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In re Channel Home Centers

filed: March 30, 1993.

CHANNEL HOME CENTERS, INC.; CHANNEL HOME CENTERS REALTY CORPORATION; CHANNEL ACQUISITION COMPANY DEBTORS LEGACY, LTD. APPELLANT
v.
CHANNEL HOME CENTERS, INC. APPELLEES



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY. D.C. Civil No. 91-04270.

Before: Becker, Hutchinson, and Alito, Circuit Judges.

Author: Alito

Opinion OF THE COURT

ALITO, Circuit Judge :

Legacy, Ltd. ("Legacy), a landlord of Chapter 11 debtor Channel Home Centers Realty Corporation ("Channel Realty"), appeals from an order of the United States District Court for the District of New Jersey. In that order, the district court affirmed two orders of the bankruptcy court that granted, under ll U.S.C. § 365(d)(4) (1988), a first and second extension of the time within which the lease with Legacy could be assumed. On appeal, Legacy contends that the second extension was invalid because Section 365(d)(4) precludes a bankruptcy court from granting any extension once 60 days have elapsed after the order for relief and because the second extension was granted after that period had ended. Legacy also contends that there was not sufficient "cause" for the extensions. We affirm the order of the district court.

I.

Channel Home Centers, Inc. ("Channel") is a corporation engaged in the retail sale of home improvement products. Channel Realty is a wholly owned subsidiary of Channel and is engaged in leasing, subleasing, purchasing, and selling real estate interests associated with Channel's retail outlets.

Channel Realty holds a long-term lease from Legacy for property in the Wilmington, Delaware area (the "Brandywine property"). At the time the lease was entered, the property was a vacant lot, but the debtors subsequently constructed a shopping center on the property at a cost of approximately two million dollars. The shopping center includes a Channel retail outlet, and Channel also subleases space to other stores.

On January 14, 1991, Channel and Channel Realty filed separate petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey.*fn1 Under 11 U.S.C. § 301 (1988), these petitions constituted orders for relief. The two petitions were consolidated, and both debtors continued to operate as debtors in possession. As of the filing date, Channel and Channel Realty were parties to about 200 leases at 91 locations in 19 states.

On February 22, 1991, Channel and Channel Realty moved, pursuant to Section 365(d)(4), for an extension of the period of time within which they had to decide whether to assume or reject their leases. In an effort to show that there was "cause" for the extension within the meaning of Section 365(d)(4), Channel and Channel Realty submitted a certification by their chief executive officer, Joseph Nusim, stating that Channel and Channel Realty were "in the process of analyzing their business operations to determine which leases to assume or reject." Explaining that the debtors planned to scale back operations and concentrate on a "'core' geographical area," Nusim continued:

Although [Channel and Channel Realty's] rehabilitation plan ultimately will require [them] to assume or reject the Leases, [their] flexibility to develop a plan of reorganization would be greatly impaired if [they] were prematurely compelled to make a decision as to the assumption or rejection of the Leases at this time. This is particularly true not only because the Leases constitute a primary asset of [Channel and Channel Realty] necessary for the conduct of Channel's retail business, but also because many of the Leases constitute a valuable real estate asset even if the leased premises are not utilized in Channel's business.

[Channel and Channel Realty] require additional time to determine and fix those locations at which Channel will continue or discontinue the conduct of its retail business as well as to assess the potential value of the Leases as surplus real estate.

No landlord will be prejudiced by granting [Channel and Channel Realty] the requested relief because landlords, with few exceptions, continue to receive regular monthly rental payments under the Leases.

App. at 131-132.

Legacy filed an objection to the motion, arguing that Channel and Channel Realty should be forced to accept or reject leases in those areas in which they had decided not to continue operations. Legacy also contended that it would be prejudiced by delay because it would lose the opportunity to take advantage of the market rate for the Brandywine property before any further decline in real estate values.

A hearing on the motion was held on March 15, 1991, but Legacy failed to attend. On that date -- 60 days after the Channel and Channel Realty petitions were filed -- the bankruptcy Judge orally granted an extension until June 17, 1991. A written order to this effect was later entered.

On May 31, 1991 -- well before the end of the period of the first extension -- the debtors filed a notice of a second motion for an extension under Section 365(d)(4). In the verified application in support of this motion, the debtors noted that they had "expeditiously rejected more than 60 leases since the Filing Date, after making the determination that the leases lacked economic value to the Debtors' estates." Their application further stated:

Although the Debtors' rehabilitation plan ultimately will require the Debtors to assume or reject all leases, the Debtors' flexibility in developing a plan of reorganization would be greatly impaired if the Debtors were prematurely compelled to make a decision as to the assumption or rejection of the Leases at this time.

In particular, assumption of long term leases prior to confirmation of a plan would result in the conversion of unsecured damage claims into substantial administrative expense claims to the detriment of unsecured creditors.

App. at 225-226.

Legacy again filed a written objection. Legacy argued that the plain language of Section 365(d)(4) prohibited any extension once 60 days had passed after the filing of the petition. Legacy also maintained that there was no valid "cause" for the second requested extension because, among other things, the debtors had already ...


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