Restructuring

Contributed by Blaire Cahn
The issue in I-4 Land Holding Limited Company v. Lazy Days’ RV Center Inc., et al. (In re Lazy Days’ RV Center Inc.) was whether the United States Bankruptcy Court for the District of Delaware erred in reopening the chapter 11 cases of Lazy Days and its affiliates to determine the validity of a purchase option in a lease.  Finding that the bankruptcy court abused its discretion in reopening the proceedings and issued what amounted to an advisory opinion with respect to the validity of the purchase option, the United States District Court for the District of Delaware vacated the bankruptcy court’s order.
Prior to the bankruptcy cases, Lazy Days leased land from I-4.  The lease provided Lazy Days with a purchase option but prohibited it from assigning the lease.  Both the purchase option and the assignment prohibition were subject to certain exceptions.  The lease was the focus of prepetition state court litigation between Lazy Days and I-4.  The parties resolved their dispute in the course of the bankruptcy proceedings and entered into a settlement agreement.  Pursuant to the agreement, I-4 consented to the assignment of the lease by Lazy Days to one of its debtor affiliates, LDRV.  The order confirming the plan for Lazy Days, LDRV, and their affiliated debtors required assumption of the lease and the settlement agreement.
After the confirmation order was entered, LDRV attempted to exercise the purchase option.  I-4 refused to recognize the option, and the parties entered into litigation in state court.  Lazy Days and LDRV filed a motion with the bankruptcy court to reopen the chapter 11 proceedings.  The bankruptcy court granted the motion over the objection of I-4 and, among other things, found that I-4’s actions in refusing the purchase option violated the confirmation order and decreed that I-4 was obligated to permit the purchase option.  I-4 appealed to the district court.
The district court’s analysis focused on Zisholtz v. Goldstein In re Martin’s Aquarium).  In Martin, the bankruptcy court reopened a chapter 7 proceeding to give an opinion on the effect of one of its orders, which could then be submitted to the state courts.  Noting that such a purpose was “particularly ill-founded,” the Third Circuit warned that “[a] bankruptcy court-or any federal court-should not provide advisory opinions for state court litigants.”  It does not appear that Martin was brought to the attention of the bankruptcy court.
The district court noted that the bankruptcy court’s order has “the flavor of an advisory opinion.”  Moreover, counsel for Lazy Days and LDRV stated that the bankruptcy court’s ruling would “instruct the Florida proceedings” as well as the parties to the Florida proceedings.  Lazy Days and LDRV went to the bankruptcy court for the purpose of obtaining an opinion that could be submitted to the state court in connection with the parties’ litigation and did, in fact, obtain such an opinion.  Interestingly, the district court recognized in a footnote that it is theoretically appropriate for the bankruptcy court to interpret its own confirmation order, but noted that these were “prepackaged” chapter 11 cases.  As such, the confirmation order was essentially an agreed upon stipulation between the parties.  The district court found that the bankruptcy court abused its discretion in reopening the chapter 11 cases and vacated the bankruptcy court’s order.
This case serves as a warning to bankruptcy courts against the issuance of advisory opinions in connection with state court litigation.  Nonetheless, the distinction drawn by the district court regarding the fact that the chapter 11 cases of Lazy Days and its affiliates were “prepackaged” may leave room for courts to distinguish this decision in the future.