Aslan, In re

• Decision Date: 19 July 1990
• Docket Number: No. 88-6581,88-6581
• Citation: 909 F.2d 367
• Parties: , Bankr. L. Rep. P 73,524 In re Moses N. ASLAN, Debtor. Moses N. ASLAN; Irving Sulmeyer, Trustee, Appellants, v. SYCAMORE INVESTMENT COMPANY, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 367

909 F.2d 367

59 USLW 2150, Bankr. L. Rep. P 73,524

In re Moses N. ASLAN, Debtor Moses N. ASLAN; Irving Sulmeyer, Trustee, Appellants, v. SYCAMORE INVESTMENT COMPANY, Appellee.

No. 88-6581.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 7, 1990.

Decided July 19, 1990.

Gary E. Klausner and Irving M. Gross, Robinson, Diamant, Brill & Klausner, Los Angeles, Cal., for appellants.

Mary D. Lane and Lawrence B. Gutcho, Loeb and Loeb, Los Angeles, Cal., for appellee.

Jon E. Drucker, Sulmeyer, Kupetz, Baumann & Rothman, Los Angeles, Cal., for amicus curiae.

Appeal from the United States District Court for the Central District of California.

Before CANBY, KOZINSKI and LEAVY, Circuit Judges.

OVERVIEW

LEAVY, Circuit Judge:

In 1982, the appellant-debtor, Moses Aslan, entered into a contract to sell a shopping arcade ("the Arcade") to Sycamore Investment Co. ("Sycamore"). Aslan failed to fulfill certain of its contractual obligations. Sycamore initially refused to purchase the Arcade, but subsequently sued to

                specifically enforce the contract.  In 1986, with Sycamore's suit still pending, Aslan filed for bankruptcy under Chapter 11 of the Bankruptcy Code.  The bankruptcy court then granted Aslan's motion to reject the sales contract as an executory contract.  Rejection of an executory contract constitutes a breach under 11 U.S.C. Sec. 365(g) (1988), 1 and the bankruptcy court fixed the date of breach for its damages calculations at the date that Aslan failed to fulfill its contractual obligations in 1982.  65 B.R. 826.    On appeal by both parties, the district court held that the relevant date of breach was the day immediately prior to the filing of the bankruptcy petition.  We affirm the district court
                

FACTS AND PROCEEDINGS

Aslan contracted to sell the Arcade to Sycamore in April 1982 for $4.5 million. The contract required Aslan to provide Sycamore with the leases and estoppel certificates for the Arcade's eighteen tenants, documents which Sycamore admittedly needed to calculate and minimize its investment risk. ² Aslan provided Sycamore with five or six leases, and the record is unclear how many, if any, estoppel certificates. Aslan also never gave Sycamore any assurances that it would provide the documents at any point in the future. Sycamore then approached various tenants and obtained some of the information that would have been conveyed by the leases and estoppel certificates.

The contract called for the purchase of the Arcade to be finalized by August 27, 1982, or 180 days thereafter. Sycamore did not complete the purchase within this time frame. In September 1983, however, Sycamore sought to complete the purchase and sued to specifically enforce the contract. On March 3, 1986, with Sycamore's suit still pending, Aslan filed for bankruptcy under Chapter 11 of the Bankruptcy Code.

Aslan petitioned the bankruptcy judge to reject the contract for the sale of the Arcade under 11 U.S.C. Sec. 365(g) as an executory contract. Rejection under section 365(g) "constitutes a breach of such contract." Section 365(g). The bankruptcy judge allowed the rejection and calculated Sycamore's damages at half a million dollars. This amount represented the difference between the contract price of $4.5 million, and the Arcade's fair market value of $5 million as of November 1, 1982, the date when, according to the bankruptcy court, Aslan breached the contract. Both parties appealed this determination to the district court. ³

The district court reversed on the damages issue. The district court held that the relevant date of breach, and therefore the date at which to value the Arcade for purposes of damages, was the day immediately preceding the petition for bankruptcy. Calculated this way, Sycamore's damages amount to the difference between the contract price and the value of the Arcade on the day prior to Aslan's March 3, 1986 bankruptcy petition, effectively granting Sycamore the appreciation of the property up to March 2, 1986. The district court remanded for a redetermination of damages taking into account the new date of breach. This appeal followed.

STANDARD OF REVIEW

State law controls both the construction of the contract and the question of breach. In re James E. O'Connell Co., 799 F.2d 1258, 1260 (9th Cir.1986). Under California law, the court's construction of the contract is reviewed de novo. Id. The Determinations regarding the executory nature of the contract under section 365(g) and the effects of rejection pursuant to that section are conclusions of law which we review de novo. See In re Woodson Co., 813 F.2d 266, 270 (9th Cir.1987).

findings of fact underlying the determination of breach will not be overturned unless they are clearly erroneous. Id. at 1260-61.

DISCUSSION

I. Breach of the Contract

Aslan argues that it substantially performed its obligations under the contract even though it failed to provide Sycamore with the leases and certificates of estoppel. Aslan's theory is that its performance was of minimal importance because Sycamore obtained the information contained in the leases and estoppel certificates by Sycamore's own efforts.

Aslan's argument is unpersuasive. Under California law, "[w]hat constitutes substantial compliance or performance is a question of fact." Cline v. Yamaga, 97 Cal.App.3d 239, 248, 158 Cal.Rptr. 598, 603 (1979). Departure from full performance constitutes a material breach " 'if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract.' " Superior Motels, Inc. v. Rinn Motor Hotels, Inc., 195 Cal.App.3d 1032, 1051, 241 Cal.Rptr. 487, 495 (1987) (quoting Jacobs & Youngs, Inc. v. Kent, 230 N.Y. 239, 243-44, 129 N.E. 889, 891 (1921)). The undisputed evidence reveals that the leases and certificates were essential to Sycamore, which needed these documents to calculate and minimize its investment risk. The district court did not clearly err in making its factual determination that Aslan materially breached the contract by failing to provide the leases and certificates. Sycamore's diligence in securing information to substitute Aslan's deficient performance in no way reduces the materiality of Aslan's breach.

II. Effect of Aslan's Breach

Aslan argues that if it breached the contract in 1982, then Sycamore's damages are properly calculated under state law using November 1, 1982, as the date of breach. Aslan's argument misapprehends the consequences of its breach.

Aslan's breach presented Sycamore with an option to "treat [its] own obligations under the contract as discharged and claim damages for the breach or to waive the breach and treat the contract as still in effect." In re Alexander, 670 F.2d 885, 887 n. 1 (9th Cir.1982) (quoting Countryman, Executory Contracts in Bankruptcy: Part II, 58 Minn.L.Rev. 479, 506-07 (1974)).

It is clear that by choosing to seek specific performance of the contract, Sycamore treated the contract as still in effect. The situation is the same as in In re Alexander and that case controls. In In re Alexander, the plaintiffs-buyers had entered into a contract to purchase a home from the defendants-sellers. On the closing date, the buyers tendered the necessary payments to close, but the sellers refused to convey the property. The buyers sued for specific performance. We held that the buyer's election to sue for specific performance and forego a suit for damages "treated the contract as still in effect." Id. The same result obtains in this case.

Since Sycamore chose to treat the contract as still in effect in spite of Aslan's 1982 breach, that breach is not relevant for purposes of determining damages.

III. Rejection of the Contract

In March 1986, with Sycamore's suit for specific performance still pending, Aslan filed for voluntary bankruptcy under Chapter 11 of the Bankruptcy Code. Aslan then moved the bankruptcy court to reject its sales contract with Sycamore as an executory contract pursuant to 11 U.S.C. Sec. 365(g). That section provides in part:

[t]he rejection of an executory contract ... of the debtor constitutes a breach of such contract[,] ... (1) if such contract ... has not been assumed ... immediately before the date of the filing of the petition.

11 U.S.C. Sec. 365(g)(1). The bankruptcy court allowed the rejection of the contract.

It is clear that the contract was executory under section 365(g). " 'Though there is no precise definition of what contracts are executory, it generally includes contracts on which performance remains due to some extent on both sides.' " In re Alexander, 670 F.2d at 887 (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 58, reprinted in 1978 U.S.Code Cong. & Admin. News 5787, 5844). Sycamore's choice to treat the contract as still in effect left both Aslan and Sycamore with unperformed contract obligations, namely Aslan's obligation to provide Sycamore with the documents required by the contract, and Sycamore's obligation to tender the purchase payment as soon as Aslan provided the documents. ⁴

The executory contract was also never assumed. Thus, section 365(g)(1) applies and the only remaining issue is whether the relevant breach occurred in 1982, as the bankruptcy court held, or one day prior to the filing of Aslan's bankruptcy petition, as the district court held. We review these conclusions of law de novo. In re Woodson Co., 813 F.2d 266, 270 (9th Cir.1987).

We agree with the district court and hold that when the debtor secures rejection of a non-assumed executory contract under section 365(g)(1), the date of breach is the day immediately prior to the filing of the bankruptcy petition. We...