Cahaba Forests, LLC v. Hay et al
MEMORANDUM OPINION AND ORDER as follows: 1. Cahaba has standing to bring this action, the court has jurisdiction by diversity of citizenship, and the Twilleys' motion is DENIED to that extent. 2. The effect of Bowater's deemed rejection of the Master Lease and Sublease pursuant to § 365 of the Bankruptcy Code was to give the Twilleys the right to terminate the Master Lease, and its termination would have the effect of terminating the Sublease. Cahaba's motion is DENIED, and the Twilleys' motion is GRANTED to that extent. 3. All other issues are reserved for future determination. Signed by Honorable Judge W. Harold Albritton, III on 2/9/2012. (Attachments: # 1 Civil Appeals Checklist)(jg, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
CAHABA FORESTS, LLC,
) CIVIL ACTION NO. 3:11-cv-423-WHA
MARY GEORGE EAST HAY, DORIS
EAST RAGSDALE, LYNDA MARIE
EAST RICE WOODALL, JIMMY RAY
EAST, JENNINGS FELIX EAST, JR.,
DONALD L. RUSH a/k/a Donald Lee Rush,
NANCY R. SCOTT, a/k/a Nancy D. Rush
a/k/a Nancy Rush Scott, MICHAEL D.
TWILLEY, JANICE TWILLEY BRYAN,
W. DAVID TWILLEY, CAROL ANN
TWILLEY DEWBERRY, JAMES FLOYD
CALDWELL, JOSEPHONE V. CALDWELL )
a/k/a Josephine Caldwell Davis, WILLIE E.
CALDWELL, BETTY ANN HANSEN a/k/a
Betty A. Drivere, PAMELA TWILLEY
WELLBORN, and AMELIA D. TWILLEY
a/k/a Amelia Dawn Twilley a/k/a Amelia
Voltz a/k/a Amelia Twilley Paschal,
MEMORANDUM OPINION AND ORDER
This case is before the court on cross Motions for Summary Judgment filed by Plaintiff,
Cahaba Forests, LLC (“Cahaba”) (Doc. # 26), and by the Defendants, Doris East Ragsdale,
Lynda Marie East Rice Woodall, Jimmy Ray East, Jennings Felix East, Jr., Donald L. Rush,
Michael D. Twilley, Janice Twilley Bryan, W. David Twilley, Carol Ann Twilley Dewberry,
James Floyd Caldwell, Josephine V. Caldwell, Willie E. Caldwell, Betty Ann Hanson, Pamela
Twilley Wellborn, and Amelia D. Twilley (collectively “the Twilleys”)1 (Doc. # 30).
Cahaba filed a Complaint for Declaratory Judgment in this case on June 2, 2011, (Doc. #
1), asserting jurisdiction based on diversity of citizenship, federal question, and supplemental
jurisdiction. The Twilleys filed an Answer, Counterclaim and Third-Party Complaint (Doc. #
21). Pursuant to this court’s October 5, 2011, Order (Doc. # 39), the cross Motions for Summary
Judgment will be considered only to the extent that those motions address the issue of whether
Bowater’s rejection in bankruptcy of the sublease and master lease with the Twilleys operated to
terminate Cahaba’s possessory rights in the property, and whether Cahaba has standing to bring
its suit. All other issues will not be addressed at this time.
II. SUMMARY JUDGMENT STANDARD
Summary judgment is proper “if there is no genuine issue as to any material fact and . . .
the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986).
The party asking for summary judgment “always bears the initial responsibility of
informing the district court of the basis for its motion,” relying on submissions “which it believes
demonstrate the absence of a genuine issue of material fact.” Id. at 323. Once the moving party
has met its burden, the nonmoving party must “go beyond the pleadings” and show that there is a
genuine issue for trial. Id. at 324.
Mary George East Hay and Nancy R. Scott, despite being named as Defendants by
Cahaba, did not join in this motion or in the pleadings, and for simplicity, they are not included
in this term for purposes of this order.
Both the party “asserting that a fact cannot be,” and a party asserting that a fact is
genuinely disputed, must support their assertions by “citing to particular parts of materials in the
record,” or by “showing that the materials cited do not establish the absence or presence of a
genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.”
Fed. R. Civ. P. 56(c)(1)(A), (B). Acceptable materials under Rule 56(c)(1)(A) include
“depositions, documents, electronically stored information, affidavits or declarations, stipulations
(including those made for purposes of the motion only), admissions, interrogatory answers, or
To avoid summary judgment, the nonmoving party “must do more than show that there is
some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586 (1986). On the other hand, the evidence of the non-movant must be
believed and all justifiable inferences must be drawn in its favor. See Anderson v. Liberty Lobby,
477 U.S. 242, 255 (1986).
After the nonmoving party has responded to the motion for summary judgment, the court
shall grant summary judgment if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a).
There are no material differences in the parties’ versions of the facts as they pertain to the
issues now before the court. They are summarized as follows:
The Twilleys, a large number of family members who are all beneficiaries under a
testamentary trust, own over 24,000 acres of undeveloped timberlands in counties within this
district. On July 1, 1967, the land was leased by them to Kimberly-Clark Corporation (“K-C”),
with unrestricted possession and use, including full timber rights, for a term ending on June 29,
2032 (the “Master Lease”). The lease contained no prohibition or restriction as to subleasing,
and required no consent of the Twilleys (the “Lessors”). Bowater Alabama LLC (“Bowater”)
subsequently became lessee under the Master Lease by virtue of becoming successor-in-interest
On or about February 10, 2000, Bowater’s predecessor-in-interest subleased all but 40
acres of the property to Cahaba, under an unrestricted sublease (“the Sublease”) requiring Cahaba
to comply with all terms of the Master Lease, to make payments called for directly to the
Twilleys, and to pay ad valorem taxes on the land. The Sublease was to terminate on the same
day as the Master Lease, June 29, 2032. The Twilleys were not parties to the Sublease. So, at
the times relevant to the issues under consideration, the Twilleys were lessors under the Master
Lease, Bowater was lessee under the Master Lease and lessor under the Sublease, and Cahaba
was lessee under the Sublease.
On or about March 21, 2006, Cahaba, Bowater, and all of the Twilleys jointly executed a
“Termination and Cancellation of Lease Agreement” that withdrew approximately 153.5 acres
from the lease and sublease upon payment of approximately $90,000 by the Twilleys to Cahaba.
On April 16, 2009, Bowater filed in the United States Bankruptcy Court for the District of
Delaware a petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code, as did its
parent company, AbitibiBowater, Inc., and numerous other subsidiaries. All of these petitions
have been jointly administered in the Bankruptcy Court under Case No. 09-11296. At the time of
the filing, all payments due to the Twilleys were current, having been paid by Cahaba directly to
the agent for the Twilleys under the terms of the Sublease. These are annual payments due on
July 1 of each year. All taxes were current.
On August 3, 2009, the bankruptcy judge entered an order granting Bowater and all
affiliated Debtors a ninety (90) day extension, through and including November 12, 2009, to
assume or reject all unexpired non-residential leases of real property pursuant to § 365(d)(4) of
the Bankruptcy Code (11 U.S.C. § 365(d)(4)).
Although the Sublease contained a provision that, in the event Sublessor became subject
to a proposed plan of reorganization under Chapter 11, it would not seek rejection of the Master
Lease, Bowater’s Trustee allowed the deadline to pass without either assuming or rejecting the
Master Lease or Sublease and, pursuant to § 365(d)(4), they were deemed rejected on November
12, 2009, under bankruptcy law. There is no evidence before the court that the Master Lease and
Sublease were listed by Bowater as either assets or debts, or that either Cahaba or the Twilleys
were listed as creditors or that either the Twilleys or Cahaba were given any notice of the deemed
rejection at that time.
On or about June 15, 2010, Cahaba paid to the Twilleys, or their agent, the required rent
for the year beginning July 1, 2010, and it was accepted.
On November 23, 2010, the Bankruptcy Court entered its findings of facts, conclusions of
law, and order confirming Bowater’s plan of reorganization and on December 9, 2010, the Court
entered its Notice of (A) Occurrence of the Effective Date of the Plan and (B) Deadlines to File
Administrative Claims, Fee Claims and Rejection of Damages Claims. This Notice was
addressed to all known creditors and equity interest holders. There is no evidence before the
court that this notice was sent to either Cahaba or the Twilleys, or that either filed any type of
claim in the Bankruptcy Court based on the deemed rejection.
On May 20, 2011, Hancock Forest Management, at the request and on behalf of Cahaba,
sent letters to all of the Twilleys, with copy to their trustee, advising them of Bowater’s Chapter
11 bankruptcy proceedings and of the deemed rejection of the Master Lease and Sublease and
requesting them to execute an enclosed Estoppel and Agreement by June 20, 2011. The
proposed Estoppel and Agreement acknowledged that the deemed rejection in the bankruptcy
court relieved Bowater from having to perform, but that it did not terminate the Master Lease or
Sublease and had no effect on Cahaba’s possessory or leasehold rights under the Sublease. It
then provided that the Twilleys recognized the Sublease and Cahaba’s rights thereunder and
deemed the Sublease converted to be a direct lease between them and Cahaba. The two Twilley
family defendants who do not join in the motion of the Twilleys executed and returned the
instrument, but the others refused.
On June 1, 2011, Cahaba tendered to the Twilleys’ trustee the annual payment for the
year to begin July 1, 2011. On June 2, 2011, Cahaba filed this suit for declaratory judgment and
its agent wrote letters to the Twilleys advising of the filing of suit.
Cahaba contends that its right to possess the timberlands under the Sublease continue to
the end of the lease period, so long as it complies with its terms, despite the bankruptcy of
Bowater. The Twilleys contend that they have had the right of possession by virtue of §
365(d)(4) of the Bankruptcy Code since November 12, 2009, when the Master Lease and
Sublease were deemed rejected by the Bankruptcy Court, and that Cahaba has had no rights
under the Sublease since that time.
The court will first address two jurisdictional issues raised by the Twilleys in their
Motion for Partial Summary Judgment, then the preliminary issue of standing, and finally the
question of the effect of Bowater’s deemed rejection of the Sublease and Master Lease.
In their Answer, the Twilleys deny the jurisdictional averments of the Complaint. In their
brief, they suggest that this court lacks subject matter jurisdiction because “[i]n the event of
disputes under the Plan, the bankruptcy court retains jurisdiction for the purposes of, among
other things, . . . enforcing and interpreting the terms and conditions of the Plan Documents.” In
re Celotex Corp., 487 F.3d 1320, 1326 (11th Cir. 2007). Essentially the Twilleys argue that the
interpretation of Cahaba’s rights falls under the jurisdiction of the Bankruptcy Court in Delaware
where Bowater’s Chapter 11 proceedings were held and not this court’s. While there are
numerous bankruptcy court cases dealing with issues involved in this case, and while the court
will examine the effect of provisions of the Bankruptcy Code, as the court will discuss later, the
court finds that the Master Lease and Sublease were not a part of the bankruptcy estate, the
bankruptcy estate will not be affected, and the rights of the parties will be finally determined on
the basis of state law. As explained below, this court will look to state law not in contravention
of the Bankruptcy Code but pursuant to it.
The court also finds that it has jurisdiction by virtue of diversity of citizenship (29 U.S.C.
The Twilleys contend that Cahaba lacks standing to pursue its rights under the Sublease
with Bowater because Cahaba is not in privity with the Twilleys as to the Master Lease.
Essentially, the Twilleys’ argument is that Cahaba as “[a] third person has no rights under a
contract between others,” and because Cahaba is not a party to the Master Lease, it has no
standing to file this declaratory judgment action. Cahaba asserts that the problem with the
Twilleys’ argument is that it incorrectly characterizes Cahaba’s claim as one to enforce the
Master Lease instead of a claim about enforcing its right to the property pursuant to the Sublease
with Bowater. Cahaba claims that the Sublease is still in effect, and if a judgment is not rendered
by the court on this matter declaring its possessory interest thereunder as proper, it will suffer
“It is by now axiomatic that ‘Article III of the Constitution limits the judicial power of the
United States to the resolution of cases and controversies.’” DiMaio v. Democratic Nat.
Committee, 520 F.3d 1299, 1301 (11th Cir. 2008) (quoting Valley Forge Christian Coll. v. Ams.
United for Separation of Church and State, Inc., 454 U.S. 464, 471 (1982)) (some internal
quotations omitted). The standing inquiry “is an essential and unchanging part of the
case-or-controversy requirement of Article III.” Lujan v. Defenders of Wildlife, 504 U.S. 555,
560 (1992). Even though Cahaba is seeking relief under the Declaratory Judgment Act, 28
U.S.C. § 2201, it still must satisfy the case-or-controversy standard. Emory v. Peeler, 756 F.2d
1547, 1552 (11th Cir. 1985).
In order to demonstrate this requisite standing requirement, Cahaba must demonstrate that
there is a “substantial continuing controversy between parties having adverse legal interest.”
Emory, 756 F.2d at 1552 (citing Lake Carriers' Association v. MacMullan, 406 U.S. 498, 506
(1972)). Moreover, Cahaba “must allege facts from which the continuation of the dispute may be
reasonably inferred,” and “the continuing controversy may not be conjectural, hypothetical, or
contingent; it must be real and immediate, and create a definite, rather than speculative threat of
future injury.” Id. (internal citations omitted). Cahaba has alleged that the property is sizable,
just over 24,000 acres, and that the continuation of its business necessarily depends on this
court’s interpretation of Bowater’s bankruptcy’s effect on Cahaba’s possessory interest in the
property. Furthermore, Cahaba has alleged, and the Twilleys have demonstrated with their
Answer and Counterclaim, that there are two adverse positions as to the validity of the Sublease
and the right to possession of the property which are not hypothetical or conjectural. Therefore,
the court finds that an actual controversy exists in this case regardless of any lack of contractual
privity between Cahaba and the Twilleys, because both parties have ongoing and continual
adverse legal interests that can be reasonably inferred from the facts. Accordingly, Cahaba has
met the standing requirements for a 28 U.S.C. 2201 claim. Having disposed of the Twilleys’
jurisdictional and standing issues, the court turns to the effect of Bowater’s rejection of the
Sublease and Master Lease.
C. Bankruptcy Law
§ 365(a) of the Bankruptcy Code provides:
Except as provided in . . . subsection . . .(d) of this section, the trustee, subject to the
court’s approval, may assume or reject any executory contract or unexpired leased of the
§ 365(d)(4) provides:
(A) Subject to subparagraph (B), an unexpired lease of nonresidential real
property under which the debtor is lessee shall be deemed rejected, and the trustee
shall immediately surrender that nonresidential real property to the lessor, if the
trustee does not assume or reject the unexpired lease by the earlier of –
(i) the date that is 120 days after the date of the order of relief; or
(ii) the date of entry of an order confirming a plan.
(B) The court may extend the period determined under subparagraph (A) . . . for
90 days on the motion of the trustee. . . .
Although there is no evidence before the court that this Master Lease and Sublease were
specifically referred to in any motion by the trustee, and the Bankruptcy Court’s single order of
extension was issued in the jointly administered cases without reference to specific leases, the
parties are in agreement that the order of extension had the effect of working a deemed rejection
of the Master Lease and Sublease on November 12, 2009. The dispute is over the effect of that
deemed rejection on the Sublease.
While there are numerous cases from around the country, as well as commentary,
showing a split of authority as to whether such a deemed rejection constitutes a termination or a
breach of an unexpired nonresidential real property lease, the parties here agree that it constitutes
a breach, and not a termination. Therefore, there is no need to discuss the two sides of that
controversy. The dispute here is about the effect that the breach resulting from the deemed
rejection then had on the rights of the parties to the property. The Twilleys contend that the
provision of § 365(d)(4) requiring the trustee to “immediately surrender” the property to the
lessor is controlling and means that Cahaba thereafter had no right to any type of possession by
virtue of bankruptcy law. Cahaba contends that state law determines the issue. The court looks
again to § 365 of the Bankruptcy Court.
§ 365(h)(1)(A) provides:
If the trustee rejects an unexpired lease of real property under which the debtor is
the lessor and –
(ii) If the term of such lease has commenced, the lessee may retain
its rights under such lease (including rights such as those relating
to the amount and timing of payment of rent and other amounts
payable by the lessee and any right of use, possession, quiet
enjoyment, subletting, assignment, or hypothecation) . . . to the
extent that such rights are enforceable under applicable
This section applies here since Bowater, the debtor, was the lessor under the sublease.
Reading these sections together “produces the anomalous result of the [Debtor] being
obligated to surrender the Premises, but [the sublessee] not having to. The matter is resolved by
resort to forum law. Thus, the dual rejection which occurred here will leave [the landlord] and
[the sublessee] to vie for possession of the Premises according to [state law].” Chatlos Systems,
Inc. v. Kaplan, 147 B.R. 96, 99 (Bankr. D. Del 1992) (quoting from Envireco International
Motors, Inc. v. Elmhurst Transmission Corp. (In re Elmhurst Transmission Corp.), 60 B.R. 9, 10
(Bankr. E.D.N.Y. 1986). “Here, both the Lease and Sublease have been deemed rejected, leaving
the bankruptcy estate with no meaningful interest in the ultimate disposition of the Premises.”
Id. at 100 (quoting from In re Dial-A-Tire, 78 B.R. 13, 16 (Bankr. W.D.N.Y. 1987).
The same approach was taken by the Bankruptcy Court of this district in the analogous
case of Miller v. Hill (In re Zip Enterprises, Inc.), 28 B.R. 223 (Bankr. M.D. Ala. 1983). There,
the court dismissed for lack of jurisdiction a complaint for declaratory judgment filed by a party
with a competing claim as an assignee or sublessee under the lease against a bankruptcy trustee, a
lessor under a lease to the bankrupt debtor, and a company claiming rights as an assignee or
sublessee. The lease had been deemed rejected in the bankruptcy proceedings. The court held
that by virtue of the deemed rejection, the lease ceased to be an asset of the bankruptcy estate
and, since the controversy did not involve the estate or the trustee, or any property of the estate, it
should be resolved in pending parallel state court proceedings. Id. at 225.
Likewise, after reaching the conclusion that a deemed rejection of a lease in bankruptcy
proceedings constituted a prepetition breach, rather than termination, of the lease, the 5th Circuit
Court of Appeals, in an analogous case involving the rights of the holder of a security assignment
of a lease by a bankrupt lessee, held that the extent of those rights as against the debtor’s lessor
should be decided in state court. This was “because after rejection, the debtor’s estate had no
remaining interest in the outcome of that controversy, which is not ‘related to’ the bankruptcy as
is required for federal jurisdiction.” Eastover Bank for Savings v. Sowashee Venture (In re
Austin Development Co.), 19 F. 3d 1077, 1084 (5th Cir. 1994).
So, what we have here is a case where the debtor/lessee (Bowater) was required by
bankruptcy law to immediately surrender possession of the subject property to its lessor (the
Twilleys) upon its deemed rejection of a lease, which at that time was a breached lease, under
which Cahaba was a sublessee, and with the rights of the sublessee as against the original lessors
to be determined according to Alabama law. That determination may be made by this federal
court by virtue of its diversity of citizenship jurisdiction. But, before turning to state law for that,
the court must first look at the nature of the lease to which the property was subject after its
The case of Thompkins v. Lil’ Joe Records, 476 F. 3d 1294 (11th Cir. 2007) is instructive.
In the analogous context of an executory contract, it is clear that the Eleventh Circuit does not
view a deemed-rejection of an executory contract by a bankruptcy court “as an outright
dissolution of the contract.” Id. at 1306.
The Thompkins court, quoting Cohen v. Drexel Burnham Lambert Group, Inc. (In re
Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 703 (Bankr. S.D.N.Y. 1992), explained
that a “rejection ‘does not embody the contract-vaporizing properties so commonly ascribed to it
. . . . Rejection merely frees the estate from the obligation to perform; it does not make the
contract disappear.’” Id. at 1306. The Eleventh Circuit, and other sister circuits, have found that
a rejection does not affect the contract’s continuing existence and certainly does not serve as a
cancellation, termination, vaporization, or repudiation of the contract. Id. at 1306-07; see also
Austin Dev. Co., 19 F.3d at 1082 (“[t]hree circuits, including this one, have held that [§ 365(g)]
does not mean that the executory contract or lease has been terminated, but only that a breach has
been deemed to occur.”); O’Neill v. Continental Airlines, Inc. (In re Cont’l Airlines), 981 F.2d
1450, 1459 (5th Cir. 1993) (“[t]o assert that a contract effectively does not exist as of the date of
rejection is inconsistent with deeming the same contract breached.”); In re Drexel Burnham
Lambert Group, Inc., 138 B.R. at 708 (“[r]ejection has absolutely no effect upon the contract's
continued existence; the contract is not cancelled, repudiated, rescinded, or in any other fashion
terminated.”) (internal citations omitted); cf. Enterprise Energy Corporation v. United States (In
re Columbia Gas Sys., Inc.), 50 F.3d 233, 239 n. 8 (3d Cir. 1995) (citing § 365(g) for the
proposition that a “[r]ejection, which is appropriate when a contract is a liability to the bankrupt,
is equivalent to a nonbankruptcy breach.”).
The court finds that this concept applies to a deemed-rejected unexpired lease as well.
The land was surrendered to the Twilleys by Bowater subject to all of the terms of the now13
breached Master Lease, with Bowater no longer having any rights under it, but with Cahaba’s
rights under the Sublease to be determined by Alabama law.
D. Lease Termination Under Alabama Law
The court must now determine the effect, under Alabama state law, of Bowater’s breach
of the Master Lease and surrender of the property as to the validity of Cahaba’s continuing
possession pursuant to the Sublease.
Under Alabama law, a sublessee’s right to possession of property is subject to the terms
and conditions of the master lease. USA Petroleum Corp. v. Jopat Bldg. Corp., 343 So. 2d 501,
504 (Ala. 1977) (“As a sublessee, USA’s right to possession was subject to the terms and
conditions of [lessee/sublessor’s] lease. The Sublessee could stand no higher than the Lessee
from which its right derived.”). Therefore, the validity of Cahaba’s Sublease will turn directly on
the continuing validity of Bowater’s breached-but-not-terminated Master Lease in light of
Bowater’s breach and surrender under bankruptcy law. Accordingly, this court will look to the
provisions of the Master Lease which give rise to termination and the enforceability of those
provisions under Alabama law.
Page eleven of the Master Lease provides the following:
If at any time during the term of this lease there shall be filed by or against K-C2
in any court . . . a petition for . . . reorganization under the bankruptcy laws of the
United States of America, . . . Owner shall have the option of immediately
cancelling and terminating this lease . . . .
While the Master Lease states that the lessee is K-C, neither party contests that Bowater
is a proper successor-in-interest to K-C and is therefore bound by the same terms as K-C.
This type of clause is commonly referred to as a bankruptcy clause or an ipso facto clause. Given
that Bowater, the current lessee under the Master Lease, has filed for Chapter 11 reorganization,
the plain language of the lease makes it clear that the Twilleys as lessors of the property have the
right to terminate the Master Lease. Cahaba, however, counters that bankruptcy clauses are
unenforceable pursuant to Bankruptcy Code § 365(e)(1), and therefore, the bankruptcy provision
in the Master Lease is void.3
Section 365(e) of the Bankruptcy Code provides that:
(1)Notwithstanding a provision in an executory contract or unexpired lease, or in
applicable law, an executory contract or unexpired lease of the debtor may not be
terminated or modified, and any right or obligation under such contract or lease
may not be terminated or modified, at any time after the commencement of the
case solely because of a provision in such contract or lease that is conditioned on-(A) the insolvency or financial condition of the debtor at any time before the
closing of the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title
or a custodian before such commencement.
Cahaba argues that the bankruptcy provision from the Master Lease falls squarely under §
365(e)(1)(A) or § 365(e)(1)(B) and is therefore subject to the prohibitions of the Bankruptcy
Code. This argument, however, misconstrues the effect of § 365(e), which is limited in its
application to the proceedings in bankruptcy. The purpose of this provision in the Bankruptcy
Code is to protect the bankrupt debtor and its creditors by allowing the debtor’s trustee to accept
an advantageous unexpired lease in spite of the bankruptcy, and to reject others. While the
bankrupt lessee is protected by bankruptcy law from any liability to its lessor under an unexpired
§365(e)(1) had not been enacted at the time the Master Lease was executed.
lease, there is no reason, or legislative intent, for this to adversely affect any other rights of the
innocent lessor under state law.
The Appellate Court of Connecticut referred to legislative intent in the case of Days Inn
of America, Inc. v. 161 Hotel Group, Inc., 739 A.2d 280, 284-285 (Conn. App. Ct. 1999). In
addressing the rights of non-bankrupt parties to a franchise agreement which contained an ipso
facto clause, where the franchisee was in bankruptcy, that court examined the legislative history
of § 365(e) and wrote:
The rationale of Congress at the time [of adoption of § 365(e)] was to aid the
debtor’s rehabilitation efforts, presumably by allowing the debtor to retain
profitable contracts with other parties. See H.R.Rep. No. 595, 95th Cong. 1st
Sess., 348 (1977); S.Rep. No. 989, 95th Cong. 2d Sess., 59 (1978), reprinted in
1978 U.S.C.C.A.N. 5963, 6304-6305.FN10
FN10. The legislative history provides in relevant part:
“Subsection (e) invalidates ipso facto or bankruptcy clauses. These
clauses, protected under present law, automatically terminate the
contract or lease, or permit the other contracting party to terminate
the contract or lease, in the event of bankruptcy. This frequently
hampers rehabilitation efforts....
“The unenforceability of ipso facto or bankruptcy clauses proposed
under this section will require the courts to be sensitive to the
rights of the nondebtor party to the executory contracts and
“This subsection does not limit the application of an ipso facto or
bankruptcy clause to a new insolvency or receivership after the
bankruptcy case is closed. That is, the clause is not invalidated in
toto, but merely made inapplicable during the case for the purposes
of [disposition] of the executory contract or unexpired lease.”
1978 U.S.C.C.A.N. 6304-6305.
The Supreme Court of Alabama cited with approval Days Inn’s explanation of “the
interplay between § 365(e)(1) and ‘ipso facto’ clauses” in Sumlin Construction Co., LLC v.
Taylor, 850 So. 2d 303, 311 (Ala. 2002), and footnote 10 from Days Inn was quoted in Sumlin in
referring to legislative intent. Id. at 314-15. Furthermore, the Sumlin Court stated, “[l]astly, we
conclude that in any event, § 365(e) is intended to apply only during the pendency of a
bankruptcy case, and is inapplicable once the ‘automatic stay’ against ipso facto termination has
been lifted by the closing of the bankruptcy case,” and agreed with the reasoning in Thomas
American Stone & Building, Inc. v. White, 142 B.R. 449 (D. Utah 1992) which found in part that
“[o]nce an asset is taken from the bankruptcy estate the prohibition against bankruptcy
termination clauses is no longer operative.” Id. at 314.
This court finds that the Master Lease, by virtue of its being deemed rejected, is no longer
subject to the automatic stay, and therefore, no longer part of the bankruptcy estate. See, e.g.,
Salzer v. Jocquel Supply (In re Salzer), 180 B.R. 523, 528 (Bankr. N.D. Ind. 1993) (“Thus, when
the lease was deemed rejected, the automatic stay as to the leased premises was terminated as
well.”). Accordingly, this court is led to the conclusion that the effect of the Master Lease and
Sublease being deemed rejected and the non-residential real property being surrendered to the
Twilleys, is that the rights of the Lessors, the Twilleys, and the sublessee, Cahaba, are governed
by the terms of the Master Lease and Sublease, free of any bankruptcy law prohibition against
enforcement of a bankruptcy or “ipso facto” clause.
That being the case, the last issue before this court is the effect of the Master Lease’s
bankruptcy clause on Cahaba’s Sublease. The Jopat case bears a striking resemblance to the
present case and is determinative of Cahaba’s rights as the sublessee. In Jopat, the lesseesublessor filed for insolvency, allowing the lessor to either terminate the lease or retake
possession of the premises without releasing the lessee’s obligations by termination, pursuant to
a bankruptcy clause found in the original lease agreement.4 Jopat, 343 So. 2d at 502-03. The
Court found that under the bankruptcy clause the sublessee’s right to possession was subject to
the terms and conditions of the original lease. Id. at 504 (“The Sublessee could stand no higher
than the Lessee from which its right derived.”).
The bankruptcy clause in the Master Lease here gave the Twilleys the right to terminate
the lease in the event of the lessee’s filing for bankruptcy. § 365(d)(4) of the Bankruptcy Code
had the effect of staying that right for a period of time, to give Bowater’s trustee the opportunity
to assume the Master Lease and Sublease. Once that time passed without assumption, they were
deemed rejected, were no longer subject to being a part of the bankruptcy estate, and the Twilleys
were then entitled to possession of the property, free of the bankruptcy proceedings and subject
to all terms of the Master Lease, which had been assumed by Cahaba under the Sublease. The
Master Lease did not make the filing in bankruptcy by Bowater an automatic termination, but
gave the Twilleys the option of terminating the master Lease or of continuing with it, with the
Sublease still in effect. Thus, under Jopat, the Twilleys were the free to terminate the Master
Lease, and upon its termination Cahaba’s rights under the Sublease would also terminate. This
result is not only by operation of law, but under the specific term of Cahaba’s sublease by which
Cahaba agreed that “[t]his Sublease shall terminate in the event the Main Lease terminates.”
For the foregoing reasons, it is hereby ORDERED as follows:
1. Cahaba has standing to bring this action, the court has jurisdiction by diversity of
citizenship, and the Twilleys’ motion is DENIED to that extent.
§ 365(e)(1) had not been enacted at the time Jopat was decided.
2. The effect of Bowater’s deemed rejection of the Master Lease and Sublease pursuant
to § 365 of the Bankruptcy Code was to give the Twilleys the right to terminate the Master Lease,
and its termination would have the effect of terminating the Sublease. Cahaba’s motion is
DENIED, and the Twilleys’ motion is GRANTED to that extent.
3. All other issues are reserved for future determination.
Done this 6th day of February, 2012.
/s/ W. Harold Albritton
W. HAROLD ALBRITTON
SENIOR UNITED STATES DISTRICT JUDGE
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