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Crown Equipment Corp. v. Toys "R" US, Inc.

United States District Court, E.D. Virginia, Richmond Division

June 28, 2019

CROWN EQUIPMENT CORPORATION, Appellant,
v.
TOYS"R"US, INC., et al., Appellees.

          OPINION

          JOHN A. GIBNEY JR. JUDGE.

         Crown 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 Bankruptcy Court.

         I. BACKGROUND

         In 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.[1]

         After 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.[2] 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.[3] Crown objected, arguing that TRU had assumed the MSA.

         The 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.

         II. DISCUSSION

         District 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).

         A. Assumption Pursuant to the Bankruptcy Code

         Under § 365(a) of the Bankruptcy Code, parties may, "subject to the court's approval.. . assume or reject any executory contract or unexpired lease."[4] 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.

         B. Implied Assumption

         Crown 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).

         Courts, 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).

         Here, 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 ...


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