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sought to compel the debtor to assume or reject the lease. The trustee objected to the motion and moved for summary judgment, arguing that the lease was not subject to assumption or rejection because the lessor terminated the lease by its material breaches (i.e., accelerating and drawing down on the letter of credit). The bankruptcy court denied summary judgement, holding that the automatic stay took effect upon the filing of the involuntary petition. At that time, the debtor was current on its lease payments. Because the lessor took actions against the debtor without first seeking relief from the automatic stay, held the court, those actions were void and could not have resulted in the termination of the lease before the order for relief. Thus, said the court, the lease potentially was still in effect and, therefore, potentially subject to assumption or rejection under section 365(d)(5) of the Bankruptcy Code.
* In re Weiss, 377 B.R 867 (Bankr. N.D. Ill. Oct. 2007) (Hollis, J.)
The debtor's membership and partnership interests could not serve as collateral for the lenders' pre-petition promissory notes. Two ostensibly secured creditors sought relief from the automatic stay to foreclose on the debtor's partnership and membership interests in several limited partnerships (LPs) and limited liability companies (LLCs, and collectively the "entities"). The debtor executed two pre-petition promissory notes and pledged as collateral several assets, including his interests in those entities. However, the respective operating agreements for each of the entities restricted the transfer or assignment of the debtor's interests without obtaining prior consent of the other partners and members. Thus, the debtor argued, his rights in the entities did not serve as collateral for the debt owed under the pre-petition notes because the assignment of those rights was invalid.
The bankruptcy court agreed and denied the lenders' request for relief from stay. Said the court, the respective operating agreements of the entities each unambiguously required prior consent. Because the lenders failed to obtain such prior consent, the purported assignments could not have transferred to the lenders any of the debtor's rights in the entities. The court further concluded that the lenders' attempts to obtain retroactive consent were ineffective under the clear "prior consent" requirements. Also unavailing was the lenders' promissory estoppel argument. To that end, the court found that the debtor never made an unambiguous promise that he had authority to transfer his rights in the entities. To the contrary, said the court, the debtor notified the lenders that prior consent was necessary. Finally, the court held that the operating agreements restricted the transfer of all or any part of the membership or partnership interests. Proceeds fall under this umbrella. Thus, because the debtor could not assign rights in his interests without prior consent, he also could not assign his rights to proceeds from his interests. Without an effective transfer or assignment, the debtor's interests in the entities could not serve as collateral for the pre-petition loans. The court, therefore, denied the lenders' requests for relief from the automatic stay. The lenders are currently learning the meaning of "due diligence."
