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Family Kingdom, Inc. v. EMIF New Jersey Limited Partnership

225 B.R. 65 (D. N.J. 1998)

LEASES; STATUTE OF FRAUDS; BANKRUPTCY; STAYS— Where the potential harm to a bankrupt tenant is enormous, it is appropriate to grant a stay of eviction even if the tenant’s likelihood of success on the merits is remote. When a contract subject to the Statute of Frauds requires modification to be in writing, the contract cannot be orally modified.

A bankruptcy court denied a motion by a debtor-tenant to assume an amusement park lease. Although the District Court strongly believed that a majority of the arguments advanced by the tenant were not likely to succeed, in view of the substantial and irreparable harm that the tenant would incur if it could not operate through the amusement park season, the District Court then granted the tenant’s request for a stay pending appeal of the bankruptcy court’s decision.

When the tenant failed to pay rent under its lease, its landlord sent appropriate notices of default and then sent a lease termination letter. After the tenant failed to vacate the property, the landlord filed an action for summary dispossession against the tenant. After the filing and some procedural maneuvering, the tenant filed a Chapter 11 bankruptcy petition. Later, it moved to assume the lease. Accordingly, the key issue was whether the lease had been properly terminated under applicable nonbankruptcy law prior to filing the bankruptcy. This is because “if a lease of nonresidential property has been terminated under state law before the filing of a bankruptcy petition, there is nothing left for the trustee to assume.” The bankruptcy court judge determined that an appropriate termination of the lease had occurred (the landlord sent its termination letter) and therefore denied the tenant’s motion to assume the lease. Further, the bankruptcy court denied a stay pending appeal, finding that there was no likelihood of success on the merits of the appeal, although the judge did note the substantial harm that would come to the debtor-tenant if the stay were not granted.

The tenant argued that pursuant to the language in the lease, rent was not payable. The obligation to pay Basic Rent derived from the following language: “From any Net Revenues, and before the payment of any debt service on Ride Equipment Debt or any management fee, [tenant] shall pay to [landlord] as annual rent… .” The tenant argued that if there are no Net Revenues no obligation to pay Basic Rent arises. Unfortunately for the tenant, the lease also expressly said, “the insufficiency of such identified source shall not be a defense to failure to pay such required amounts… .” While there was additional language in the lease that provided for some situations where the unpaid Basic Rent might be deferred, there was no provision that would completely excuse the tenant from paying rent when there were no Net Revenues. In short, the lease was in no way ambiguous about the tenant’s obligation to pay Basic Rent and the tenant showed no likelihood of success in demonstrating that there was any such likelihood of success.

The tenant also took the position that if it were given the opportunity to take discovery, it could provide evidence that the lease had been modified by the parties. The tenant’s argument appeared to be that modification of a contract may occur without the mutual assent of the parties and may be implied from the conduct of the parties, and also that an oral modification can override a contractual provision prohibiting oral modifications. The District Court noted that the lease provided that it could not be modified or amended other than by an agreement in writing and that the lease contained a “no waiver” provision. Accordingly, the tenant should not have reasonably expected that any modification which was not in the form of a writing signed by its landlord would have any effect. In New Jersey, in general, a contract which the Statue of Frauds requires to be in writing (such as this lease) may not be modified by a subsequent oral agreement.


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