The results can be unpredictable if a lease does not precisely
document the parties' intent, leaving matters up to a
The Sisters of St. Francis Health Services bought a fitness
center with a sports bar through a subsidiary (SMMHC) in January
1998. As a matter of policy, they decided against direct
ownership of the liquor license. Instead SMMHC entered into a
three-year Consulting and Non-Competition Agreement with the
seller (Et Al) to continue to operate the sports bar and maintain
the liquor license.
SMMHC then decided to convert the sports bar into an upscale
restaurant and bar to be operated by a new group. The
new group formed The Sunshine Boys, Inc. (TSB), which leased the
bar under a five year lease, and Woodhollow Lofts, Inc.
(Woodhollow), which operated the bar. The two entities had
the same three shareholders.
The lease provided that "Landlord shall transfer a liquor
license to Tenant [TSB] upon execution of this Lease
Agreement. Upon expiration or termination of this Lease
Agreement Tenant shall work with Landlord to transfer the liquor
license back to Landlord." In fact, the liquor license
was transferred by Et Al (SMMHC's seller) to Woodhollow.
Woodhollow did not pay any consideration for the transfer of the
Woodhollow occupied and operated the bar from October 1999
through July 31, 2007. It was never a formal party to the
lease. In 2001 SMMHC sought to evict Woodhollow. The
parties entered into a stipulated order that required TSB and
Woodhollow to make certain rent payments, and provided for the
return of the leased premises and the liquor license if TSB and
Woodhollow filed a Chapter 11 petition in February 2007.
(TSB was administratively dissolved by the State of Indiana in
August 2002.) The landlord sought relief from the automatic
stay to recover the leased premises, and Woodhollow sought to
assume its tenancy. This was resolved by an agreement that
Woodhollow would vacate the premises at the end of July 2007.
The landlord also commenced a proceeding to determine ownership
of the liquor license. After initially determining that
Woodhollow was entitled to transfer the liquor license, the
bankruptcy court ultimately determined that (i) Woodhollow had no
right to continue to use the liquor license after it vacated the
leased premises, and (ii) the landlord did not have an allowable
claim against Woodhollow.
Woodhollow appealed contending that it was entitled to retain
the liquor license. The landlord filed a cross-appeal asking
for a determination that its amended proof of claim was timely
filed, either because it was a claim for rejection of the lease
(which was not subject to the claims bar date) or because its
motion for relief from the automatic stay constituted a timely
informal proof of claim.
On appeal, the district court went out of its way to lay out the
contract construction principle that where a contract is
"clear and unambiguous," it should be enforced as
written, and it is ambiguous only if there is more than one
interpretation so that "reasonably intelligent" people
could come to different conclusions – citing more than a
half dozen cases.
However, this principle seems to have disappeared as soon as it
was stated. Instead the court relied on the "pivotal
factual finding ... that an agreement existed among all of the
parties" that the liquor license should remain with the leased
premises – citing various supporting facts, as opposed to
The district court also rejected the landlord's argument
that it had a timely filed claim. (The landlord was claiming
almost $800,000 in unpaid rent and expenses.) The court
determined that the claim was not a rejection claim since
Woodhollow was not a party to the lease and there was no rejection
of an occupancy agreement because Woodhollow vacated under the
automatic stay settlement agreement. The court also rejected
the argument that the automatic stay motion was an informal proof
of claim, applying a relatively strict test.
This case illustrates that it is generally a good idea to draft
contracts so that they clearly document the actual agreement of the
parties, and if circumstances change through a course of dealing it
is probably worth documenting the new relationships.
Otherwise if things do not proceed as anticipated, the
parties may face extended litigation with uncertain results, as
turned out to be the case in Woodhollow.
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