When May a Debtor in Possession (DIP) Sell or Lease Property of the Estate? a Dualistic Approach Requiring Business Justification and Balancing of the Interests of the Debtor, Creditors, and Equity Ho

In response to a $140 million judgment Hulk Hogan, known legally as Terrence Bollea, obtained against, inter alia, Gawker Media, LLC (“Gawker”) and its founder and erstwhile CEO Nicholas G.A. Denton in connection with Mr. Bollea’s allegations that Gawker damaged him by publicizing a video depicting Mr. Bollea and the wife of his friend engaged in sexual intercourse, Mr. Denton filed a chapter 11 bankruptcy case seeking to discharge his personal obligations arising from the judgment  and other debts. See In re Nicholas G.A. Denton, Case No. 16-12239 (Bankr. S.D.N.Y.).  

In his bankruptcy case, Mr. Denton sought court approval (Court Doc. 22) to lease his Manhattan condominium for approximately (a proposed second-year lease option would have incrementally increased rent) $12,500 per month—​substantially less than his carrying costs, according to a declaration (Court Doc. No. 22-1) he filed in support of his motion, of approximately $20,500 per month. In opposing the motion on behalf of Mr. Bollea (Court Doc. 42), Daniel H. Tabak of Cohen & Gresser, LLP in New York and Eric B. Fisher of Binder & Schwartz, LLP in New York urged the court, while acknowledging Mr. Denton's "understandable" personal desire to avoid the sale of his condominium, to reject the proposed lease on the grounds that Mr. Denton had not demonstrated a “good business reason” (a sine qua non of the granting of motions, such as that brought by Mr. Denton, to lease property of the bankruptcy estate pursuant to 11 U.S.C. § 363(b), as authorized through 11 U.S.C. § 1107 (relating to a debtor in possession such as Mr. Denton)) to enter into the lease (vis-à-vis, e.g., a sale or more favorable lease) since Mr. Denton had not provided the court with a copy of the proposed lease or any other background relating to the commercial reasonableness of the price or other terms of the lease or substantiated the proposed tenant’s or guarantor’s ability to pay, and since the proposed transaction failed to balance the interests of the debtor and creditors by considering certain broad, non-exclusive factors articulated in In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). In walking through the Lionel factors, Messrs. Tabak and Fisher noted that Mr. Denton was attempting to encumber (by way of the proposed lease) nearly all of his saleable assets; that the proposed lease was premature insofar as no plan of reorganization had yet been confirmed and insofar as it was far too early to determine what effect the proposed lease would, if approved, have on future plans for reorganization; that Mr. Denton’s request that the court hold a hearing within three days constituted insufficient notice (an argument the court expressly rejected in issuing its order sustaining the objections raised by Mr. Bollea (Court Doc. 50)); and that the tether of the proposed lease and second-year option would render the condominium unpalatable to buyers and thus decrease its market value if sold to satisfy the claims of Mr. Bollea and other creditors. Ultimately, the court found merit in the arguments propounded by Mr. Bollea and declined to approve the proposed lease.  

The upshot for jurists is that courts will require full disclosure with respect to such transactions and carefully scrutinize them if it appears that a debtor in possession (DIP)—in lieu of a court-appointed trustee—is acting in a self-dealing way by sidestepping its legal responsibility to fairly consider the interests of creditors and other stakeholders.