Hearthside Food Solutions, LLC received a split decision in its adversary proceeding against landlord LOF 3333, LLC as a bankruptcy judge issued a detailed ruling distinguishing between claims that fall within the court's jurisdiction and those that do not in the post-confirmation context.
In a memorandum opinion issued January 7, 2026, a bankruptcy judge for the Southern District of Texas denied LOF's motion to dismiss claims related to the lease assumption during bankruptcy proceedings but granted the motion as to claims seeking post-confirmation enforcement of contractual obligations.
Background of the Dispute
The dispute arose from negotiations over an Illinois office lease that occurred just days before Hearthside's bankruptcy plan confirmation hearing in March 2025. The lease covered office space at 3333 Finley Road in Downers Grove, Illinois. The original lease, which Hearthside had acquired through its 2018 acquisition of Peacock Engineering Company, covered 24,031 square feet at $24.50 per square foot.
When Hearthside and affiliated debtors filed Chapter 11 bankruptcy petitions on November 22, 2024, the company determined it would reject the lease and relocate to a smaller, more economical location unless LOF agreed to significant concessions. The Third Amended Chapter 11 Plan filed February 28, 2025 provided that executory contracts would be assumed and assigned to the reorganized debtor unless specifically identified for rejection.
On March 6, 2025, the Thursday before the scheduled confirmation hearing, LOF approached Hearthside seeking one last opportunity to negotiate new terms. The parties executed a letter of intent on March 7, 2025 proposing to reduce the leased space to 12,704 square feet and lower the rental rate to $18 per square foot, with credits reducing the net rental rate to $16 per square foot. The letter specifically stated it was non-binding and did not constitute an offer to lease.
The bankruptcy court confirmed Hearthside's plan on March 11, 2025, and Hearthside assumed the lease with LOF. The plan became effective on March 31, 2025. Following the effective date, the parties continued to negotiate but never finalized an amended agreement. On April 11, 2025, LOF allegedly notified the reorganized debtor that it would reject the proposed lease amendment and that rent would be governed by the original lease terms.
The Complaint and Motion to Dismiss
Hearthside filed an initial complaint on April 29, 2025, which was dismissed without prejudice on August 14, 2025. The amended complaint filed September 2, 2025 contained two counts. Count I alleged fraudulent inducement and sought damages for excess rent payments or rescission of the lease assumption. Count II sought a declaratory judgment that the assumption of the letter of intent under the plan obligates LOF to negotiate in good faith to execute an amended lease consistent with the letter of intent.
LOF filed a motion to dismiss on October 2, 2025 under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). LOF asserted that the fraudulent inducement claim in Count I should be dismissed because Hearthside failed to state a claim upon which relief could be granted. LOF further contended that the court lacks jurisdiction to grant the declaratory relief requested in Count II and the claim should be dismissed for lack of subject matter jurisdiction.
Choice of Law Analysis
The court first addressed which state's substantive law would govern the claims. Both parties agreed there was a conflict between Texas and Illinois law but disagreed on which state's law should apply. LOF contended Illinois law applies while Hearthside asserted Texas law applies.
The court applied the most significant relationship test from the Second Restatement of Conflict of Laws. The court noted that in bankruptcy cases arising under federal question rather than diversity jurisdiction, courts are split on whether to apply the forum state's choice-of-law rules or exercise independent judgment. The Fifth Circuit has not determined which approach bankruptcy courts should follow. However, the court noted that in Texas tort cases, courts apply the most significant relationship test, which is essentially synonymous with the independent judgment test, making the distinction irrelevant in this case.
The court found that Illinois law applies because both Hearthside and LOF are based in Illinois, the parties' relationship is centered in Illinois, and the alleged fraudulent representations were made in Illinois. Hearthside argued that although there are limited contacts with Texas, the significance of those contacts weighs in favor of applying Texas law because the complaint centers on conduct that took place in Texas through manipulation of the bankruptcy process. The court found this argument unconvincing, noting that the letter of intent and the alleged fraudulent misrepresentations within it were created in Illinois. The only contact with Texas was the bankruptcy filing location.
Count I: Fraudulent Inducement Claim
Under Illinois law, to state a claim for fraud, a plaintiff must allege a false statement of material fact, knowledge or belief of the statement's falsity, intent to induce the plaintiff to act, reasonable reliance on the false statement, and damages from such reliance. In Illinois, fraudulent inducement is known as promissory fraud and is a disfavored claim. Promissory fraud is generally not actionable in Illinois unless the promise is part of a scheme to defraud.
Illinois case law has not been clear about what constitutes a scheme to defraud. Some courts have found a scheme when fraud persisted over a long period of time in a larger pattern of deception. The Seventh Circuit has stated that promissory fraud is actionable only if it is particularly egregious or embedded in a larger pattern of deceptions or enticements that reasonably induces reliance. To survive a motion to dismiss, a claimant must allege the elements of fraud and point to specific, objective manifestations of fraudulent intent.
The court found that Hearthside stated a plausible claim for relief. The complaint contains sufficient facts that point to allegations of specific, objective manifestations of fraudulent intent. The complaint alleges that days before Hearthside was set to reject the lease, LOF approached Hearthside to negotiate an amendment. The complaint alleges that because the parties signed the letter of intent, Hearthside was falsely led to believe that LOF would honor their promise to finalize the lease amendment. The complaint alleges that soon after confirmation and the effective date, LOF changed course and refused to amend the lease or engage in further negotiations.
The court found that the allegations sufficiently support an inference of fraudulent intent and make it plausible that Hearthside has a claim for relief under Illinois law. The court noted that the complaint does not merely allege that LOF broke a promise, but that LOF used the timing of the bankruptcy confirmation and the letter of intent to fraudulently induce Hearthside into assuming the lease when it could have easily rejected it.
The court rejected LOF's argument that Hearthside failed to plead justifiable reliance because the letter of intent was non-binding. The court found that Hearthside sufficiently pleaded the element of justifiable reliance. The amended complaint alleges that based on the timing and LOF's representations in the letter of intent, Hearthside believed LOF was willing to execute an amended lease on the terms set forth. The complaint alleges that Hearthside assumed the lease based on these representations and would not have done so without them. The court found that the timing of the bankruptcy proceedings coupled with the timing of negotiations and the representations in the letter of intent are allegations sufficient to conclude it is plausible Hearthside justifiably relied on the letter of intent.
The court found that Hearthside pleaded with sufficient particularity the who, what, when, where, and how required for compliance with Rule 9(b)'s heightened pleading standard for fraud claims. The motion to dismiss Count I was denied.
Count II: Post-Confirmation Jurisdiction
The court next addressed whether it has subject matter jurisdiction over the declaratory judgment claim. The court explained that its subject matter jurisdiction narrows when a dispute arises post-confirmation. The Fifth Circuit has emphasized that post-confirmation jurisdiction requires a careful evaluation of the connection between a dispute and the plan of reorganization.
The Fifth Circuit provided three factors relevant to post-confirmation jurisdiction in In re Enron. The first factor is whether the dispute principally dealt with post-confirmation relations between the parties or instead arose from pre-confirmation conduct. The second is whether the claims were brought before confirmation. The third is whether any facts or law deriving from the reorganization or the plan were necessary to the claim. The Fifth Circuit has explained that some cases can be decided without analyzing these factors. In most of its decisions, the Fifth Circuit has focused on the overarching question: Does the dispute pertain to the implementation or execution of the debtor's reorganization plan?
The court found that it does not have subject matter jurisdiction to order the relief requested in Count II. The amended complaint makes clear that the parties' core dispute is not about the assumption of the letter of intent and is instead related to post-confirmation enforcement of the rights Hearthside believes it has under the letter of intent. The declaratory relief seeks a declaration that LOF is obligated to negotiate a lease amendment.
The court explained that if the issue were whether the letter of intent was properly assumed at plan confirmation, the court would have jurisdiction because it would implicate the rights provided to debtors by Section 365 of the Bankruptcy Code to assume or reject contracts. Instead, the pleadings appear to assume the letter of intent was assumed and request the court to enforce the letter of intent by declaring what obligations LOF has under it. The pleadings reflect a post-petition contractual dispute that does not affect plan implementation and execution.
The court noted that the party asserting the court's jurisdiction has the burden of proving such jurisdiction. Because Hearthside failed to meet its burden, the court granted the motion to dismiss Count II.
Jurisdictional Distinction Between Claims
The court drew a clear distinction between the two counts in terms of jurisdiction. The fraudulent inducement claim in Count I is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (L), and (O). If found, the claim would allow Hearthside to retroactively reject the lease under Federal Rule of Civil Procedure 60(b)(3) and Bankruptcy Rule 9024. This right is provided by the Bankruptcy Code and Rules, placing the claim within the court's jurisdiction.
In contrast, the declaratory judgment claim seeks post-confirmation enforcement of rights under the letter of intent. The dispute concerns what obligations LOF has post-confirmation rather than whether the letter was properly assumed during bankruptcy. This falls outside the court's post-confirmation jurisdiction, which focuses on matters affecting plan implementation and execution.
The bankruptcy case is Case No. 24-90586, and the adversary proceeding is numbered 25-3316 in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. The case will proceed on Count I while Count II has been dismissed.
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