UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION -----------------------------------------------------x : In re : Chapter 9 : CITY OF DETROIT, MICHIGAN, : Case No. 13-53846 : Debtor. : Hon. Steven W. Rhodes : -----------------------------------------------------x MOTION OF THE CITY OF DETROIT, PURSUANT TO SECTION 365 OF THE BANKRUPTCY CODE, FOR AN ORDER AUTHORIZING THE CITY TO ASSUME CERTAIN UNEXPIRED LEASES OF NONRESIDENTIAL REAL PROPERTY The City of Detroit, Michigan (the "City") hereby files this motion ("Motion"), pursuant to section 365 of title 11 of the United States Code (the "Bankruptcy Code"), for the entry of an order1 authorizing the City to assume certain of its unexpired leases of nonresidential real property (such leases, including all exhibits, amendments, supplements or modifications thereto, 1 This Motion includes certain attachments that are labeled in accordance with Rule 9014-1(b)(1) of the Local Rules of the Bankruptcy Court for the Eastern District of Michigan (the "Local Rules"). Consistent with Local Rule 9014-1(b), a copy of the proposed form of order granting this Motion is attached hereto as Exhibit 1 (the "Proposed Order"). A summary identifying each included attachment by exhibit number is appended to this Motion. CHI-1933539v1 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 1 of 30 the "Assumed Leases").2 In support of this Motion, the City respectfully represents as follows: Jurisdiction 1. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Background 2. On July 18, 2013 (the "Petition Date"), the City filed a petition for relief in this Court, thereby commencing the largest chapter 9 case in history. 3. On December 5, 2013, this Court determined that the City was eligible to be a debtor under chapter 9 of the Bankruptcy Code. See Order for Relief Under Chapter 9 of the Bankruptcy Code (Docket No. 1946) (the "Order for Relief"). A thorough description of the City's economic decline, the challenges it faces and the events leading up to the filing of this case can be found in the Declaration of Kevyn D. Orr in Support of City of Detroit, Michigan's Statement of 2 A list of the Assumed Leases is attached hereto as Exhibit 6. For each Assumed Lease, Exhibit 6 includes: (a) the location of the property subject to the Assumed Lease; (b) the name and address of the lessor for the Assumed Lease; (c) a description of the use of the leased property; and (d) the proposed cure amount associated with the assumption of such lease, if any. The terms of the Assumed Leases summarized in Exhibit 6 are provided for convenience only and are not intended to modify, or to represent the City's interpretation of, the terms of any Assumed Lease. CHI-1933539v1 -2- 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 2 of 30 Qualifications Pursuant to Section 109(c) of the Bankruptcy Code (Docket No. 11) and the Disclosure Statement (as defined below). 4. On March 19, 2014, the City filed the Motion of the City of Detroit for Entry of an Order Extending the Time to Assume or Reject Unexpired Leases of Nonresidential Real Property, Pursuant to Section 365(d)(4) of the Bankruptcy Code (Docket #3079) (the "Motion to Extend"). Pursuant to the Motion to Extend, the City sought an extension of an additional 90 days — until July 2, 2014 (the "Extended Rejection Deadline") — to determine whether to assume or reject its unexpired leases of nonresidential real property (any such lease, an "Unexpired Lease"). The Motion to Extend was approved by this Court by an order entered on March 26, 2014 (Docket No. 3233) (the "Extension Order").3 3 Pursuant to the Extension Order and consistent with section 365(d)(4)(B)(ii) of the Bankruptcy Code, the City is authorized to further extend the assumption/rejection period beyond July 2, 2014 without further order of the Court, but with the written consent of the affected lessor. The City has received such consent from each of its landlords affected by the Extension Order — other than the lessors under the Assumed Leases — and will file a notice of these extensions in compliance with the Extension Order prior to the Extended Rejection Deadline. By filing this Motion, the City has satisfied the deadline of section 365(d)(4) of the Bankruptcy Code with respect to the Assumed Leases, which will not be deemed rejected pending the Court's consideration of this Motion. See Cousins Props., Inc. v. Treasure Isles HC, Inc. (In re Treasure Isles HC, Inc.), 462 B.R. 645, 649-50 (6th Cir. B.A.P. 2011); In re Filene's Basement, LLC, Case No. 11-1351, 2014 BL 119427 (Bankr. D. Del. Apr. 29, 2014). CHI-1933539v1 -3- 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 3 of 30 5. On May 5, 2014, the City filed the Fourth Amended Plan for the Adjustment of Debts of the City of Detroit (Docket No. 4392) (as it may be further amended, modified or supplemented from time to time, the "Plan") and the Fourth Amended Disclosure Statement with Respect to Fourth Amended Plan for the Adjustment of Debts of the City of Detroit (Docket No. 4391) (the "Disclosure Statement"). That same day, the Court entered the Order Approving the Proposed Disclosure Statement (Docket No. 4401), thereby approving the Disclosure Statement as containing "adequate information" with respect to the Plan, pursuant to section 1125(a)(1) of the Bankruptcy Code. Relief Requested 6. Pursuant to section 365 of the Bankruptcy Code and Rule 6006 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), the City hereby seeks the entry of an order authorizing the City to assume the Assumed Leases and granting related relief. 4 Basis for Relief 7. Section 365 of the Bankruptcy Code provides the statutory basis pursuant to which debtors may assume or reject executory contracts or unexpired leases, and states, in relevant part: 4 Pursuant to Bankruptcy Rule 6006(e)(2), the City may file an omnibus motion seeking assumption of multiple unexpired leases. CHI-1933539v1 -4- 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 4 of 30 (a) Except as provided . in subsections (b), (c), and (d) of this section, the [debtor], subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor. (b)(1) If there has been a default in an executory contract or unexpired lease of the debtor, the [debtor] may not assume such contract or lease unless, at the time of assumption of such contract or lease, the [debtor] — (A) cures, or provides adequate assurance that the [debtor] will promptly cure, such default…. 11 U.S.C. § 365. Section 365 is incorporated into chapter 9 pursuant to section 901(a) of the Bankruptcy Code. 8. Courts routinely approve motions to assume or reject executory contracts or unexpired leases upon a showing that the debtor's decision to take such action is an exercise of sound business judgment. See Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993) (stating that section 365 of the Bankruptcy Code "permits the trustee or debtor-in-possession, subject to the approval of the bankruptcy court, to go through the inventory of executory contracts of the debtor and decide which ones it would be beneficial to adhere to and which ones it would be beneficial to reject"); In re JRT, Inc., 121 B.R. 314, 321 (Bankr. W.D. Mich. 1990) (utilizing the business judgment rule to determine whether a contract should be assumed or rejected); In re McLouth Steel Corp., 20 B.R. 688, 692 (Bankr. E.D. Mich. 1982) CHI-1933539v1 -5- 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 5 of 30 ("In determining whether a certain contract should be assumed or rejected, the decision should rest on the business judgment of the debtor."); see also NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523 (1984) (stating that the traditional standard applied by courts under section 365 is that of "business judgment"). 9. Courts generally will not second-guess a debtor's business judgment concerning the assumption or rejection of an executory contract or unexpired lease. See In re Riodizio, Inc., 204 B.R. 417, 424 (Bankr. S.D.N.Y. 1997) ("[A] court will ordinarily defer to the business judgment of the debtor's management."); accord Phar-Mor, Inc. v. Strouss Bldg. Assocs., 204 B.R. 948, 951-52 (Bankr. N.D. Ohio 1997) ("Whether an executory contract is 'favorable' or 'unfavorable' is left to the sound business judgment of the debtor . Courts should generally defer to a debtor's decision whether to reject an executory contract."). 10. The "business judgment" test is not a strict standard; it merely requires a showing that either assumption or rejection of the executory contract or unexpired lease will benefit the debtor. See, e.g., Westbury Real Estate Ventures, Inc. v. Bradlees, Inc. (In re Bradlees Stores, Inc.), 194 B.R. 555, 558 n.1 (Bankr. S.D.N.Y. 1996) ("In reviewing a debtor's decision to assume or reject an executory contract, the court must examine the contract and circumstances and CHI-1933539v1 -6- 13-53846-swr Doc 5461 Filed 06/19/14 Entered 06/19/14 16:52:44 Page 6 of 30 apply its best 'business judgment' to determine if the assumption or rejection would be beneficial or burdensome to the estate.").