Texas Health Enterprises Inc. v. Lytle Nursing Home (In Re Texas Health Enterprises Inc.)

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS July 31, 2003
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk

No. 02-40734

In The Matter Of: TEXAS HEALTH ENTERPRISES INC
Debtor
-------------------------
TEXAS HEALTH ENTERPRISES INC; OFFICIAL UNSECURED CREDITORS’
COMMITTEE OF TEXAS HEALTH ENTERPRISES INC
Appellants
v.
LYTLE NURSING HOME
Appellee

In The Matter Of: TEXAS HEALTH ENTERPRISES INC
Debtor
-------------------------
TEXAS HEALTH ENTERPRISES INC
Appellant
v.
LYTLE NURSING HOME
Appellee

In The Matter Of: TEXAS HEALTH ENTERPRISES INC
Debtor
-------------------------
OFFICIAL UNSECURED CREDITORS’ COMMITTEE OF TEXAS
HEALTH ENTERPRISES INC
Appellant
v.
LYTLE NURSING HOME
Appellee

Appeal from the United States District Court
for the Eastern District of Texas, Sherman
No. 4:00-CV-412

Before KING, Chief Judge, and REAVLEY and STEWART, Circuit

1
Judges.

PER CURIAM:*

Texas Health Enterprises, Inc. and the Trustee of the

bankruptcy estate appeal the bankruptcy court’s denial of their

motion to assume a management contract and grant of Lytle Nursing

Home, Inc.’s motion to confirm rejection of the management

contract. We affirm.

I. FACTUAL AND PROCEDURAL HISTORY

A. Facts

Appellant Texas Health Enterprises, Inc. (“Texas Health”)

operated and managed over one hundred nursing homes throughout

Texas. Texas Health filed a voluntary petition for Chapter 11

bankruptcy on August 3, 1999.

Prior to its bankruptcy, Texas Health operated the nursing

home owned by Appellee Lytle Nursing Home, Inc. (“Lytle”)

according to a management contract (the “Management Contract”)

and a lease (the “Lease”). After filing for bankruptcy, Texas

Health moved to assume the Management Contract pursuant to 11

U.S.C. § 365(a) (2000).1 Texas Health wished to assume this

*
Pursuant to 5TH CIR. R. 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR. R.
47.5.4.
1
Though the motion originally referred only to the
Lease, not the Management Contract, Texas Health later amended
the motion to refer only to the Management Contract.

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contract in order to preserve its value for the benefit of the

bankruptcy estate. The Official Creditors’ Committee of Texas

Health (the “Creditors’ Committee”) supported Texas Health in

this request.

B. Procedural History

The bankruptcy court conducted a hearing on Texas Health’s

motion to assume the Management Contract and then issued an order

and opinion denying the motion. The bankruptcy court found that

Texas Health had not set forth adequate assurance of future

performance, as 11 U.S.C. § 365(b)(1)(C) requires. Texas Health

and the Creditors’ Committee then filed a motion for

reconsideration, which the bankruptcy court denied after a

hearing.

Lytle filed a motion to “confirm [the] rejection” of the

Management Contract and the Lease. Texas Health and the

Creditors’ Committee filed responses in which they requested a

hearing. The bankruptcy court granted Lytle’s motion in part2

and declared the Management Contract rejected without an

additional hearing. Texas Health and the Creditors’ Committee

Nonetheless, the bankruptcy court stated it would “consider[]
[the Management Contract and the Lease] as a whole rather than
tak[ing] [them] up separately as suggested.”
2
In the motion, Lytle also sought to compel Texas Health
to surrender possession of the real property comprising the
nursing home to Lytle. The bankruptcy court did not initially
rule on this portion of motion, though the court later granted it
as well.

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appealed the bankruptcy court’s orders denying their motion to

assume, denying their motion for reconsideration, and granting

Lytle’s motion to confirm rejection. The bankruptcy court then

confirmed Texas Health’s plan of reorganization. Appellant

Dennis Faulkner was designated plan trustee (the “Trustee”) and

he replaced the Creditors’ Committee in this appeal.

The district court affirmed all of the bankruptcy court’s

orders.

Texas Health and the Trustee (collectively the “Appellants”)

now appeal. They argue that: (1) the bankruptcy court erred in

denying their motion to assume the Management Contract; and (2)

the bankruptcy court erred in granting Lytle’s motion to confirm

rejection of the Management Contract.3

II. STANDARD OF REVIEW

This court reviews a bankruptcy court’s findings of fact for

clear error and conclusions of law de novo. E.g., In re Nat’l

Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000). Whether a debtor

has provided adequate assurance of future performance is a

finding of fact reviewed under the clearly erroneous standard.4

3
Appellants abandoned their argument that the bankruptcy
court abused its discretion in denying their motion for
reconsideration in their appeal to this court.
4
Appellants urge us to review the bankruptcy court’s
determination that Texas Health did not provide adequate
assurance of future performance de novo because, in their view,
the bankruptcy court used an improper legal standard. But, the
bankruptcy court stated the correct legal standard for

4
E.g., Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303,

1307-08 (5th Cir. 1985).

III. DISCUSSION

A. Whether the bankruptcy court clearly erred in denying Texas
Health’s initial motion to assume the Management Contract

The bankruptcy code allows a trustee to assume or reject any

executory contract5 of the debtor with the bankruptcy court’s

approval. See 11 U.S.C. § 365 (2000). Because 11 U.S.C.

§ 1107(a) gives a debtor-in-possession most rights of a trustee,

a debtor-in-possession (such as Texas Health) may assume an

executory contract with bankruptcy court approval. See id.

§ 1107(a). Under § 365(b)(1), a debtor-in-possession that has

previously defaulted on an executory contract may not assume that

contract unless it: (A) cures, or provides adequate assurance

that it will promptly cure, the default; (B) compensates the non-

debtor party for pecuniary loss resulting from the default; and

(C) “provides adequate assurance of future performance under such

contract or lease.” Id. § 365(b)(1). Only the third requirement

is at issue in this case.

determining whether a debtor has provided adequate assurance of
future performance and applied that standard by evaluating the
relationship between the parties, the circumstances surrounding
prior breaches, and the conflicting testimony about the
possibility of future breaches. We thus reject Appellants’
argument in favor of a de novo standard of review.
5
The parties agree that the Management Contract is an
executory contract.

5
 As the bankruptcy court correctly noted, whether a debtor

has given adequate assurance is extremely fact-specific. This

court has previously stated: “The terms ‘adequate assurance of

future performance’ are not words of art; the legislative history

of the [Bankruptcy] Code shows that they were intended to be

given a practical, pragmatic construction.” Richmond Leasing

Co., 762 F.2d at 1309 (quoting In re Sapolin Paints, Inc., 5 B.R.

412, 420 (E.D.N.Y. 1980)). Some helpful factors include “whether

the debtor’s financial data indicated its ability to generate an

income stream sufficient to meet its obligations, the general

economic outlook in the debtor’s industry, and the presence of a

guarantee.” Id. at 1310. The burden of proof is on Texas Health

to show that it gave “adequate assurance.” See, e.g., In re

Rachels Indus., Inc., 109 B.R. 797, 802 (W.D. Tenn. 1990).

The bankruptcy court did not clearly err in finding that

Texas Health did not provide adequate assurance. The bankruptcy

court reviewed the Management Contract and the Lease and heard

testimony from Richard Knight, Texas Health’s President and Chief

Operating Officer, James F. Cotter, Lytle’s President, and

William Sleeth, Lytle’s Comptroller. Though Knight stated that

the Management Contract would benefit Texas Health and that Texas

Health was prepared to cure its previous defaults and perform in

the future, Cotter and Sleeth testified that Texas Health had a

history of monetary defaults, poor communication, and outright

6
refusals to follow Lytle’s instructions. The bankruptcy court

appropriately weighed this conflicting testimony and found that

Texas Health had not shown it would likely perform in the future.

See Richmond Leasing Co., 762 F.2d at 1310 (upholding the

bankruptcy court’s determination that the debtor provided

adequate assurance after weighing conflicting testimony about the

debtor’s future profitability).

Texas Health argues that the bankruptcy court must allow

assumption if the assumption would benefit the estate. We have

previously stated that “the question of whether a lease should be

rejected . . . is one of business judgment,” but we have also

recognized that the bankruptcy court need not approve every

contract that is beneficial to the debtor if the debtor cannot

assure performance on the contract. Id. at 1309 (quoting Group

of Inst. Investors v. Chicago, Milwaukee, St. Paul & Pac. R.R.

Co., 318 U.S. 523, 550 (1943)). Though § 365 benefits the debtor

by allowing it to assume contracts beneficial to the estate, it

also puts a specific limitation (the adequate assurance

requirement) on which contracts may be assumed, providing a

measure of protection for the non-debtor. See In re Nat’l Gypsum

Co., 208 F.3d at 506. Thus, Texas Health may not assume a

beneficial executory contract unless it gives adequate assurance

of future performance.

Texas Health also argues that the bankruptcy court cannot

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rely on evidence of prior defaults or defaults involving other

parties to support its conclusion that Texas Health will be

unable to perform.6 Evidence of prior defaults, though, is

probative of whether the debtor will be able to perform in the

future. See, e.g., In re Gen. Oil Distribs., Inc., 18 B.R. 654,

658 (E.D.N.Y. 1982) (“What constitutes adequate assurance is a

factual question to be determined on a case by case basis with

due regard to the nature of the parties, their past dealings and

present commercial realities.”). The bankruptcy court thus did

not clearly err in finding that Texas Health did not meet its

burden of providing adequate assurance of future performance.

B. Whether the bankruptcy court erred in granting Lytle’s
motion to declare the Management Contract and the Lease
rejected after it denied Texas Health’s motion to assume the

6
Texas Health makes two evidentiary objections as part
of this argument. Evidentiary rulings are reviewed for an abuse
of discretion. See, e.g., Green v. Adm’rs of the Tulane Educ.
Fund, 284 F.3d 642, 660 (5th Cir. 2002).
First, Texas Health argues that the bankruptcy court erred
in allowing testimony about a letter from Lytle regarding a
wrongful death suit because that testimony violated the Best
Evidence Rule. The court did not abuse its discretion because
the testimony was used to show that Lytle sent Texas Health a
letter and not to prove the content of that letter. See FED. R.
EVID. 1002 (requiring an original writing “[t]o prove the
content” of that writing).
Second, Texas Health argues that the bankruptcy court erred
in admitting evidence of breaches with other nursing homes, which
Texas Health believes irrelevant. The bankruptcy court found
this evidence relevant because “the course of conduct [] in
obviously an identical situation or substantially identical
situation, is relevant [] to the ability to perform in the
future.” Given this reasoning, the bankruptcy court did not
abuse its discretion.

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 Management Contract

Initially, the bankruptcy code makes it clear that it is the

choice of the debtor-in-possession, and not the bankruptcy court,

to assume or reject an executory contract. Section 365 gives the

debtor-in-possession the power to accept or reject an executory

contract as part of its reorganization. See 11 U.S.C. § 365(a)

(2000) (stating that “the trustee, subject to the court’s

approval, may assume or reject any executory contract or

unexpired lease of the debtor”). At the same time, the

bankruptcy court may deny a motion to assume an executory

contract if the requirements set forth in 11 U.S.C. § 365 have

not been met. See 11 U.S.C. § 365(b)(1) (2000); In re Sundial

Asphalt Co., 147 B.R. 72, 80 (E.D.N.Y. 1992) (“The Court finds

nothing in the statute or the Bankruptcy Rules providing for

rejection or assumption of an executory contract by any party

other than the trustee or debtor in possession, and finds no

authorization for the court making such an election sua sponte,

although whatever election is made by the trustee is subject to

the court’s approval.”).

The denial of a debtor-in-possession’s motion to assume an

executory contract does not mean that the contract is

automatically rejected. See In re F.W. Rest. Assocs., Inc., 190

B.R. 143, 149 n.8 (D. Conn. 1995) (“A court’s denial of a debtor-

in-possession’s motion to assume an executory contract does not

9
effect a pro tanto rejection of the subject contract.”). There

is nothing in the bankruptcy code that bars a debtor-in-

possession from making successive motions to assume a given

contract as its financial situation improves. See In re Food

City, 94 B.R. 91, 95 (W.D. Tex. 1988) (“All that is currently

before the court is a request for approval of assumption of these

contracts at this stage of the bankruptcy. A refusal of that

request at this time does not prevent the debtor from again

seeking that approval later in the proceedings.”). But, a

debtor-in possession can be required to assume an executory

contract within a given time frame: “[T]he court, on the request

of any party to such contract or lease, may order the trustee to

determine within a specified period of time whether to assume or

reject such contract or lease.” 11 U.S.C. § 365(d)(2). Further,

an executory contract must be assumed prior to confirmation of

the debtor’s plan of reorganization. See id.

In this case, then, the fact that the bankruptcy court

denied Texas Health’s initial motion to assume the Management

Contract did not mean that the contract was “rejected.”

Nonetheless, we view the Management Contract as deemed rejected

in light of the bankruptcy court’s additional proceedings.

According to § 365, the bankruptcy court may, upon request of a

party, set a deadline by which an executory contract must be

assumed or rejected. Effectively, that is what the bankruptcy

10
court did in this case.7 After the bankruptcy court denied Texas

Health’s motion to assume and its motion for reconsideration,

after a hearing on each motion, Lytle filed a motion to have the

Management Contract declared rejected. The bankruptcy court

allowed for additional briefing within a specified period of

time, in which Texas Health provided no new arguments or evidence

to suggest that it would be prepared to perform on the Management

Contract. Faced with the recognition that allowing Texas Health

to make further motions to assume the Management Contract would

be futile, the bankruptcy court deemed it rejected.8 Rather than

elevate form over substance, we elect to view the bankruptcy

court’s action as a deemed rejection under 11 U.S.C. § 365(d)(2)

and affirm on that basis.9

7
We recognize that the procedure followed by the
bankruptcy court did not strictly adhere to § 365(d)(2), and on a
different record, we might be compelled to reverse. For the
reasons indicated, on this record, the Management Contract was
properly deemed rejected.
8
Appellants argue that we should remand for a hearing
because assumption or rejection of an executory contract or lease
is a contested matter requiring a hearing. See FED. R. BANKR. P.
6006(a) (explaining that assumption or rejection is a contested
matter); see also FED. R. BANKR. P. 9014 (explaining the required
procedures for contested matters). But, Texas Health received
two hearings: one on its motion to assume the Management Contract
and one on its motion for reconsideration. In its response in
opposition to Lytle’s motion to declare the Management Contract
rejected, Texas Health did not suggest that it had any new
evidence that would make another hearing of value. In this
particular case, then, another hearing was not required.
9
The Trustee’s final argument is that the bankruptcy
court granted relief based on a motion that violated Local Rule

11
 IV. CONCLUSION

For the foregoing reasons, we AFFIRM. Costs shall be borne

by Appellants.

9004(b). Local Rule 9004(b) states that “[a] separate motion is
required for each form of relief requested.” E.D. TEX. BANKR. R.
9004(b). The Trustee argues that Lytle’s motion violated this
rule because it requested an order confirming rejection of the
Management Contract, or an order compelling the debtor to reject
the executory contract, or an order setting a date by which Texas
Health must reject the Management Contract, or an order granting
Lytle possession of the nursing home property. The bankruptcy
court accepted this motion, apparently finding no violation of
the Local Rules that warranted striking the document. This
decision is reviewed for an abuse of discretion. See Victor F.
v. Pasadena Indep. Sch. Dist., 793 F.2d 633, 635 (5th Cir. 1986).
Because the Trustee has not articulated any reason why the
bankruptcy court abused its discretion, we find no reversible
error.

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