Claremont Acquisition Corp., Inc., In re
| Decision Date | 12 May 1997 |
| Docket Number | Nos. 95-56527,95-56589,s. 95-56527 |
| Parties | , Bankr. L. Rep. P 77,469, 97 Cal. Daily Op. Serv. 3531, 97 Daily Journal D.A.R. 6061 In re CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc., Debtors. Cal WORTHINGTON; Cal Worthington Dodge, Inc.; and Claremont Acquisition Corporation, Inc., Appellants, v. GENERAL MOTORS CORPORATION, Appellee. In re CLAREMONT ACQUISITION CORPORATION, INC.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc., Debtors. GENERAL MOTORS CORPORATION, Appellant, v. Cal WORTHINGTON; Cal Worthington Dodge, Inc.; Claremont Acquisition Corporation, Inc.; Claremont Pontiac/GMC Truck, Inc.; Claremont Ford, Inc.; Claremont Cadillac, Inc.; Claremont Isuzu, Inc.; and Claremont Hyundai, Inc., Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Gary E. Klausner, Robinson, Diamant, Brill & Klausner, Los Angeles, California, for appellants and cross-appellees.
Wallace M. Allan, O'Melveny & Myers, Los Angeles, California, for appellees and cross-appellants.
Appeals from the United States District Court for the Central District of California, Mariana R. Pfaelzer, District Judge, Presiding. D.C. No. CV 95-03248-MRP
Before: BROWNING and KLEINFELD, Circuit Judges, and MERHIGE, * Senior District Judge.
Appellants Cal Worthington & Cal Worthington Dodge, Inc. ("Worthington") and Debtors, a group of commonly owned automobile dealerships in the Claremont Auto Center ("Debtors"), appeal an order of the district court which reversed an order of the bankruptcy court compelling Appellee General Motors Corporation ("GM") to accept assignment of Debtors' franchise agreements to Worthington. GM has filed a cross-appeal regarding an issue upon which it was unsuccessful in the courts below. For the reasons which follow, we affirm.
Debtors operated Cadillac, Pontiac/GMC Truck, Ford, Isuzu and Hyundai dealerships at the Claremont Auto Center in Claremont, California. On or about November 7, 1994, Debtors ceased operating their automobile dealerships. On November 20, 1994, Debtors commenced a Chapter 11 bankruptcy proceeding. On March 31, 1995, the bankruptcy court approved Worthington as the purchaser of the Debtors' assets, including the dealer franchises. Applying California Vehicle Code § 11713.3(e), which prohibits transfer of an automobile franchise agreement without the consent of the manufacturer whose consent may not be unreasonably withheld, the bankruptcy court required the consent of GM prior to ordering the assignment of the franchise agreements to Worthington. GM refused to consent to the assignment, prompting Debtors to seek an order compelling the assignment. After hearing argument, the bankruptcy court entered an order finding that GM had unreasonably withheld consent within the meaning of Cal.Veh.Code § 11713.3(e). The bankruptcy court therefore ordered GM to accept the assignment of Debtors' GM Dealer and Service Agreements (the "GM Dealer Agreements") from the Debtors to Worthington. The bankruptcy court also ruled that pursuant to § 365(b)(2)(D) of the Bankruptcy Code (the "Code"), Debtors were not required to cure any nonmonetary defaults in order to assume and assign their contracts to Worthington.
GM appealed the order compelling assignment of the GM Dealer Agreements. The district court found that the bankruptcy court had misapplied Cal.Veh.Code § 11713.3(e) and reversed the bankruptcy court's order as it applied to GM. In re Claremont Acquisition Corp., 186 B.R. 977, 986-87. (C.D.Cal.1995). The district court affirmed, however, the bankruptcy court's interpretation of § 365(b)(2)(D). Id. at 989-90. Worthington and Debtors now appeal the district court's decision with respect to the application of § 11713.3(e) to the assignment. GM has filed a cross-appeal challenging the district court's interpretation of § 365(b)(2)(D).
This court reviews the district court's decision on an appeal from a bankruptcy court de novo. Federal Deposit Insurance Corp. v. Daily (In re Daily), 47 F.3d 365, 367 (9th Cir.1995); Siragusa v. Siragusa (In re Siragusa), 27 F.3d 406, 407 (9th Cir.1994) (per curiam). The court independently reviews the bankruptcy court's decision and need not give deference to the district court's determinations. Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir.1993). We review the bankruptcy court's interpretation of applicable law de novo, and the findings of fact for clear error. 550 West Ina Road Trust v. Tucker (In re Tucker), 989 F.2d 328, 330 (9th Cir.1993).
A. Assignment of the GM Dealer Agreements
California law restricts an automobile franchisee's ability to assign the franchise without the consent of the manufacturer. Section 11713.3 of the California Vehicle Code provides:
It is unlawful and a violation of this code for any manufacturer, manufacturer branch, distributor, or distributor branch licensed under this code to do any of the following:
...
(e) To prevent, or attempt to prevent, a dealer from receiving fair and reasonable compensation for the value of the franchised business. There shall be no transfer or assignment of the dealer's franchise without the consent of the manufacturer or distributor, which consent shall not be unreasonably withheld.
Cal.Veh.Code § 11713.3.
The bankruptcy court held that § 11713.3(e) applied to the assignment of the GM Dealer Agreements to Worthington. 1 On appeal, Worthington argues that the bankruptcy court erred in applying this statute because § 365(f)(1) of the Code does not permit courts to look to state laws prohibiting the assignment of executory contracts. 11 U.S.C. § 365(f)(1). Worthington argues that the bankruptcy court should not have inquired whether GM's refusal to consent was "reasonable" under California law, but should have instead inquired whether Worthington had given GM "adequate assurance of future performance" as required by § 365(f)(2)(B). 11 U.S.C. § 365(f)(2)(B). 2
Federal courts have struggled with interpreting the Bankruptcy Code provisions governing the assignment of executory contracts. Section 365(f)(1) of the Code provides a general rule which permits a trustee in bankruptcy to assign an executory contract:
Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection [requiring adequate assurance of future performance].
11 U.S.C. § 365(f)(1). Subsection (c) of § 365 contains an important exception to this assignability rule:
The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if--
(1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties.
11 U.S.C. § 365(c)(1)(A).
Section 365(f)(1) appears to authorize a trustee to assign an executory contract, notwithstanding any contrary provision in the contract or in applicable law, provided that adequate assurance of future performance by the assignee is provided. Section 365(f)(1), explicitly states, however, that it applies except as provided in subsection (c) of § 365. Subsection (c), in turn, prohibits an assignment of an executory contract if applicable law excuses the non-debtor party from accepting performance from the assignee. What § 365(f)(1) appears to give, § 365(c)(1)(A) seems to take away.
Recently, in In re CFLC, 89 F.3d 673 (9th Cir.1996), this court recognized the apparent conflict between subsections (f) and (c), and noted that this conflict has lead to two different constructions of § 365 and the meaning of the phrase "applicable law" in both subsections. Id. at 676-77 ). The CFLC court did not find it necessary to resolve this conflict, however, because assignment of the patent at issue in that case was barred under either construction of the statute. Likewise, in the instant case, we find it unnecessary to address this matter because resolution of the conflict will not result in the assignment of the GM Dealer Agreements. Instead, we find that the issue raised by GM's cross-appeal, regarding the proper interpretation of § 365(b)(2)(D), is dispositive of this appeal.
On or about November 7, 1994, Debtors ceased operating their automobile dealerships. The bankruptcy cases were not filed until November 20, 1994. The GM Dealer Agreements provided that GM may terminate the franchise for the failure to operate the business for seven consecutive business days. 3 Debtors' failure to operate the dealership for two weeks preceding the bankruptcy filing constituted a nonmonetary default. Moreover, this default is a "historical fact" and, by definition, cannot be cured. See Lee West Enterprises, 179 B.R. 204, 208 (Bankr.C.D.Cal.1995).
In general, a debtor must cure all defaults, both monetary and nonmonetary, prior to the assumption and assignment of an executory contract. 11 U.S.C. § 365(b)(1). However, § 365(b)(2) sets forth an exclusive list of the monetary and nonmonetary...
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