Federal's, Inc. v. Edmonton Investment Company

• Decision Date: 19 November 1975
• Docket Number: No. 72-1933-P.,72-1933-P.
• Citation: 404 F. Supp. 68
• Parties: In the Matter of Federal's, Inc., a Michigan Corporation, Debtor. FEDERAL'S, INC., a Michigan Corporation, Plaintiff, v. EDMONTON INVESTMENT COMPANY, a Michigan co-partnership, Defendant.
• Court: U.S. District Court — Western District of Michigan

404 F. Supp. 68

In the Matter of Federal's, Inc., a Michigan Corporation, Debtor.

FEDERAL'S, INC., a Michigan Corporation, Plaintiff, v. EDMONTON INVESTMENT COMPANY, a Michigan co-partnership, Defendant.

No. 72-1933-P.

United States District Court, E. D. Michigan, S. D.

October 24, 1975.

As Amended November 19, 1975.

COPYRIGHT MATERIAL OMITTED

Sheldon S. Toll, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for plaintiff.

Lewis Daniels, James M. Wienner, Detroit, Mich., for defendant.

MEMORANDUM OPINION AND ORDER

JOINER, District Judge.

These cross appeals in bankruptcy raise questions about the debtor's and receiver's liability for an unexpired real property lease affected by a Chapter XI arrangement.¹ The subject of dispute is a 20-year lease agreement, dated January 11, 1971, requiring monthly rent payments of $11,288.98 plus taxes and interest. Under the terms of the lease, Federal's, Inc., the debtor and lessee, had the right to assign its rights under the lease, but continued liable on the lease for any assignments made without the prior written consent of the lessor, Edmonton Investment Company.² The bankruptcy judge found that on June 24, 1972, Federal's made such an unconsented assignment to Federal Hardware and Supply, Inc., a subsidiary of Federal's, Inc. Shortly thereafter, on August 16, 1972, Federal's filed a petition under Chapter XI of the Bankruptcy Act, and a receiver was appointed. The filing of a petition for an arrangement was an event of default under the lease,³ giving the landlord a right to terminate the lease.⁴

Beginning February 21, 1973, all notices from the debtor to creditors in the arrangement proceedings were sent to Edmonton, and Edmonton was scheduled as a lessor of an assigned lease to whom Federal's was "contingently" liable in the amount of $10.00.⁵ On October 1, 1973, after the Edmonton lease had been scheduled, Federal Hardware defaulted. Edmonton promptly sent Federal's, Inc., written notice of default. On November 9, 1973, Edmonton filed a petition in the arrangement proceedings seeking to establish the receiver's liability for unpaid rentals during the period of his receivership. The confirmation order was entered on December 11, 1973, and the Edmonton lease was not rejected, although many other leases of real property were rejected. Edmonton never filed a claim. On May 6, 1974, however, Edmonton filed suit against Federal's in state court, seeking unpaid rentals from the date of confirmation to May 6, 1974.⁶ On May 15, 1974, Federal's applied to the bankruptcy judge for a determination that the debt due Edmonton had been discharged.

Edmonton appeals from an order of August 14, 1974, dismissing its petition to hold the receiver liable under the lease. Federal's appeals from an order of the same date dismissing its petition to determine that the Edmonton debt was discharged upon confirmation of the arrangement and from another order, dated December 9, 1974, dismissing its petition for modification of the confirmation order for the purpose of rejecting the Edmonton lease under Bankruptcy Rule 924 and rule 60 of the Federal Rules of Civil Procedure. This court retains jurisdiction over the controversy under 11 U.S.C. § 769 and article VII of the debtor's Second Modified Arrangement.

I.

Under Chapter XI and other chapters of the Bankruptcy Act, executory contracts are treated separately from contracts that have been performed. An "executory" contract is one in which, by the terms of the contract and with the support of consideration, something remains to be done before the contract is fully performed. See Farrington v. Tennessee, 95 U.S. 679, 683, 24 L.Ed. 558 (1877); Black's Law Dictionary 395 (Rev. 4th ed. 1968). Under Chapter XI, executory contracts include unexpired leases of real property. 11 U.S.C. § 706(4). The debtor must file a statement of its executory contracts with its petition. 11 U.S.C. § 724(1). The court may permit the rejection of executory contracts, 11 U.S.C. § 713(1), or, alternatively, the plan of arrangement may provide for their rejection. 11 U.S.C. § 757(2). Any person injured by the rejection of an executory contract is deemed a "creditor," 11 U.S.C. § 753, whose claim may be filed within such time as the court may direct, 11 U.S.C. § 755a(2).

Confirmation of the plan makes the arrangement binding on all "creditors," whether or not they have accepted it or filed their claims, and whether or not their claims were scheduled or allowable. 11 U.S.C. § 767(1). It discharges all unsecured debts and liabilities as provided in the plan of arrangement, except debts not dischargeable under section 35 of 11 U.S.C., 11 U.S.C. § 771. Section 35 provides that discharge releases the debtor from all "provable" debts except certain enumerated debts not relevant here.

Chapter XI is designed to enable debtors to continue in their businesses under court supervision. SEC v. American Trailer Rentals, 379 U.S. 594, 606-07, 85 S.Ct. 513, 13 L.Ed.2d 510 (1965). The rules governing executory contracts facilitate the statutory design by assuming the continuing vitality of executory contracts in the absence of unambiguous rejection. Rejection of executory contracts under Chapter XI therefore must be by affirmative action. Contracts which are not affirmatively rejected remain in full effect. Consolidated Gas Electric Light & Power Co. of Baltimore v. United Railways & Electric Co. of Baltimore, 85 F.2d 799, 805 (4th Cir. 1936), cert. denied, 300 U.S. 663, 57 S.Ct. 493, 81 L.Ed. 871 (1937); 8 Collier on Bankruptcy 204. A party to an executory contract with the debtor has no provable claim while the contract is executory; the claim arises only upon rejection. U. S. Metal Products Co. v. United States, 302 F.Supp. 1263, 1267-68 (E.D.N.Y.1969). Rejection is a question of law. In re Greenpoint Metallic Bed Co., Inc., 113 F.2d 881, 884 (2d Cir. 1940).

Federal's provided for the rejection of executory contracts in its plan of arrangement and affirmatively rejected an appended list of real property leases. The Edmonton lease, which by then had been assigned, was not listed as a real property lease or as an executory contract. Some months later, the Edmonton lease was scheduled, but as a "contingent" debt rather than as an executory contract — perhaps because Federal Hardware was still paying the monthly rents. Federal's took no further action even after Federal Hardware defaulted. Approximately 2 months elapsed between the time that Federal's had notice of the default and the date of the confirmation. On these facts, the bankruptcy judge held that Federal's never rejected the Edmonton lease.⁷

This court concurs that the Edmonton lease was never affirmatively rejected. And there is no such thing as tacit rejection under Chapter XI. See Greenpoint, supra, at 884, (employment contract); U. S. Metal Products, supra (contract for the sale of goods). It would be especially inappropriate to allow tacit rejection of a long-term lease, because there is a continuing possibility that the debtor might retake possession or find another assignee. Since the lease was never rejected, Edmonton never became a "creditor" bound by the order of confirmation.

Federal's argues that Mohonk Realty Corp. v. Wise Shoe Stores, Inc., 111 F.2d 287 (2d Cir.), cert. denied, 311 U.S. 654, 61 S.Ct. 47, 85 L.Ed. 418 (1940) and In re Greenpoint Metallic Bed Co., Inc., 113 F.2d 881 (2d Cir. 1940), require a different result in this case. These cases establish that a lessor is not helpless if there has been a default on the lease, but the lease has not been rejected. Such a lessor has a right to participate in the arrangement proceedings and may insist that the lease be affirmed or rejected. In some circumstances, the lessor "must appear in the reorganization court at the confirmation hearing or before, in order to assure adequate protection for his interests." Mohonk, supra, at 290 (all assets of the corporate debtor transferred to new corporation upon confirmation). The court may then compel rejection of the contract under section 713(1). In re Greenpoint, supra, at 884; 8 Colliers ¶ 3.157 n.26.

Mohonk and Greenpoint are illustrative of how a bankruptcy court may make good use of its equitable powers to supplement the literal language of the Act. This case, however, is not an appropriate one for the court to invoke its equitable powers.⁸ Edmonton did appear to protect its interests at the hearing held on December 5, 1973, shortly before confirmation of the plan of arrangement. Present at this hearing were counsel for Federal's, for the receiver, and for Edmonton. Although the purpose of the hearing was to determine only the receiver's liability during the period of his receivership, the court drew attention to Federal's failure to reject, and Edmonton made it clear that it intended to hold Federal's liable for this failure:

MR. DANIELS for Edmonton: ... The receiver is liable on the October rent under the terms of the lease which he affirmatively — which he didn't do anything to reject or take any steps to give us our day in court.

THE COURT: Or the debtor didn't reject.

MR. DANIELS: No one rejected.

* * * * * *

He never took any steps in that and so, therefore, by not taking any affirmative action, he has adopted this lease. We are a continuing liability.⁹

Federal's expressly retained the power to reject additional executory contracts up to the date of confirmation. It could have rejected the Edmonton lease at the December 5th hearing or later. For some reason, or inadvertently, it failed to do so. Whatever the reason, Federal's attention was called to its omission before confirmation of the plan, and even then Federal's failed to reject the lease. The court is not convinced, in these circumstances, that there are any equitable considerations here which warrant relieving Federal's from the consequences that normally flow from such a failure to reject.¹⁰ The bankruptcy court's order...