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In re Barclay Industries Inc.

June 4, 1984

IN THE MATTER OF BARCLAY INDUSTRIES, INC., DEBTOR; TWO-FORTY ASSOCIATES, APPELLANT; IN THE MATTER OF BARCLAY INDUSTRIES, INC., DEBTOR TEACHERS INSURANCE & ANNUITY ASSOCIATION OF AMERICA, APPELLANT


On Appeal from the United States District Court for the District of New Jersey.

Seitz, Chief Judge and Garth and Becker, Circuit Judges.

Author: Garth

Opinion OF THE COURT

GARTH, Circuit Judge:

This appeal requires us to consider the effect of provisions in a lease assumed by a debtor-in-possession, Barclay Industries, Inc. (Barclay), which subsequently sought to execute a "collateral assignment" of its leasehold interest. The landlord, Teachers Insurance & Annuity Association of America (Teachers),*fn1 opposes the assignment on the ground that the lease prohibits it, and that neither section 364 nor section 365 of the Bankruptcy Code permits a trustee in bankruptcy (including the debtor-in-possession) to execute a prohibited assignment of this type. Barclay and its assignee, Walter Heller & Co., deny that the lease prohibits the collateral assignment, and argue that even if it is prohibited, section 364 of the Code authorizes it.

The bankruptcy court interpreted the lease to require that Teachers not unreasonably withhold consent to a collateral assignment. The bankruptcy court then held that Teachers' opposition to the assignment constituted an unreasonable withholding of consent, and that the transaction was permitted by the Code. The district court summarily affirmed the bankruptcy court's decision.

Our interpretation of the lease agrees with that of the bankruptcy court, but we cannot agree with the premise on which the court's finding of fact of unreasonableness was made. We therefore vacate the order of the district court and remand for further proceedings.

I.

A.

Barclay, as lessee, executed a lease agreement on January 10, 1973 with Two Forty Associates (Two Forty) as lessor. The lease covered premises at 65 Industrial Road, Lodi, New Jersey. Teachers became the assignee of the landlord by virtue of an assignment dated as of August 21, 1973. The lease was to end on October 31, 1998; Barclay, however, retained the option to extend the lease for ten more years.

Barclay filed a voluntary petition in bankruptcy under Chapter 11 of the Code on November 6, 1981. On July 20, 1982, after a hearing at which Teachers had requested that Barclay assume or reject the lease, the bankruptcy court issued an order authorizing the assumption of the lease by Barclay as debtor-in-possession. See 11 U.S.C. ยง 365(a)(1982).

On January 24, 1983, Barclay made an oral application to the bankruptcy court for an order authorizing the obtaining of credit and concomitant assignment of Barclay's interest in the lease, as collateral, to Heller. The court conducted a hearing at which Teachers objected to Barclay's application.*fn2 Teachers contended that the lease prohibited the assignment to Heller. This contention was based on paragraph 19.3 of the lease, which states:

19.3 Neither this Lease nor the term hereby demised shall be mortgaged by Lessee, nor shall Lessee mortgage or pledge the interest of Lessee in and to any sublease of the Demised Premises or the rentals payable thereunder. Any such mortgage, pledge, sublease or assignment made in violation of Paragraph 19.1 shall be void.

Arguing that the "collateral assignment" was in reality a mortgage of the lease, Teachers interpreted this provision to impose an absolute prohibition on the proposed transaction. They argued also that even if the transaction was a pledge, ...


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