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Friday Investments, LLC v. Bally Total Fitness of Mid-Atlantic, Inc.

Court of Appeals of North Carolina

August 1, 2017

FRIDAY INVESTMENTS, LLC, as Successor in Interest to Tisano Realty, Inc., Plaintiff,
v.
BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC. f/k/a Bally Total Fitness of the Southeast, Inc. f/k/a Holiday Health Clubs of the Southeast, Inc., as Successor in Interest to Bally Fitness Corporation; and BALLY TOTAL FITNESS HOLDING CORPORATION, Defendants.

          Heard in the Court of Appeals 22 March 2017.

         Appeal by plaintiff from order entered 9 March 2016 by Judge Forrest D. Bridges in Mecklenburg County No. 14 CVS 8495 Superior Court.

          Horack, Talley, Pharr & Lowndes, P.A., by Keith B. Nichols, and Chadbourne & Parke, LLP, by Samuel S. Kohn, pro hac vice, for plaintiff-appellant.

          Burt & Cordes, PLLC, by Stacy C. Cordes, and Knox, Knox, Brotherton & Godfrey, by Lisa Godfrey, for defendant-appellees.

          TYSON, Judge.

         Friday Investments, LLC, ("Plaintiff") appeals from the trial court's order granting summary judgment in favor of Defendant, Bally Total Fitness Holding Corporation ("Bally Holding"). Genuine issues of material fact exist regarding whether the Guaranty was "required to be maintained" or was discharged in the 2008-2009 Bankruptcy. We reverse the trial court's order granting summary judgment in favor of Bally Holding and remand.

         I. Factual Background

         This case arises from a lease of commercial premises between Plaintiff, as landlord and successor-in-interest to the original landlord, and Bally of the Mid-Atlantic, as tenant and successor-in-interest to the original tenant. Bally Holding had guaranteed the obligations of the original tenant and of the successors-in-interest thereto. When Bally of the Mid-Atlantic defaulted on its monthly rent obligations, Plaintiff sued to recover damages jointly and severally from Bally of the Mid-Atlantic and Bally Holding.

         A. Lease and Guaranty

         On or about 14 February 2000, Tower Place Joint Venture, as landlord, and Bally Total Fitness Corporation, as tenant, entered into a written Lease Agreement (the "Lease") for commercial premises located within the Tower Place Festival Shopping Center in Charlotte. As an inducement to Tower Place Joint Venture to enter into the Lease with Bally Total Fitness Corporation, Bally Holding guaranteed the obligations of Bally Total Fitness Corporation. The Guaranty Agreement (the "Guaranty") was executed on or about 10 February 2000. In accordance with the recitals contained in the Lease, the Guaranty is attached to the Lease as "Exhibit C."

         Bally Total Fitness Corporation later assigned its interest in the Lease to its subsidiary, Holiday Health Clubs of the Southeast, Inc.

         B. 2007 Bankruptcy Proceedings

         On 31 July 2007, Bally Holding and its subsidiaries (collectively, the "Bally Companies") filed a petition for Chapter 11 bankruptcy in U.S. Bankruptcy Court (the "2007 Bankruptcy").

         In anticipation of the initial bankruptcy, Tisano Realty, Inc., as successor-in-interest to the original landlord Tower Place Joint Venture, and Bally Total Fitness of the Southeast, Inc. ("Bally of the Southeast") f/k/a Holiday Health Clubs of the Southeast, Inc., as the tenant and successor-in-interest to Bally Total Fitness Corporation, executed an amendment to the Lease (the "First Amendment").

         The First Amendment provides for reduced base rent schedules, which would apply in the event of tenant's filing a Chapter 11 bankruptcy petition. The First Amendment also stipulates: "Except as amended hereby, the Lease shall remain in full force and effect; and, as amended hereby, the Lease is affirmed, confirmed and ratified." On 17 September 2007, the bankruptcy court confirmed the Bally Companies' Plan of Reorganization.

         C. 2008-2009 Bankruptcy Proceedings

         On 3 December 2008, the Bally Companies, including Bally of the Southeast, filed a second petition for Chapter 11 bankruptcy in U.S. Bankruptcy Court for the Southern District of New York (the "2008-2009 Bankruptcy"). The cases were jointly administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure.

         On 25 June 2009, after the petition had been filed, Tisano Realty, Inc. and Bally of the Southeast executed another amendment to the Lease (the "Second Amendment"). The Second Amendment contains site plan modifications, signage revisions, and monthly base rent adjustments. Except as modified in the Second Amendment, the Lease and the terms thereof not expressly amended were to continue "in full force and effect."

         During the 2008-2009 Bankruptcy proceedings, the Bally Companies jointly moved to assume certain unexpired real property leases pursuant to 11 U.S.C. § 365. By order entered 29 June 2009, the bankruptcy court granted the motion and authorized the Bally Companies to assume the unexpired leases identified in the Assumed Lease Schedule attached to the order (the "Assumption Order"). The Lease before us was included among those listed in the Assumed Lease Schedule.

         The Bally Companies also submitted a Joint Plan of Reorganization of the Debtors Under Chapter 11 of the Bankruptcy Code. The Joint Plan of Reorganization was amended during the proceedings (as amended, the "Plan"). Seeking confirmation of the Plan, William G. Fanelli, the acting chief financial officer of the Bally Companies, submitted to the bankruptcy court a declaration in support of confirmation (the "Fanelli Declaration"). The Fanelli Declaration provides an outline of the proposed reorganization and the feasibility thereof. It also offers reasons to consolidate the Bally Companies for distribution purposes, including the following:

11. Article IV of the Plan provides that the Plan shall "serve as, and shall be deemed to be, a motion for entry of an order consolidating the [Debtors'] Estates" solely for distribution purposes. The Plan explicitly limits the scope and purpose of such consolidation to implementation of the Plan, providing that the consolidation sought shall not affect: (i) the legal and corporate structure of the Reorganized Debtors; (ii) guarantees that are required to be maintained post-Effective Date[.] (alteration and emphasis original).
12. The Debtors propose consolidation of the Consolidated Debtors solely to facilitate distributions under the Plan. The Debtors do not seek to improperly enhance or impair the recoveries of any creditors by way of the consolidation. Indeed, the Debtors are not aware of any creditor actually affected by the consolidation contemplated under the Plan.

         The bankruptcy court confirmed the Plan by order entered 19 August 2009 (the "Confirmation Order"). At issue in this case are two sections of the Confirmation Order and the Plan (together, the "Consolidation Provisions"): Paragraph 3 of the Confirmation Order, which reflects Article IV of the Plan, and Paragraph 15 of the Confirmation Order, which reflects Article X of the Plan.

         Paragraph 3 of the Confirmation Order approves the consolidation contemplated in Article IV of the Plan. Paragraph 3 provides in pertinent part:

3. Consolidation of the Debtors.
(a) As no objections to such consolidation have been filed or served by any party, pursuant to Article IV of the Plan the consolidation of the consolidated Debtors solely for the purpose of implementing the Plan, including for purposes of voting, confirmation and distributions to be made under the Plan is hereby approved. Solely for purposes of implementing the Plan, including without limitation the making of Distributions thereunder, and for no other purposes . . . and (vi) all guarantees of the Debtors of the obligations of any other Debtors shall be deemed eliminated so that any Claim against any Debtor and any guarantee thereof executed by any other Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors.
(b) Such consolidation (other than for the purpose of implementing the Plan) shall not affect . . . (ii) guarantees that are required to be maintained post-Effective Date (a) in connection with executory contracts or unexpired leases that were entered into during the Chapter 11 Cases or that have been, or will hereunder be, assumed[.]

         Article IV of the Plan provides in pertinent part:

Solely in connection with Distributions to be made to the holders of Allowed Claims, the Plan is predicated upon, and it is a condition precedent to confirmation of the Plan, that the Court provide in the Confirmation Order for the consolidation of the Debtors' Estates into a single Estate for purposes of this Plan and the Distributions hereunder. . . .
Pursuant to the Confirmation Order . . . (ii) the obligations of each Debtor will be deemed to be the obligation of the consolidated Debtors solely for purposes of this Plan and Distributions hereunder . . ., and (vi) all guarantees of the Debtors of the obligations of any other Debtors shall be deemed eliminated so that any Claim against any Debtor and any guarantee thereof executed by any other Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors.
Notwithstanding the foregoing, such consolidation shall not affect . . . (ii) guarantees that are required to be maintained post-Effective Date (a) in connection with executory contracts or unexpired leases that were entered into during the Chapter 11 Cases or that have been, or will hereunder be, assumed[.]

         Paragraph 15 of the Confirmation Order approves the provisions contained in Article X of the Plan, which addresses the assumption and rejection of executory contracts and unexpired leases. Paragraph 15 provides in pertinent part:

15. Executory Contracts and Unexpired Leases.
(a)The executory contract and unexpired lease provisions of Article X of the Plan are specifically approved in all respects, are incorporated herein in their entirety and are so ordered. The Debtors are authorized to assume, assign and/or reject executory contracts or unexpired leases in accordance with Article X of the Plan. In the event of an inconsistency between the Plan and any executory contract or unexpired lease assumed under the Plan, the provisions of the Plan shall govern.
(b)Pursuant to Article X of the Plan, the Debtors shall be deemed to assume each executory contract and unexpired lease that (i) was not previously assumed, assumed and assigned or rejected by an order of the Court, (ii) was not rejected pursuant to Exhibit A of the ...

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