Sigel & Co., Ltd., In re, 89-15898

Decision Date11 January 1991
Docket NumberNo. 89-15898,89-15898
Citation923 F.2d 142
CourtU.S. Court of Appeals — Ninth Circuit
Parties, 24 Collier Bankr.Cas.2d 869, 21 Bankr.Ct.Dec. 375, Bankr. L. Rep. P 73,780 In re SIGEL & CO., LTD., Debtor. Manning J. POST, Appellant, v. SIGEL & CO., LTD., Appellee.

J. Douglas Deaner, Deaner, Deaner & Scann, Las Vegas, Nev., for appellant Post.

Michael H. Singer, Oshins, Singer, Segal & Morris, Las Vegas, Nev., for appellee Sigel & Co.

Appeal from the United States District Court for the District of Nevada.

Before TANG and NOONAN, Circuit Judges, and DIMMICK, * District Judge.

NOONAN, Circuit Judge:

Manning J. Post (Post) appeals from a judgment of the district court denying his appeal from a bankruptcy court order. Post had entered into a joint venture agreement with the debtor, Sigel & Co., Ltd. (Sigel). The bankruptcy court held that the joint venture agreement was an executory contract assumable by Sigel, and the district court affirmed. A critical question we must determine is whether a party in reorganization has power to cure a default in an executory contract although the contract does not provide for such a cure. We affirm the judgment of the district court.

FACTS AND PROCEEDINGS

On July 11, 1979, Sigel & Co. and Manning J. Post entered into a joint venture agreement for the purpose of acquiring, holding and selling parcels of real property located in Clark County, Nevada. Under the joint venture, each party agreed to pay its proportionate share of all financial obligations, including loans secured by the real property. Paragraph 8 of the agreement provided that in the event a party failed to pay its pro rata share, the remaining party would be entitled to make such payment and would have the option to purchase the defaulting party's interest in the joint venture pursuant to a set formula. Paragraph 8 further provided that the rights and obligations of the defaulting party under the joint venture would terminate upon purchase of the defaulted share. The parties agreed to submit to arbitration any dispute as to the agreement and to have judgment upon the arbitrators' award entered in any court having competent jurisdiction.

In 1986, Sigel failed to make its pro rata share of the mortgage payment. On December 3, 1986, Post paid off the entire unpaid balance of principal and interest of the mortgage. At about the same time, he recorded a document purporting to terminate Sigel's interest in the joint venture and mailed a copy of the document to Sigel.

On January 11, 1987, Sigel filed a voluntary petition under Chapter 11. Besides payment of the mortgage, at the time of the filing, Post had neither tendered nor offered to tender any amount to acquire Sigel's interest in the joint venture.

On April 16, 1987, the bankruptcy court entered an order lifting the automatic stay for the sole purpose of allowing arbitration proceedings to go forward to determine Sigel's ownership interest in the real property. On December 21, 1987, the arbitrators entered an award stating that "Post shall pay ... $154,802.32 for the interest of [Sigel] in the joint venture property...." In their findings of fact entered on April 28, 1988, the arbitrators found that Sigel held a 25.875% interest in the joint venture as of the filing and that the sum of $154,802.32 was required from Post to purchase Sigel's interest.

Sigel elected to treat the joint venture agreement as an executory contract. Its Plan of Reorganization provided for full payment of its proportionate share of the mortgage plus interest to Post. On November 30, 1988, the bankruptcy court held that the joint venture agreement was an executory contract on the date of the filing and that Sigel properly provided for the curing of its default in its reorganization plan. On June 8, 1989, the district court affirmed the bankruptcy court's order. Post appeals.

ANALYSIS

The joint venture agreement between Post and Sigel was an executory contract. Griffel v. Murphy (In re Wegner), 839 F.2d 533, 536 (9th Cir.1988). Both parties had not yet rendered adequate performance of the contract at the time of the filing. Post had not purchased Sigel's interest in the joint venture, and Sigel had not relinquished its rights and obligations under the agreement. See Aslan v. Sycamore Inv. Co. (In re Aslan), 909 F.2d 367 (9th Cir.1990); Benevides v. Alexander (In re Alexander), 670 F.2d 885, 887 (9th Cir.1982) (deposit receipt sale agreement remained executory where creditor still had to pay remainder of purchase price and debtor had to give up possession and convey title). Neither party had received any benefit from the option provision. See id. at 888 (citing In re Knutson, 563 F.2d 916, 917 (8th Cir.1977)). Post could not yet participate in profit distributions, losses and other venture functions on the basis of an increased interest through Sigel's share, and Sigel had not yet received the purchase sum. Since performance of the contract remained due on the part of both Post and Sigel, the joint venture agreement was executory.

Post did not terminate Sigel's interest by purchasing Sigel's share prior to the filing of the petition. The joint venture agreement contained no automatic termination provision. It did not specify that a defaulting party had no right to cure a breach. It did not provide that breaches were incurable after a certain period. It did not state that the contract would expire upon notice of default or termination. The contract gave Post an option to purchase Sigel's share, but because Post did not complete the purchase prior to the petition, Sigel's interest in the contract did not terminate. Nothing in Nevada law prevents Sigel from curing the breach. Under section 365(b)(1)(A) of the Bankruptcy Code, Sigel is entitled to cure or to provide adequate assurance that it will promptly cure the default so that it may assume the contract. 11 U.S.C. Sec. 365(b)(1)(A). Sigel timely assumed the contract by providing for a cure of the breach in its reorganization plan. See 11 U.S.C. Sec. 365(d)(2).

The question is raised whether Sigel had power to cure a default when the contract says nothing about cure of a breach. There is no appellate case authority on the point. See 2 Collier on Bankruptcy p 365.04(1), at 365-40 (L. King 15th ed. 1990). But at least one bankruptcy court has held that section 365(b) gives the trustee "the power to void the non-debtor's right under state law to terminate the contract provided the contract is executory." Seacoast Products Inc. v. Spring Valley Farms, 34 B.R. 379, 382 (Bankr.M.D.N.C.1983).

The statute itself has a negative form, providing that if there has been a default in an executory contract, "the trustee may not assume such contract" unless the trustee cures the default or "provides adequate assurance that the trustee will promptly cure" the default. 11 U.S.C. Sec. 365(b)(1)(A). The implication is that the trustee has power to cure the default. Such power is vital to sustain the trustee's power to assume a defaulted executory contract. If this power were to be dependent upon specific language in the contract permitting cure of a default, the trustee's power would be sharply limited. We find no indication that Congress wanted to make the power to assume a defaulted executory contract dependent on the precise language of the contract; and if the trustee has power to assume the contract, he or she must also have power to cure or the assumption of the contract is futile.

The statutory language letting the trustee provide assurance that he will promptly cure the default contemplates an exercise of a power that would be unusual in most contracts. Normally if a contract is breached, the breach cannot be cured by an assurance that it will be cured. The statute gives the trustee a power that in this respect goes beyond the contract.

Congress, it is true, while voiding all contract clauses automatically terminating the contract on a party's bankruptcy, noted that the other contractual obligations of the parties must stand:

The unenforceability of ipso facto or bankruptcy clauses proposed under this section will require the courts to be...

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