In Re: Sears Holdings Corporation

Background

Santa Rosa Mall, LLC was the landlord of a store operated by SR – Rover de Puerto Rico, LLC, formerly Sears Roebuck de Puerto Rico, Inc. The tenant was a subsidiary of Sears Holdings Corporation. Hurricanes Irma and Maria damaged the store in 2017, after which the tenant closed it and left it in disrepair.

The lease required insurance coverage for the store. It also provided that, if damage exceeded $100,000 from an insured casualty, insurance proceeds would be deposited in a specified account in the landlord’s name. The parent company, however, was named as the insured under a property-insurance policy. The insurers paid the debtors $46,332,916 in installments on the hurricane claims.

After the debtors filed for Chapter 11 bankruptcy, they settled their claims with the insurers for $13,260,122. The settlement released the insurers from claims relating to the policy and hurricane losses and required the debtors to defend and indemnify the insurers against later claims, including claims by landlords. The settlement proceeds were paid to the debtors rather than deposited in an account in the landlord’s name.

The landlord proposed suing the insurers under Puerto Rican law, asserting that it was a loss payee and that the insurers had improperly paid the debtors. The landlord had previously sought relief from the automatic stay, and the bankruptcy court had permitted a claim against the insurance broker, Aon, but not the proposed claim against the insurers. The bankruptcy court denied the landlord’s third motion for relief from the stay, and the landlord appealed.

Issues and analysis

The district court reviewed the bankruptcy court’s factual findings for clear error, its legal conclusions independently, and its decision on whether to lift the automatic stay for abuse of discretion.

Enforceability of the settlement. The landlord argued that the settlement was invalid because the bankruptcy court had not approved it under Bankruptcy Rule 9019(a). The district court held that the debtors could enter transactions involving estate property in the ordinary course of business without prior court approval under 11 U.S.C. § 363(c)(1). Applying the ordinary-course tests, the court concluded that the debtors had regularly filed and settled property-damage insurance claims before bankruptcy. The size of this settlement did not change the type of transaction. The court therefore held that the settlement was made in the ordinary course of business and was enforceable without prior notice, a hearing, or court approval.

Effect of the proposed lawsuit on the bankruptcy estate. The landlord characterized its proposed action as an independent property-insurance claim concerning payment to the wrong party. The district court rejected that characterization, concluding that the proposed claim arose from the insurance policy and concerned the hurricane losses. The lawsuit would therefore trigger the settlement’s defense and indemnity provisions.

The court also held that the indemnity obligation could qualify as an administrative expense. The settlement was made after the bankruptcy filing and brought millions of dollars into the bankruptcy estate. The Chapter 11 plan provided that indemnification claims arising from postpetition conduct would be treated as administrative expenses to the extent allowed. Because the proposed lawsuit could impose those expenses on the estate, it would adversely affect the bankruptcy case.

Application of the automatic stay. The automatic stay generally protects a bankruptcy debtor from judicial actions. Although it ordinarily does not protect non-debtor third parties, the district court explained that it may apply when a lawsuit against a non-debtor would have an immediate adverse economic effect on the debtor’s estate. The court held that this principle applied to the insurers because the debtors would have to defend and indemnify them, making the debtors the real party affected by the proposed lawsuit.

Cause to lift the stay. Bankruptcy courts may lift the stay for cause under 11 U.S.C. § 362(d)(1). The bankruptcy court gave primary weight to the effect of the stay on the parties and the balance of harms, while also considering interference with the bankruptcy case and possible prejudice to other creditors. The district court found no legal or factual error and held that the bankruptcy court’s decision was within its permissible discretion. Allowing the lawsuit to proceed could trigger indemnity obligations, create an administrative expense, and impair the interests of other creditors.

Disposition

Judge Philip M. Halpern affirmed the bankruptcy court’s order denying Santa Rosa Mall’s third motion for relief from the automatic stay. The district court stated that the landlord’s claim for the cost of repairing the store would be reconciled with the other general unsecured claims in the bankruptcy case and directed the clerk to close the district-court case.