United States District Court, E.D. Virginia, Richmond Division
A. GIBNEY JR. JUDGE.
Equipment Corporation ("Crown") appeals an order of
the United States Bankruptcy Court for the Eastern District
of Virginia, which allowed Toys "R" Us, Inc.
("TRU") to reject a service contract it had entered
with Crown before TRU declared bankruptcy. For the reasons
that follow, the Court will affirm the decision of the
2007, Crown and TRU entered into a contract called the Master
Services Agreement ("MSA"), in which Crown agreed
to perform forklift maintenance at TRU's warehouses. The
parties originally agreed to the MSA for three years, and the
MSA automatically renewed for each subsequent year with
updated prices. TRU incurred a hefty debt for forklift repair
services performed before TRU declared bankruptcy in
September, 2017. In December, 2017, the Bankruptcy Court
entered an order detailing the procedure TRU must follow to
assume or reject its many contracts (the "Procedure
Order"), including the MSA.
TRU declared bankruptcy, Crown contacted TRU to discuss the
future of the MSA. Crown says that high-level TRU officials
told Crown that TRU would assume the MSA, but TRU disputes
that claim. In any event, the parties updated the MSA
to reflect new labor rates and changed the effective date.
Crown continued to provide forklift repair services to TRU,
and TRU paid Crown for all services rendered after TRU
declared bankruptcy. On June 4, 2018, TRU asked the
Bankruptcy Court to formally reject the MSA. Crown objected,
arguing that TRU had assumed the MSA.
Bankruptcy Court granted TRU's request to reject the MSA,
holding that the Bankruptcy Code requires court approval
before assumption, that parties cannot assume contracts by
words or conduct, and that allowing assumption would render
the Procedure Order meaningless. This appeal followed.
courts have jurisdiction to hear appeals from "final
judgments, orders, and decrees" of bankruptcy courts. 28
U.S.C. § 158(a)(1). Additionally, district courts review
the factual findings of a bankruptcy court for clear error
and review questions of law de novo. In re Anderson,
811 F.3d 166, 171 (4th Cir. 2016).
Assumption Pursuant to the Bankruptcy Code
§ 365(a) of the Bankruptcy Code, parties may,
"subject to the court's approval.. . assume or
reject any executory contract or unexpired
lease." 11 U.S.C § 365(a). Parties must
obtain court approval before assuming or rejecting an
executory contract. In re Merry-Go-Round Enters.,
Inc., 400 F.3d 219, 225-26 (4th Cir. 2005). To assume an
executory contract, parties also must "cure" the
debt owed pursuant to the contract or "provide adequate
assurance of future performance." 11 U.S.C §
365(b)(1)(A)-(C). In this case, the parties agree that TRU
never sought court approval to assume the MSA. Because TRU
did not seek court approval to assume the MSA, TRU did not
assume the MSA pursuant to the Bankruptcy Code.
also argues that TRU assumed the MSA by its words and deeds.
Courts generally prohibit the implied assumption of executory
contracts because § 365 of the Bankruptcy Code requires
court approval. See In re Merry-Go-Round Enters.,
400 F.3d at 226; In re A.H. Robins Co., 68 B.R. 705,
711 (Bankr. E.D. Va. 1986) (holding that court approval is
not a "perfunctory step" that parties can avoid by
arguing implied assumption).
however, allow implied assumption of executory contracts in
rare circumstances. See, e.g., In re Clavis Smith Bldg.,
Inc, 112 B.R. 768, 770 (Bankr. E.D. Va. 1990)
(permitting implied assumption when the bankrupt party tried
to reject a real estate contract that required it to pay the
broker a commission). For example, courts allow implied
assumption when parties try to avoid paying a creditor for
both pre- and post-bankruptcy services or try to disadvantage
the creditor over other creditors. Cf. In re A.H. Robins
Co., 68 B.R. at 711 (rejecting implied assumption
because the bankrupt party paid all post-bankruptcy premiums
and did not cause any more prejudice than what all creditors
in bankruptcy suffer).
after TRU declared bankruptcy, TRU changed the date on the
MSA, asked to update the labor rates, and allegedly told
Crown that it would assume the contract. Although TRU
continued to receive benefits from Crown, TRU did not swindle
Crown out of compensation. Implied assumption requires more
than just the "acceptance of benefits."
Id. TRU has paid for all forklift repair services
Crown rendered after TRU declared bankruptcy, and only owes
Crown for services rendered before TRU declared bankruptcy.
Crown is in no worse position than TRU's many other