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Lacks Stores Assumption Motion

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					                                                            Docket #0684 10
         Case 10-60149 Document 684 Filed in TXSB on 02/21/11 Page 1 of Date Filed: 2/21/2011



                         IN THE UNITED STATES BANKRUPTCY COURT
                           FOR THE SOUTHERN DISTRICT OF TEXAS
                                    VICTORIA DIVISION

    IN RE:                                                   §
                                                             §     CASE NO. 10-60149
    LACK’S STORES, INCORPORATED,                             §
    ET AL.,1                                                 §     (Chapter 11)
                                                             §     (Jointly Administered)
           DEBTORS.                                          §
                                                             §
                                                             §

              DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
                  VICTORIA HEADQUARTERS LEASE AGREEMENT

                   A HEARING WILL BE CONDUCTED ON THIS MATTER
                   ON MARCH 9, 2011 AT 2:30 P.M. AT THE UNITED
                   STATES COURTHOUSE, 515 RUSK AVENUE, HOUSTON,
                   TEXAS 77002.

                   IF YOU OBJECT TO THE RELIEF REQUESTED, YOU
                   MUST RESPOND IN WRITING, SPECIFICALLY
                   ANSWERING EACH PARAGRAPH OF THIS PLEADING.
                   UNLESS OTHERWISE DIRECTED BY THE COURT, YOU
                   MUST FILE YOUR RESPONSE WITH THE CLERK OF
                   THE BANKRUPTCY COURT BY FEBRUARY 28, 2011.
                   YOU MUST SERVE A COPY OF YOUR RESPONSE ON
                   THE PERSON WHO SENT YOU THE NOTICE;
                   OTHERWISE, THE COURT MAY TREAT THE PLEADING
                   AS UNOPPOSED AND GRANT THE RELIEF REQUESTED.

         Lack’s Stores, Incorporated and its affiliated debtor entities, as debtors and debtors in

possession (collectively, the “Debtors”), file this Debtors’ Motion for Authority to Assume

Amended Victoria Headquarters Lease Agreement (the “Motion”). In support of the Motion, the

Debtors respectfully submit the following:




1
 The Debtors and the last four digits of their tax identification numbers are Lack’s Stores, Incorporated (6528), Merchandise
Acceptance Corporation (0972), Lack’s Furniture Centers, Inc. (9468), and Lack Properties, Inc. (8961).


DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT
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                      JURISDICTION AND PROCEDURAL BACKGROUND

         1.       The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and

157. This Motion concerns the administration of the estates and is a core proceeding pursuant to

28 U.S.C. § 157(b)(2)(A).

         2.       Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

         3.       On November 16, 2010 (the “Petition Date”), the Debtors each filed a voluntary

petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy

Code”), commencing the above-referenced cases (collectively, the “Cases”), which are being

jointly administered under the case styled In re Lack’s Stores, Incorporated, et al. [Docket No.

23].

         4.       Since the Petition Date, the Debtors have continued to operate and manage their

businesses as debtors in possession pursuant to Bankruptcy Code §§ 1107(a) and 1108.

         5.       On November 30, 2010, the United States Trustee appointed an official

committee of unsecured creditors in these Cases (the “Committee”) [Docket No. 96].

                                           STATEMENT OF FACTS

A.       The Debtors and Their Businesses

         6.       The Debtors are family-owned Texas corporations headquartered in Victoria,

Texas. Prior to filing these Cases, Lack’s Stores, Incorporated (“Lack’s”) was one of the largest

independently-owned retail furniture chains in the United States. Lack’s sold a complete line of

home furnishings through thirty-six (36) retail stores in twenty-six (26) Texas cities.2

Historically, Lack’s financed approximately 70% of its customers’ purchases through the


2
 For a more complete description of the background of the Debtors, please see the Declaration of Melvin Lack in Support of
First Day Pleadings [Docket No. 14] filed in these Cases.



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                                        Page 2 of 10
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underwriting of “in store” financing, and the book amount of the customer notes receivable

portfolio as of the Petition Date was approximately $130,000,000.

            7.        As authorized by the Court [Docket No. 184], and with the assistance of Hilco

Merchant Resources, LLC, the Debtors conducted store closing sales. The store closing sales

lasted approximately eight (8) weeks and concluded on or about January 16, 2011 with the

closing of all remaining retail locations.

            8.        Working toward conclusion of the Cases, the Debtors intend to propose a chapter

11 plan that will provide for the collection of the customer notes receivable portfolio in the

ordinary course of business and the marketing and disposition of the Debtors’ real estate

interests3 over time and in such a manner as to maximize their value for the benefit of the estates.

B.          The Victoria Headquarters Lease

            9.        On June 1, 1996, Lack’s, as lessee, and Triple M Partnership Ltd. (“Triple M”),4

as lessor, entered into that certain lease for non-residential real property associated with its

headquarters in Victoria, Texas,5 located at 200 S. Ben Jordan, Victoria, Texas 77901, which

lease was subsequently amended on February 1, 2009 (the “Victoria Headquarters Lease”).6 A

copy of the Victoria Headquarters Lease is attached hereto as Exhibit “A.”




3
 Lack Properties, Inc. (“Lack Properties”), a Debtor in these Cases, is the owner of real property and improvements associated
with fourteen store and warehouse locations leased to Lack’s.

4
    Triple M is an entity owned by members of the Lack family, including Melvin Lack.

5
    The Victoria headquarters lease is assigned “Store # 899” even though it is not a store.

6
 The Victoria Headquarters Lease covers an “11.51 acre tract of land, more or less, located in Victoria County, Texas . . . located
at 200 S. Ben Jordan, Victoria, Texas 77901, on which is situated a building and warehouse,” which was already occupied by
Lack’s, and “the racking system, shelving, carts, forklifts, and other equipment described in [that certain] Lease Agreement dated
February 11, 1987, between Merchandise Acceptance Corporation, Inc. and Lack’s Stores, Inc., and assigned to Lessor, the terms
of which are being modified and replaced by this Lease Agreement.” Victoria Headquarters Lease, Article I.



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                                                Page 3 of 10
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            10.       Under the Victoria Headquarters Lease, Lack’s leases 111,000 square feet from

Triple M. Lack’s is currently obligated to pay monthly rent of $26,6507 through May 31, 2011

and $29,650 during the five-year renewal term beginning June 1, 2011 through May 31, 2016.8

            11.       The premises associated with the Victoria Headquarters Lease have been used as

the Debtors’ corporate headquarters and include office space for management, accounting,

human resources, advertising, customer service, purchasing, computer operations, and fleet

management personnel. The leased premises have also included warehouse space for regional

delivery and a service center for the repair of furniture and electronics sold in the Debtors’ retail

stores. Given the conclusion of the store closing sales and the resulting downsizing of the

Debtors’ business operations, the Debtors no longer require the use of a facility as large as the

entire Victoria facility.

            12.       In an effort to reduce costs of estate administration and meet the needs of the

Debtors’ ongoing business operations, as of February 1, 2011, Lack’s and Triple M have entered

into that certain Amendment to Lease Agreement (899) (the “Victoria Amendment”), the

effectiveness of which is subject to Court approval. The Victoria Amendment is attached hereto

as Exhibit “B.”

            13.       The Victoria Amendment recites the following:

                      Recognizing the reduced needs of the Lessee for warehouse space,
                      a service center and office space, Lessor agrees to amend the
                      current lease between Lessor and Lessee to include only 9,000 sq ft
                      of office space, as well as a storage area in the service center. Rent
                      for the reduced space will be $7,500 a month. There shall be no
                      payment for taxes or insurance.
7
 Pursuant to the Amendment to the Victoria Headquarters Lease dated February 1, 2009, Lack’s is obligated to pay $2,650 over
and above the monthly base rental amounts stated in the Victoria Headquarters Lease (i.e., $24,000 until May 31, 2011 and
$27,000 until May 31, 2016), in consideration for Triple M paying the ad valorem taxes on the leased premises.

8
    Lack’s exercised a five-year renewal option under the Victoria Headquarters Lease on October 18, 2010.



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                                          Page 4 of 10
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Victoria Amendment ¶ 2. The rent reduction is contemplated to be effective as of February 1,

2011. The Victoria Amendment also provides that the term of the Victoria Headquarters Lease

will be for 2 years, beginning on February 1, 2011 and ending on January 31, 2013. Lack’s is

entitled to two successive one-year options to renew, with ninety (90) days’ advance notice to

Triple M. Victoria Amendment ¶ 3. The Victoria Amendment also provides that either party

may terminate the Victoria Headquarters Lease with one hundred twenty (120) days written

notice. Victoria Amendment ¶ 4.

                                     RELIEF REQUESTED

                   Approval of Amendment to Victoria Headquarters Lease

       14.     Pursuant to Bankruptcy Code §§ 105 and 363, the Debtors request approval of the

amendment to the Victoria Headquarters Lease. Bankruptcy Code § 363(b)(1) provides: “The

trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of

business, property of the estate . . . .” 11 U.S.C. § 363(b)(1).

       15.     The proposed use, sale, or lease of property of the estate may be approved under

Bankruptcy Code § 363(b) if it is supported by sound business justification. See, e.g., In re

Crutcher Resources Corp., 72 B.R. 628, 631 (Bankr. N.D. Tex. 1987); Inst’l Creds. of

Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines), 780 F.2d

1223, 1226 (5th Cir. 1986) (“[F]or a debtor-in-possession or trustee to satisfy its fiduciary duty

to the debtor, creditors and equity holders, there must be some articulated business justification

for using, selling, or leasing the property outside the ordinary course of business”).

       16.     In the exercise of their business judgment, the Debtors have determined that

executing the Victoria Amendment will benefit their estates. Prior to the completion of the store

closing sales, the premises relating to the Victoria Headquarters Lease were used as the Debtors’


DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                    Page 5 of 10
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corporate headquarters, including offices for many departments, as discussed above, as

warehouse space, and as a service center for the repair of furniture and electronics sold in the

Debtors’ retail stores. As stated in the Victoria Amendment, the Debtors’ need for leased space

with respect to the Victoria Headquarters Lease has been reduced. Going forward, Lack’s

intends to use the space as offices for management and accounting personnel and for the Victoria

region’s customer notes receivable collections staff and a small portion of the warehouse space

to store any repossessed furniture relating to ongoing collections efforts.

         17.       Accordingly, Lack’s and Triple M have entered into the Victoria Amendment,

which reduces the leased square footage, shortens the lease term by approximately three (3)

years, allows for a termination on one hundred twenty (120) days notice, and reduces Lack’s rent

by approximately $19,000 per month through May of 2011 and $22,000 per month for the

remainder of the lease term.9

         18.       The Victoria Amendment will thus reduce the Debtors’ expenses and the lease

term associated with the Victoria Headquarters Lease, which will benefit the Debtors’ estates and

creditors.

         19.       The Debtors respectfully request that the Court approve the Victoria Amendment

as an exercise of the Debtors’ sound business judgment.

                Approval of Assumption of Amended Victoria Headquarters Lease

         20.       By this Motion, the Debtors also seek authority to assume the Victoria

Headquarters Lease as amended by the Victoria Amendment (the “Amended Victoria

Headquarters Lease”).

9
  The Debtors’ submit that market rent in Victoria for comparable space is approximately $1 per square foot per month. Under
the Victoria Amendment, Lack’s will be leasing 9,000 square feet and paying monthly rent of $7,500, which is $0.83 per square
foot.



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                                           Page 6 of 10
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       21.     Under Bankruptcy Code § 365 a debtor-in-possession may “subject to the Court’s

approval . . . assume or reject any executory contract or unexpired lease of the debtor.” 11

U.S.C. § 365(a).

       22.     Bankruptcy Code § 365 does not provide a standard for determining when

assumption or rejection of an executory contract or unexpired lease is appropriate.          In re

Monarch Tool & Mfg. Co., 114 B.R. 134 (Bankr. S.D. Ohio 1990). However, most courts,

including the Fifth Circuit Court of Appeals, acknowledge that the business judgment standard

should be applied to determine whether to authorize the assumption or rejection of executory

contracts and unexpired leases. See In re Liljeberg Enters., Inc., 304 F.3d 410, 438 (5th Cir.

2002); Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir. 1985);

Delightful Music Ltd. v. Taylor (In re Taylor), 913 F.2d 102, 107 (3d Cir. 1990); Sharon Steel

Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36-40 (3d Cir. 1989); In re Gardinier, Inc., 831

F.2d 974, 976 n.2 (11th Cir. 1987); In re Federated Dep’t Stores, Inc., 131 B.R. 808, 811 (Bankr.

S.D. Ohio 1991) (citing N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 523 (1984); Group of

Investors v. Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 318 U.S. 523 (1943)). “The act of

assumption must be grounded, at least in part, in the conclusion that maintenance of the contract

is more beneficial to the estate than doing without the other party’s services.” In re Liljeberg

Enters., Inc., 304 F.3d at 438 (quoting MMR Holding Corp. v. C & C Consultants, Inc. (In re

MMR Holding Corp.), 203 B.R. 605, 612 (Bankr. M.D. La. 1996)).

       23.     As previously explained, the Amended Victoria Headquarters Lease provides for

reduced rent, square footage, and lease term as compared to the Victoria Headquarters Lease

without the Victoria Amendment. The Debtors need the Amended Victoria Headquarters Lease

because it will support the necessary business function of providing office space for the Debtors’


DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                   Page 7 of 10
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management and accounting personnel and the Victoria region’s customer notes receivable

collections staff, as well as warehouse space for repossessed furniture relating to ongoing

collections efforts. Additionally, locating a suitable alternative 9,000 square foot office and

warehouse space in the Victoria market, especially for a short-term lease, would be challenging.

       24.     Assumption of the Amended Victoria Headquarters Lease will also save the

Debtors the expense of relocating the offices at the leased premises and will save the estates from

lease rejection claims relating to the Victoria Headquarters Lease. Thus, the Debtors have

determined, in their business judgment, that the Amended Victoria Headquarters Lease is

reasonable and appropriate for the Debtors’ ongoing needs.

       25.     In connection with the assumption, Lack’s must also pay cure costs and other

compensation relating to any defaults under the Victoria Headquarters Lease as well as provide

adequate assurance of future performance under the lease.            Bankruptcy Code § 365(b)(1)

provides:

               If there has been a default in an executory contract or unexpired
               lease of the debtor, the trustee may not assume such contract or
               lease unless, at the time of assumption of such contract or lease,
               the trustee –

               (A) cures, or provides adequate assurance that the trustee will
               promptly cure, such default other than a default that is a breach of
               a provision relating to the satisfaction of any provision (other than
               a penalty rate or penalty provision) relating to a default arising
               from any failure to perform nonmonetary obligations under an
               unexpired lease of real property, if it is impossible for the trustee to
               cure such default by performing nonmonetary acts at and after the
               time of assumption, except that if such default arises from a failure
               to operate in accordance with a nonresidential real property lease,
               then such default shall be cured by performance at and after the
               time of assumption in accordance with such lease, and pecuniary
               losses resulting from such default shall be compensated in
               accordance with the provisions of this paragraph;



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                     Page 8 of 10
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                  (B) compensates, or provides adequate assurance that the trustee
                  will promptly compensate, a party other than the debtor to such
                  contract or lease, for any actual pecuniary loss to such party
                  resulting from such default; and

                  (C) provides adequate assurance of future performance under such
                  contract or lease.

11 U.S.C. § 365(b)(1).

         26.      With respect to their obligation to cure and compensate under Bankruptcy Code

§ 365(b)(1)(A) and (B), the Debtors will not pay any amounts to Triple M at this time.

Notwithstanding Triple M’s entitlement to a cure payment in connection with the assumption,

Triple M has agreed that it will instead have an allowed general unsecured claim in the Cases for

prepetition amounts owed under the Victoria Headquarters Lease totaling $22,469.39.10

         27.      Therefore, in the exercise of their business judgment, the Debtors have

determined that the assumption of the amended Victoria Headquarters Lease is in the best

interests of the Debtors and their estates and request that this Court approve the assumption.

                   WAIVER OF STAY UNDER BANKRUPTCY RULE 6004(h)

         28.      In order to have the Court’s approval of the Amended Victoria Headquarters

Lease be effective immediately upon entry of the Order approving this Motion, which will

reduce the rents under the Victoria Headquarters Lease, the Debtors request that this Court waive

the fourteen-day stay of Rule 6004(h) applicable to the use, sale, or lease of property.




10
  This $22,469.39 amount is comprised of $12,350, which represents one half month of unpaid prepetition rent for November
2010, and $10,119.39, which represents an unpaid deferred rent obligation.



DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                                        Page 9 of 10
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                                            PRAYER

       The Debtors respectfully request that the Court enter an Order: (a) approving the Victoria

Amendment, (b) approving the assumption of the Amended Victoria Headquarters Lease, and (c)

granting the Debtors such other and further relief to which they may be justly entitled.

Dated: February 21, 2011

                                           Respectfully submitted,

                                           VINSON & ELKINS LLP

                                     By:     /s/ Katherine D. Grissel
                                           Daniel C. Stewart, SBT #19206500
                                           Paul E. Heath, SBT #093555050
                                           Michaela C. Crocker, SBT #24031985
                                           Katherine D. Grissel, SBT #24059865
                                           2001 Ross Avenue, Suite 3700
                                           Dallas, Texas 75201
                                           Tel: 214.220.7700
                                           Fax: 214.999.7787
                                           mcrocker@velaw.com
                                           kgrissel@velaw.com

                                           ATTORNEYS FOR THE DEBTORS




DEBTORS’ MOTION FOR AUTHORITY TO ASSUME AMENDED
VICTORIA HEADQUARTERS LEASE AGREEMENT                                                      Page 10 of 10
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                            EXHIBIT "A"
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                           EXHIBIT "B"
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                       IN THE UNITED STATES BANKRUPTCY COURT
                         FOR THE SOUTHERN DISTRICT OF TEXAS
                                  VICTORIA DIVISION

    IN RE:                                              §
                                                        §    CASE NO. 10-60149
    LACK’S STORES, INCORPORATED,                        §
    ET AL.,1                                            §    (Chapter 11)
                                                        §    (Jointly Administered)
          DEBTORS.                                      §
                                                        §
                                                        §

       ORDER GRANTING DEBTORS’ MOTION FOR AUTHORITY TO ASSUME
          AMENDED VICTORIA HEADQUARTERS LEASE AGREEMENT

                                        [Related to Docket No. ___]

        On March 9, 2011, the Court considered the Debtors’ Motion for Authority to Assume

Amended Victoria Headquarters Lease Agreement (the “Motion”)2 filed by the above-referenced

debtors and debtors in possession (the “Debtors”). The Court finds that (a) it has jurisdiction

over the matters raised in the Motion pursuant to 28 U.S.C. § 1334(b); (b) this is a core

proceeding pursuant to 28 U.S.C. § 157(b)(2); (c) the Debtors have exercised sound business

judgment in determining that they should enter into the Victoria Lease Amendment, and the

Debtors’ entry into such amendment is in the best interests of the Debtors’ estates and their

creditors; (d) proper and adequate notice of the Motion and hearing thereon has been given, and

no other or further notice is necessary; and (e) after due deliberation upon the Motion and all

proceedings before the Court in connection with the Motion, good and sufficient cause exists for

granting the relief requested in the Motion. Therefore, it is

        ORDERED that the Motion is GRANTED. It is further

1
  The Debtors and the last four digits of their tax identification numbers are Lack’s Stores, Incorporated (6528),
Merchandise Acceptance Corporation (0972), Lack’s Furniture Centers, Inc. (9468), and Lack Properties, Inc.
(8961).
2
  Capitalized terms not defined herein shall have the meanings given to them in the Motion.

ORDER GRANTING DEBTORS’ MOTION FOR AUTHORITY TO ASSUME
AMENDED VICTORIA HEADQUARTERS LEASE AGREEMENT                                                              1 of 2

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          ORDERED that the Victoria Amendment is hereby approved.     It is further

          ORDERED that the Debtors are hereby authorized to assume the Amended Victoria

Headquarters Lease. It is further

          ORDERED that the Debtors owe no cure payment under Bankruptcy Code § 365(b)(1).

Rather, Triple M will have an allowed general unsecured claim for amounts owed under the

Victoria Headquarters Lease totaling $22,469.39. It is further

          ORDERED that the Debtors have demonstrated adequate assurance of future

performance and have satisfied the requirements of Bankruptcy Code § 365(b)(1)(C) in

connection with assumption of the Amended Victoria Headquarters Lease. It is further

          ORDERED that all applicable requirements of Bankruptcy Code § 365 are satisfied or

waived. It is further

          ORDERED that the Debtors are authorized and empowered to take all actions necessary

to implement the relief granted in this Order. It is further

          ORDERED that notwithstanding the possible applicability of Bankruptcy Rule 6004(h),

or otherwise, this Order shall be immediately effective and enforceable upon its entry. It is

further

          ORDERED that this Court shall retain jurisdiction to hear and determine all matters

arising from the interpretation or implementation of this Order.



SIGNED THIS ____ day of March, 2011.
                                                      ____________________________________
                                                      Jeff Bohm
                                                      United States Bankruptcy Judge




ORDER GRANTING DEBTORS’ MOTION FOR AUTHORITY TO ASSUME
AMENDED VICTORIA HEADQUARTERS LEASE AGREEMENT                                          2 of 2

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