Abboud v. The Ground Round, Inc. (In re The Ground Round, Inc.)

In 1977, Joseph Abboud and partners (the partnership) (plaintiff) leased restaurant premises to Howard Johnson Company. The Ground Round, Inc. (Ground Round) (debtor) (defendant) eventually succeeded Howard Johnson as lessee. In 1978, one of the lessor partners obtained a Pennsylvania liquor license for use at the restaurant. The partner transferred legal title to the license to Ground Round pursuant to a lease addendum providing that the lessor would transfer the liquor license to the lessee and that the lessee would transfer the liquor license back to the lessor upon the lease’s termination. Although the partnership was effectively leasing the liquor license to Ground Round, the parties structured the liquor-license transaction as a transfer and re-transfer because state law did not permit the liquor license to be leased. In 2004, while the partnership and Ground Round were still operating under the lease, Ground Round filed for Chapter 11 bankruptcy. Ground Round rejected the unexpired lease but claimed the right to retain the liquor license. The partnership brought an adversary proceeding against Ground Round seeking specific performance of the lease addendum that required the return of the liquor license upon termination of the lease. The bankruptcy court granted specific performance, and the bankruptcy appellate panel affirmed. Ground Round appealed to the First Circuit, arguing that Ground Round’s rejection of the lease terminated Ground Round’s contractual obligation to return the liquor license and that allowing specific performance of the lease addendum would undercut Ground Round’s power to reject the lease. Ground Round also argued that the partnership’s request for specific performance was a claim against the bankruptcy estate such that the partnership could not seek return of the license without violating the principle that the estate’s creditors should be treated equally.