As part of its Chapter 11 reorganization Bally Total Fitness of the Mid-Atlantic assumed a lease with Friday Investment, which had originally included a guaranty by Bally Holding. When Bally Mid-Atlantic later defaulted, Friday Investments sought to enforce the guaranty against Bally Holding. Bally asserted that while the lease had been assumed, the guaranty was discharged.
In a divided opinion, the majority of held that under North Carolina law a guaranty is a separate contract from the underlying obligation, Tripps Rests. of N.C., Inc. v. Showtime Enters., Inc., 164 N.C. App. 389, 391, 595 S.E.2d 765, 767 (2004), with “[t]he strict independence of the two separate contracts is “not affected by the fact that both contracts are written on the same paper or instrument or are contemporaneously executed.” There remained, however, a genuine issue of material fact whether the guaranty was “required to be maintained” by the assumption or discharged.… Read More
Carolina Internet had an oral agreement to pay O’Dell 6.5% of its sales from its largest customer, believing that O’Dell could take that account away. When Carolina Internet filed Chapter 11, however, it did not list O’Dell as a creditor. That failure notwithstanding, O’Dell was aware of the bankruptcy, both as it was being planned and after it was filed. After filing, Carolina Internet continued to pay O’Dell, unlike other unsecured creditors, and belatedly included a budget item for $22,124.66 a month in “sales commissions”, that were discovered by the Creditor’s Committee to have been paid to O’Dell as a “kickback.” The Creditor’s Committee insisted that payments to O’Dell be returned and discontinued, but Carolina Internet, fearing the loss of its primary customer, sought to assume what it alleged was an oral executory contract with O’Dell.… Read More
This article discusses the “fix” that Congress attempted to make in BAPCPA in 11 U.S.C. § 365(p)(2), by allowing Debtors, rather than just the Trustee, to assume leases for personal property, usually vehicles, in Chapter 7 cases.
The author finds that two questions arise from the statutory language, which is yet another example of the shoddy drafting that is a hallmark of BAPCPA. First, whether a debtor can effectively assume a lease under § 365(p)(2) without entering into a reaffirmation under § 524(c) and second, if assumption under § 365(p)(2) can occur without reaffirmation, are the debtor’s obligations under the lease subject to discharge, in effect providing for “ride-through”.… Read More