KVS Foodsystems LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
KVS FOODSYSTEMS, LLC,
DEBTOR
CASE NO.
08-07905-8-RDD
ORDER DENYING APPLICABILITY OF AUTOMATIC
STAY UNDER 11 U.S.C. § 362 AND DENYING EXTENSION OF
THE AUTOMATIC STAY UNDER 11 U.S.C. § 105
Pending before the Court is the Debtor’s Motion to Determine Extent and Applicability of
the Automatic Stay Under 11 U.S.C. § 362 or, in the Alternative, to Extend the Automatic Stay
under 11 U.S.C. § 105 (the “Motion”) filed by KVS Foodsystems, LLC (the “Debtor” or “KVS”)
on December 17, 2008 and Subway Real Estate Corp.’s Response in Opposition to Debtor’s Motion
to Determine Extent and Applicability of the Automatic Stay under 11 U.S.C. § 362 or, in the
Alternative, to Extend the Automatic Stay under 11 U.S.C. § 105 (the “Response”) filed by Subway
Real Estate Corp. (“Subway”) on January 13, 2009. After several continuances at the request of
both parties, the Court conducted a hearing on the Motion and Response on February 26, 2009.
SO ORDERED.
SIGNED this 29 day of April, 2009.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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1Bradshaw permitted the Debtor to operate the Subway stores in the leased premises but
the record does not reflect that either of the subleases were assigned to Debtor.
2
BACKGROUND
1. 	On November 7, 2008, KVS filed a voluntary petition for relief under Chapter 11 of Title
11 of the United States Code (the “Bankruptcy Code”).
2. 	Since the petition date, the debtor has continued to operate as a debtor-in-possession.
3. 	Vitus B. Bradshaw, Jr. (“Bradshaw”) entered into a franchise relationship with Subway in
his individual capacity. 	Subsequently, Mr. Bradshaw formed the Debtor to operate his
Subway stores and served as the Debtor’s managing member.
4. 	Pursuant to the franchise relationship, Subway enters into master lease agreements with the
respective landlords once it has approved a store location and the proposed lease terms.
Subway then subleases the premises to the franchisee, in this case Bradshaw, to operate each
store. Subway requires a franchisee to make the rent payments directly to the landlord listed
on each master lease.
5. 	In accordance with the franchise arrangement, Subway entered into two master lease
agreements for commercial space located in Jordan Shopping Center and Shamrock Plaza.
Thereafter, Subway entered into sublease agreements with Bradshaw for these locations.
6. 	Although the Debtor does not hold a leasehold interest in the premises, the Debtor operated
two Subway restaurant locations.1 Subway Store No. 5219 is located in Jordan Shopping
Center in Clinton, North Carolina and Subway Store No. 22288 is located in Shamrock
Plaza, also in Clinton, North Carolina.
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7. 	Subway asserts that Bradshaw breached his sublease with respect to Store No. 5219 based
on his failure to pay rent for the months of September, October, November, and December
2008 and January 2009. 	Subway mailed Bradshaw several notices of default and, after
Bradshaw’s failure to cure the default, Subway informed Bradshaw that the sublease
terminated on October 21, 2008. Subway also demanded possession of the leased premises
and the past due rent.
8. 	In addition, Subway asserts that Bradshaw also breached the sublease in connection with
Store No. 22288 based on his failure to pay rent for those same months. Subway mailed
Bradshaw several notices of default and, after Bradshaw’s failure to cure the default, Subway
informed Bradshaw that this sublease terminated on October 21, 2008. Subway demanded
possession of the leased premises and the past due rent.
9. 	Subsequently, on December 8, 2008, Subway filed two Complaints for Summary Ejectment
in the General Court of Justice, District Court Small Claims Division, Wilson County, North
Carolina against Bradshaw seeking to terminate Bradshaw’s right to possess the leased
premises and to allow Subway to re-enter the property.
10. 	On December 10, 2008, Subway served a copy of the summons from each case on
Bradshaw, in his individual capacity, seeking to eject Bradshaw from both Subway locations.
11. 	Subsequently, the Debtor filed this Motion seeking (1) a determination by this Court that,
in fact, the Debtor holds an equitable leasehold interest in the commercial locations and, as
a result , the automatic stay provision of the Bankruptcy Code protects the Debtor, or, in the
alternative, (2) to extend the automatic stay to stay any proceedings or actions against
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2The Debtor failed to list any subleases of the premises of the two stores in Schedule G
and, on Schedule F, the Debtor lists Shamrock Plaza and Jordan Plaza as unsecured creditors
based on its nonpayment of rent for October and November 2008. The Debtor states “sub-lease
in the name of: Vitus B. Bradshaw, Jr.” with respect to the Shamrock Plaza debt and “sub-lease
in the name of: Vitus Bradshaw, Jr” in connection with Jordan Plaza.
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Bradshaw, individually, with respect 	to Subway’s attempt 	to eject Bradshaw from the
leased premises.
DISCUSSION
The Debtor asserts that it holds an equitable interest in subleases and that the equitable
interest is property of the estate under 11 U.S.C. § 541.2 Because the equitable interest is part of
the estate, the Debtor asserts that it is entitled to the automatic stay protections set forth in 11
U.S.C. § 541.
By its own admission, the Debtor failed to make rent payments in connection with the
subleases for October and November 2008. However, the Debtor argues that since the due dates
were prior to the petition date, it cannot make payments on its prepetition rent.
Mr. Bradshaw testified at the hearing that he has operated the Subway locations as if the
Debtor was the owner of such stores. He stated that the monthly rental payments, the royalty
payments to Subway, and all other transactions related to the Subway stores were paid through
the Debtor’s accounts and not through his personal accounts. Furthermore, he contends that the
personal property taxes and all of the required insurance listed the Debtor as the entity
responsible for the Subway locations.
Subway did not present any evidence disputing the fact it or the respective landlords may
have received payments from accounts held by the Debtor or that the Debtor may have been
making payments on behalf of Bradshaw.
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Regardless of who made the payments on behalf of the Debtor, Subway contends the
Debtor is not entitled to the protections set forth in 11 U.S.C. § 362(a). It argues that even though
the Debtor may have made the sublease payments for Bradshaw, that in and of itself neither
makes the Debtor a party to the subleases, nor does it suffice to give the Debtor an interest in the
leased premises. Subway contends that since the Debtor is not a party to the subleases and does
not hold any interest in them, the subleases have been terminated pursuant to its correspondence
to Bradshaw and his failure to cure the arrearage.
Section 362(a) of the Bankruptcy Code operates as a stay of:
(1) ...the commencement or continuation...of a judicial, administrative, or other
action or proceeding against the debtor that was or could have been commenced
before the commencement of the case under this title, or to recover a claim
against the debtor that arose before the commencement of the case under this title;
(3) ...any act to obtain possession of property of the estate or of property from the
estate or to exercise control over property of the estate.
(emphasis added).
The Fourth Circuit has found that the automatic stay only protects “the debtor, not third
party defendants or co-defendants.” Kresler v. Goldberg, 478 F.3d 209, 213 (4th Cir. 2007); A.H.
Robins Co. v. Paccinin, 788 F.2d 994, 999 (4th Cir. 1986). Courts have extended the automatic
stay to certain non-debtor third parties in “unusual circumstances.” Kresler, 478 F.3d at 213;
Robins, 788 F.2d at 999. An “unusual circumstance arises when there is such identity between
the debtor and the third-party defendant that the debtor may be said to be the real party defendant
and that a judgment against the third-party defendant will in effect be a judgment or finding
against the debtor.” Robins, 788 F.2d at 799, see also Kresler, 478 F.3d at 213. The Robins
Court went on to say that “[a]n illustration of such a situation would be a suit against a third-
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3 The complaints filed for summary ejectment by Subway, captioned as Case No. 08-
CVM-4865 and 08-CVM-4866 in the General Court of Justice, District Court, Small Claims
Division, were filed against Bradshaw, individually. KVS was not a co-defendant in either
action.
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party who is entitled to absolute indemnity by the debtor on account of any judgment that might
result against them in the case.” Robins, 788 F.2d at 799.
In Kresler, the debtors asserted that creditors of a wholly owned subsidiary violated the
automatic stay provisions of Section 362(a) in pursuing a summary ejectment action against the
wholly owned nonbankrupt subsidiary of the debtor. Kresler, 479 F.3d 209. In relying on
Robins, the Kresler court went on to find that based upon the facts presented to it, there was no
basis to conclude the blanket identity of an individual debtor, his LLC holding company, and a
wholly owned subsidiary was the same. A judgment against the individual and his holding
company would bind it and not the wholly owned subsidiary. The Court went on to say that “[i]t
is a fundamental precept of corporate law that each corporation is a separate legal entity with its
own debts and assets, even when such corporation is wholly owned by another corporate entity.”
Kresler, 478 F.3d at 213 (citations omitted).
Bradshaw is neither the Debtor, a third party defendant, nor a co-defendant in this case. 3
Bradshaw has a contractual relationship with Subway. He is the franchisee and the sublessee,
not the Debtor. Furthermore, there are no unusual circumstances in this case. The subleases are
between Subway and Bradshaw. The Debtor failed to present the Court with any written
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4 Any attempt by Bradshaw to assign the subleases would have been limited to the terms
set forth in the original sublease. More specifically, paragraph 7 of the Sublease dated March
17, 1989 between Subway Restaurants, Inc. and Vitus B. Bradshaw, Jr. provides “[t]he Sublessee
may assign or sublease the premises only to a Franchisee of Doctor’s Associates, Inc. for use as
a sandwich shop, provided that the prior written consent to the assignment or sublease is
obtained from the Sublessor, which consent shall not be unreasonably withheld.” Doctor’s
Associates, Inc. is the Subway entity that approves and enters into franchise agreements for the
North Carolina locations. Subway contends that it has a strict policy of only entering into
franchise agreements and subleases with individuals, not entities, but recognizes that many of its
individual franchisees form a limited liability company to operate the store. However, Subway
asserts that these operating entities do not impact the relationship between the individual
franchisee and Subway.
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documentation that Bradshaw properly assigned the subleases to the Debtor. 4 The fact that the
payments to Subway were drawn upon an account of the Debtor did not limit Subway’s rights
and remedies under its franchise agreement with Bradshaw. Bradshaw chose the manner and
method of payment, not Subway. Clearly Bradshaw, as an individual, and the Debtor, as an
LLC, are separate and distinct entities.
The Debtor is not the sublessee under the leases with Subway. KVS Foodsystems, LLC
is only the operating entity for the Subway locations. Vitus Bradshaw is the sublessee under the
sublease agreements with Subway. Although the Debtor may be in possession of the premises, it
is without the expressed consent or permission of Subway. In this circumstance, possession of
the leased premises alone does not warrant the Court extending the automatic stay under Section
105 of the Bankruptcy Code to non-estate property. As such, the Court finds that the subleased
premises are not equitable interests which are property of the estate of KVS Foodsystems, LLC
and the protection of 11 U.S.C. § 362 does not extend to Vitus Bradshaw. The fact that
Bradshaw directed the Debtor to make payments to Subway on behalf of his individual sublessee
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obligations does not give rise to the level of unusual circumstance required to extend the
automatic stay to a non-debtor entity.
Furthermore, the Court finds that 11 U.S.C. § 105 should not be employed by the Court
when another remedy is available under the Bankruptcy Code. In this situation, Bradshaw is not
without a remedy. He retains the ability to file an individual bankruptcy petition under the
appropriate chapter should he determine that it is in his interest to do so to gain the benefit of the
automatic stay.
Based upon this Court’s finding that the automatic stay in the Debtor’s case does not
apply to Vitus Bradshaw, it is not necessary for the Court to reach a determination as to whether
or not the subleases were, in fact, terminated by Subway.
Therefore, the Court hereby DENIES the Debtor’s Motion to Determine Extent and
Applicability of Automatic Stay Under 11 U.S.C. § 362 or, in the Alternative, to Extend the
Automatic Stay under 11 U.S.C. § 105.
SO ORDERED.
END OF DOCUMENT
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