## Facts

- The debtors operated Furr’s-branded cafeteria restaurants and were debtors-in-possession in Chapter 11.
- K Mart was the prime tenant under numerous third-party retail leases and subleased cafeteria space inside K Mart stores through a master sublease arrangement.
- A master sublease covered 43 separate restaurant locations, each tied to an underlying prime lease between K Mart and a different third-party landlord.
- The master sublease allocated rent among the individual locations, and the locations had differing terms (including varying expiration dates).
- Each restaurant location operated independently as a separate business site.
- After filing Chapter 11, the debtors moved under 11 U.S.C. § 365 to reject the master sublease only as to certain specified locations, not all 43.
- Some targeted locations had been vacated by the debtors; other targeted locations remained occupied by unrelated third-party subtenants.
- Certain landlords/objecting parties argued the master sublease was a single, indivisible contract that had to be assumed or rejected in full and disputed the debtors’ proposed rejection effective dates.

## Issues

1. Whether a master sublease covering multiple locations was severable, permitting rejection as to some locations while continuing performance as to others.
2. If partial rejection was permitted, what effective rejection date should apply to (a) premises vacated by the debtors and (b) premises occupied by third-party subtenants.

## Decision

- The court held the master sublease was severable and approved rejection as to specified locations only.
- For vacated premises, the effective rejection date was the later of (1) the motion filing date or (2) the date the premises were vacated.
- For sublet premises, the effective rejection date was the date the court approved the rejection.

## Legal Principles

- A multi-location “master” lease or sublease may be treated as severable for § 365 purposes when obligations and consideration are divisible by property, including where:
  - Rent is apportioned among locations,
  - Terms differ by location, and
  - Each location operates independently.
- If an agreement is severable, a debtor may reject it on a location-by-location basis under § 365, subject to approval under the business-judgment standard.
- The effective date of lease rejection is set by court order based on equitable considerations and may differ by factual category:
  - For premises surrendered by the debtor, an effective date may be set no earlier than both surrender (vacancy) and the filing of the rejection motion.
  - For premises from which the debtor continues to obtain economic benefit (such as through subtenants), rejection generally becomes effective on the order date.

## Conclusion

The bankruptcy court treated the 43-location master sublease as severable because rent and terms were divisible by site and operations were independent, allowing the debtors to reject only selected locations and to apply different effective rejection dates depending on whether the space had been vacated or remained occupied by subtenants.


In re Cafeteria Operators, L.P., 299 B.R. 384 (Bankr. N.D. Tex. 2003)