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On appeal, the Fourth Circuit reversed. In reaching its decision, the court analyzed two conflicting Code sections — 365(f)(1), which generally allows a debtor to assign its lease notwithstanding a provision restricting assignment, and 365(b)(3)(C), which specifically requires a debtor-tenant in a shopping center to assign its lease subject to any provision restricting use of the premises. The court ruled that ' 365(b)(3)(C), the more specific provision, controlled here. In examining the legislative history of the Code sections, the court concluded that with respect to shopping center lease assignments, “Congress's purpose in ' 365(b)(3)(C) is to preserve the landlord's bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant.” The court also noted, however, that this decision “does not mean that ' 365(f)(1) can never be used to invalidate a clause prohibiting or restricting assignment in a shopping center lease … A shopping center lease provision designed to prevent any assignment whatsoever might be a candidate for the application of ' 365(f)(1).” But, as the court stated, “The issue of when ' 365(f)(1) might apply is a subject for some future case.”

WorldCom Pension Investors Must Pursue Their Claims in Federal Court

The Second Circuit has ruled that investors in the California and New York public pension funds must pursue their securities law claims against WorldCom in federal rather than state courts. California Public Employees' Retirement System v. WorldCom Inc., No. 040219 (May 11).

The issue, one of first impression in the courts of appeals, was whether a federal district court may exercise bankruptcy jurisdiction over generally non-removable claims brought under the Securities Act of 1933. The court noted that issue was a “close question, as it involves a direct conflict between two unambiguous statutes — Section 22(a) of the Securities Act of 1933, which bars removal of individual Securities Act claims, and 28 U.S.C. ' 1452(a), which permits removal of claims that are 'related to' a bankruptcy case.” The court concluded that this conflict “must be resolved in favor of bankruptcy removal,” finding that Section 22(a) of the Securities Act is not more specific than the bankruptcy removal provision. Moreover, the court rejected the argument that “Congress granted the plaintiffs an absolute choice of forum when it amended the Securities Act in 1998.” Instead, the court resolved “the conflict between the statutes by contrasting the bankruptcy removal statute, which contains no exception for claims arising under an Act of Congress that prohibits removal, with the general removal statute, which applies “[e]xcept as otherwise expressly provided by an Act of Congress.” 28 U.S.C. ' 1441(a) (Emphasis added).” Looking at the whole of the federal jurisdictional scheme, the court concluded that “Section 22(a) does not preclude removal of individual actions that are 'related to' a bankruptcy case under Section 1452(a).”

Debtor Bound By Lease Assignment Restrictions

The Fourth Circuit has ruled that while a Chapter 11 debtor did have the right to assign a shopping center lease, it was also bound by the assignment limitations contained in the original lease. Trak Auto Corp. v. West Town Center LLC (In re Trak Auto Corp.), No. 03-1136 (April 22).

A Chapter 11 debtor seeking to assign one of its retail shopping center leases solicited bids for the space. The high bidder was a discount clothing store. The lessor objected, arguing that the assignment would breach the lease and upset the tenant-mix in violation of ' 365(b)(3)(D). The debtor's lease explicitly limited the use of the leased space to the sale of retail automobile parts and accessories. Nevertheless, the bankruptcy court approved the assignment and the district court affirmed.

On appeal, the Fourth Circuit reversed. In reaching its decision, the court analyzed two conflicting Code sections — 365(f)(1), which generally allows a debtor to assign its lease notwithstanding a provision restricting assignment, and 365(b)(3)(C), which specifically requires a debtor-tenant in a shopping center to assign its lease subject to any provision restricting use of the premises. The court ruled that ' 365(b)(3)(C), the more specific provision, controlled here. In examining the legislative history of the Code sections, the court concluded that with respect to shopping center lease assignments, “Congress's purpose in ' 365(b)(3)(C) is to preserve the landlord's bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant.” The court also noted, however, that this decision “does not mean that ' 365(f)(1) can never be used to invalidate a clause prohibiting or restricting assignment in a shopping center lease … A shopping center lease provision designed to prevent any assignment whatsoever might be a candidate for the application of ' 365(f)(1).” But, as the court stated, “The issue of when ' 365(f)(1) might apply is a subject for some future case.”

WorldCom Pension Investors Must Pursue Their Claims in Federal Court

The Second Circuit has ruled that investors in the California and New York public pension funds must pursue their securities law claims against WorldCom in federal rather than state courts. California Public Employees' Retirement System v. WorldCom Inc., No. 040219 (May 11).

The issue, one of first impression in the courts of appeals, was whether a federal district court may exercise bankruptcy jurisdiction over generally non-removable claims brought under the Securities Act of 1933. The court noted that issue was a “close question, as it involves a direct conflict between two unambiguous statutes — Section 22(a) of the Securities Act of 1933, which bars removal of individual Securities Act claims, and 28 U.S.C. ' 1452(a), which permits removal of claims that are 'related to' a bankruptcy case.” The court concluded that this conflict “must be resolved in favor of bankruptcy removal,” finding that Section 22(a) of the Securities Act is not more specific than the bankruptcy removal provision. Moreover, the court rejected the argument that “Congress granted the plaintiffs an absolute choice of forum when it amended the Securities Act in 1998.” Instead, the court resolved “the conflict between the statutes by contrasting the bankruptcy removal statute, which contains no exception for claims arising under an Act of Congress that prohibits removal, with the general removal statute, which applies “[e]xcept as otherwise expressly provided by an Act of Congress.” 28 U.S.C. ' 1441(a) (Emphasis added).” Looking at the whole of the federal jurisdictional scheme, the court concluded that “Section 22(a) does not preclude removal of individual actions that are 'related to' a bankruptcy case under Section 1452(a).”