. Albiorix, Inc., 2013 WL 396254 (Del. Sup. 2013). The Debtor’s original members were, in effect, promoters of the preformation entity. See also Lorillard Tobacco Co. v. Am. Legacy Found., 903 A. 2d 728, 744 (Del. 2006).
The Court also found that the Town was estopped from denying the existence of the Debtor, first, because it accepted Debtor as a limited liability company throughout; and second, because the Town conceded that Debtor’s formation was sufficient to cure the default.
HOLDING ON ISSUE TWO: No. Debtor seeks to subordinate the Town’s fee simple interest in the property to the Debtor’s credit agreement (the “DIP”). The Lease provides that:
[Debtor] shall have the right to grant a leasehold mortgage or otherwise encumber this Lease or any sublease of all or any part of the Property and [Debtor] may assign its rights hereunder. Such leasehold mortgage shall encumber the leasehold interest created by this Lease; [the Town] agrees to execute a commercially reasonable Subordination and Non-Disturbance Agreement or similar agreement with [Debtor’s] lender.
Lease, § 7.2. The Court’s decision that the Lease was terminated makes it unnecessary to address the subordination issue.
It is the Debtors’ failure to enter into a recoupment agreement that creates an uncured default. Debtor indicated at the Hearing that it may want to develop only six or so fields and because of the lighter traffic the recoupment agreement would not be needed. The Lease, however, makes the parties’ expectations clear. The Debtor was in good faith to develop the leasehold as numerous fields and facilities. Although the Lease does not contain timelines for the development of the fields and buildings, the “time is of the essence” provision in the Lease establishes the Debtor’s and the Town’s expectation that the entire project would be accomplished and promptly. It is perfectly clear to the Court that had the parties to the Lease focused on their understanding and agreement that Debtor would fully develop the property promptly, they would have included time limits. The Debtor’s failure to promptly enter into the recoupment agreement based on its intention to develop only a portion of the property and to fulfill only a portion of its plan is a default which Debtor failed to cure in a timely fashion. The default renders the Lease terminated.
The Debtor defaulted on the Lease and the Town’s termination was proper.