Court Opinion

ID: 3184946
Source: CourtListenerOpinion
Date Created: 2016-03-11 21:06:07.362425+00
Date Added: 2024-06-11T07:39:01.208505
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                   ____________________
No. 15-2093

IN RE: GREAT LAKES QUICK LUBE LP,
                                                               Debtor.
                   ____________________

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF GREAT
LAKES QUICK LUBE LP,
                                      Plaintiff-Appellant,
                                v.

T.D. INVESTMENTS I, LLP,
                                              Defendant-Appellee.
                   ____________________

      Appeal from the United States Bankruptcy Court for the
                   Eastern District of Wisconsin.
      No. 13-02709-SVK — Susan V. Kelley, Bankruptcy Judge.
                   ____________________

   ARGUED DECEMBER 4, 2015 — DECIDED MARCH 11, 2016
                   ____________________

   Before POSNER, FLAUM, and WILLIAMS, Circuit Judges.
   POSNER, Circuit Judge. In 2012 a company named Great
Lakes Quick Lube LP (Great Lakes for short), which owned a
2                                                     No. 15-2093

series of stores throughout the Midwest that provided oil
changes and other automotive maintenance services, filed
for bankruptcy under Chapter 11 of the Bankruptcy Code.
The committee appointed to represent the unsecured credi-
tors filed an adversary action (in effect a separate suit within
the overall bankruptcy proceeding) against T.D. Investments
I, LLP, which had leased two oil-change stores to Great
Lakes. Great Lakes had negotiated the termination of the
leases 52 days before it declared bankruptcy, and the credi-
tors’ committee contends that the termination was either a
preferential or a fraudulent transfer of the leases to T.D. and
that whichever it was the value of the leases belongs to the
bankrupt estate and should therefore be available to the
bankrupt’s creditors.
   T.D. denies that the terminations were transfers, let alone
preferential or fraudulent, and the bankruptcy judge agreed
but at the request of the creditors’ committee asked us to ac-
cept a direct appeal from her ruling. See 28 U.S.C.
§ 158(d)(2)(A). We have accepted the appeal.
    Before its bankruptcy Great Lakes had acquired more
than a hundred store leases, typically by buying a store, sell-
ing it to investors, and leasing it from the new owners under
a long-term contract. In February 2012, with its debts mount-
ing and bankruptcy looming, Great Lakes agreed with T.D.
to terminate the two leases that it had obtained from that
company—even though the leased stores were profitable—
plus leases which we can ignore on three unprofitable stores
that it had obtained from affiliates of T.D. The creditors’
committee contends that the transaction with T.D. was both
a preferential and a fraudulent transfer. A preferential trans-
fer, forbidden by 11 U.S.C. § 547(b), is, so far as relates to this
No. 15-2093                                                   3

case, a transfer by an insolvent debtor to a favored creditor
within 90 days before bankruptcy that gave that creditor
more than if it had waited for the bankrupt’s assets to be dis-
tributed in the bankruptcy proceeding. (T.D. was of course a
creditor of Great Lakes.) The particular type of fraudulent
transfer alleged by the creditors’ committee—what is called
a “constructive” fraudulent transfer, see 11 U.S.C.
§ 548(a)(1)(B)—is a transfer, made by an insolvent or nearly
insolvent debtor to anyone (whether or not a creditor) within
two years before the bankruptcy, that gave the debtor (and
consequently the estate in bankruptcy) less than what he
transferred. So far as relates to this case, there appears to be
no difference between the two types of improper transfer.
    The transfer alleged is the surrender by Great Lakes of
the two leases that it had been granted by T.D. The parties
disagree about whether Great Lakes received equivalent
value for the leases that it surrendered and whether T.D. re-
ceived more value as a result of the surrender than it would
have received had the leases been part of the bankrupt es-
tate. The bankruptcy judge did not resolve these issues be-
cause as we said she ruled that the terminations had not
been transfers.
    At trial, the head of Great Lakes, Jim Wheat, testified that
the company had terminated the profitable leases for a varie-
ty of reasons including a strained relationship between
Wheat and the head of T.D., John Theisen. According to
Wheat, Theisen was demanding and inflexible, especially in
insisting on prompt payment of Great Lakes’ rental obliga-
tions despite its parlous financial state. Wheat testified that
other reasons for his decision to terminate the leases were
fear of eviction by T.D. and that having fallen behind in its
4                                                  No. 15-2093

rental payments and other obligations Great Lakes had also
to fear being sued by T.D.
    It seems unlikely that Great Lakes terminated leases on
two profitable stores just because the landlord was being dif-
ficult and making threats. But if Great Lakes knew it was go-
ing down the tubes it would have had no compelling reason
to cling to the leases since if it did they would become assets
of the estate in bankruptcy and thus property of Great
Lakes’ creditors; and either way the leases would have no
value to Great Lakes. Conceivably, therefore, even slight irri-
tation with Theisen might have led Great Lakes to terminate
them.
    The creditors’ committee presented evidence that the two
stores together were worth between $327,000 and $450,000 to
Great Lakes, figures derived from projections of how well
the stores were likely to have done before the leases expired.
The value estimates would make little difference to Great
Lakes if, to repeat, it knew it was going to lose the stores re-
gardless, whether to T.D. or to its other creditors. But to the
extent that the leases would have had comparable or at least
significant value to creditors of the bankrupt estate, Great
Lakes’ surrender of the leases to T.D. could be regarded as a
preferential transfer.
    T.D. argues that Great Lakes decided to terminate the
leases in order “to rid itself of locations that were burden-
some to its operations with the hopes that such action would
allow it to avoid bankruptcy and continue operating.”
Though discarding profitable locations could not stave off
bankruptcy, T.D. argues that even though the two stores
were profitable, ongoing maintenance, repairs, and other ob-
ligations would have cut so far into those profits that Great
No. 15-2093                                                  5

Lakes would actually have lost money had it retained the
leases.
    Another possible explanation for the terminations builds
on the fact that Great Lakes may have expected to emerge
from bankruptcy as a going concern—Chapter 11 is oriented
toward reorganization rather than liquidation. And while
the bankruptcy proceeding will not end until this adversary
action between Great Lakes’ unsecured creditors and T.D. is
resolved, Great Lakes has continued to operate its business,
albeit in shrunken form—the number of stores it leased
dropped from 107 at the company’s peak to 64 shortly after
the bankruptcy. Once reorganized, it would be struggling
for survival with its diminished number of stores. Still, a
fresh start may be easier for Great Lakes’ management to ob-
tain without its needing to deal with the irritating Theisen.
    T.D. argues that the leases were abandoned rather than
transferred, and if they were not transferred the creditors
have no valid avoidance claims. But the Bankruptcy Code
defines “transfer” broadly, as including “each mode, direct
or indirect, absolute or conditional, voluntary or involun-
tary, of disposing of or parting with—(i) property; or (ii) an
interest in property.” 11 U.S.C. § 101(54)(D) (emphasis added).
Great Lakes had an interest in property—namely the lease-
holds—which it parted with by transferring that interest to
T.D. That was a transfer to one creditor of what might have
been an asset to Great Lakes’ other creditors had the transfer
not taken place; and if so it was a preferential transfer and
therefore avoidable.
    T.D. invokes another provision of the Bankruptcy
Code—11 U.S.C. § 365(c)(3), which provides that “the trustee
[in bankruptcy] may not assume or assign any … unexpired
6                                                    No. 15-2093

lease of the debtor … if … such lease is of nonresidential real
property and has been terminated under applicable non-
bankruptcy law prior to the order for relief.” The bankruptcy
judge thought the quoted language describes this case. But if
true this would place section 365(c)(3) on a collision course
with section 101(54)(D), quoted in the preceding paragraph.
For remember that the latter section covers not only proper-
ty but also an interest in property, and a lease is an interest in
property. Section 365(c) is aimed at facilitating the re-leasing
of commercial property during bankruptcy proceedings by
forbidding the trustee to interfere with the occupancy of the
new tenants. See Robinson v. Chicago Housing Authority, 54
F.3d 316, 319 (7th Cir. 1995). It prohibits the trustee from “as-
sum[ing] or assign[ing]” leases, as in selling a lease to some-
one who as lessee would be entitled to occupy the property.
But Great Lakes’ creditors don’t want the leases; their ac-
tions for avoidance of the transfers of the leases (sections
547(b) and 548(a)(1)) and recovery of the leases’ value (sec-
tion 550(a)) do not require “assum[ing] or assign[ing]” the
leases. Section 365(c)(3) is therefore inapplicable.
    Upon the termination of Great Lakes’ leases, T.D. leased
the two stores to Super Lubes of Wisconsin, LLC, an oil-
change company much like Great Lakes. If the bankruptcy
court were to order the stores turned over to Great Lakes’
creditors, this would have the disruptive effect on commer-
cial activity against which section 365(c)(3) is aimed. But to
repeat, the creditors are seeking not the leases but the value
of the leases that Great Lakes transferred to T.D. They are
not trying to evict anyone.
  This distinction between the value of the leases (value to
which the creditors may be entitled) and the leases them-
No. 15-2093                                                7

selves (which cannot lawfully be transferred to them) ena-
bles the purpose of section 365(c)(3) to be fulfilled without
making inroads into section 101(54)(D). The bankruptcy
judge’s reading of 365(c)(3) placed the two sections in need-
less conflict.
   The judgment of the bankruptcy court is reversed and
the case remanded to that court to determine the value of
Great Lakes’ transfer to T.D. and whether T.D. has any de-
fenses to the creditors’ claims.
   Other issues are raised by the parties but do not warrant
discussion.
                 REVERSED, AND REMANDED WITH DIRECTIONS