Harris Pine Mills, In re

• Decision Date: 30 November 1988
• Docket Number: No. 87-4359,87-4359
• Citation: 862 F.2d 217
• Parties: , Bankr. L. Rep. P 72,502 In re HARRIS PINE MILLS, Debtor. Bertha BAKER, Dean Forth, Louise Forth, Tommie Gibson and Betty Gibson, Appellants, v. HARRIS PINE MILLS, Defendant-Appellee, and Unsecured Creditors Committee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 217

862 F.2d 217

18 Bankr.Ct.Dec. 947, Bankr. L. Rep. P 72,502

In re HARRIS PINE MILLS, Debtor Bertha BAKER, Dean Forth, Louise Forth, Tommie Gibson and Betty Gibson, Appellants, v. HARRIS PINE MILLS, Defendant-Appellee and Unsecured Creditors Committee, Appellee.

No. 87-4359.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 12, 1988.

Decided Nov. 30, 1988.

W. Eugene Hallman, Mautz, Hallman & DeVore, Pendleton, Or., for appellants.

Leon Simson, Richard Samuels, Ransom, Blackman & Simson, Portland, Or., for defendant-appellee.

Mildred Carmack, Schwabe, Williamson & Wyatt, Portland, Or., for appellee.

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

Before SCHROEDER, PREGERSON and LEAVY, Circuit Judges.

LEAVY, Circuit Judge:

Several landowners claim that their agreements with the debtor, Harris Pine Mills, constitute leases under federal or state law, and that the Trustee failed to timely assume the leases pursuant to 11 U.S.C. Sec. 365(d)(4) (Supp. IV 1986). The bankruptcy court and the district court held the Trustee was under no duty to assume the leases within the time constraints of section 365(d)(4), because the agreements were not leases for purposes of section 365. We affirm.

FACTS AND PROCEEDINGS

From 1947 to 1978 the debtor, Harris Pine Mills (Harris Pine), and five landowners entered into agreements that enabled Harris Pine to conduct logging activities on Oregon lands. The pre-1957 agreements generally give Harris Pine the rights to merchantable timber, and to construct and maintain roads for a specified number of years. ¹ The post-1957 agreements differ from the earlier ones in two significant respects. First, the agreements grant Harris Pine the right to extend the duration of the agreements upon payment of additional consideration at or near the end of the agreement's term. Second, the agreements redefine merchantable timber to include not only timber existing at the time of entering the agreement, but also timber that may grow during the life of the agreement.

All agreements refer to Harris Pine as the "purchaser" or "grantee" and to the landowners as the "sellers" or "grantors." The agreements required Harris Pine to pay full consideration at the time of entering the agreement.

Harris Pine filed for bankruptcy under Chapter 7 on December 5, 1986. On December 11, 1986, the matter was converted into a Chapter 11 proceeding. Under section 365(d)(4) of the Bankruptcy Code, the Trustee has 60 days to assume non-residential leases; otherwise such leases are deemed rejected. ² The Trustee obtained an extension for time in which to assume or reject Harris Pine's leases on February 4, 1987. On March 6, the Trustee gave notice of the extension to other lessors, but not to the landowners involved in this case.

On March 30, the Trustee moved to assume Harris Pine's agreements with the landowners. The landowners objected, contending that the agreements were non-residential leases, and that the Trustee had failed to timely assume the leases under section 365(d)(4). ³ However, the bankruptcy court and the district court, 79 B.R. 919, ruled that none of the agreements were non-residential leases, so that there was no duty to assume them within 60 days under that section.

STANDARD OF REVIEW

The facts in this case are undisputed. We are in as good a position as the district court to review the bankruptcy court's decision, and we review that court's conclusions of law de novo. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986).

DISCUSSION

We must decide whether the agreements between Harris Pine and the several landowners were non-residential leases for purposes of section 365(d)(4) of the Bankruptcy Code.

Under section 365 a Trustee can assume or reject the debtor's executory contracts and unexpired leases. Rejection of an unexpired non-residential lease results in termination of the lease, "and the trustee shall immediately surrender such non-residential real property to the lessor." Sec. 365(d)(4). Rejection can be automatic upon untimely assumption of the lease:

[I]n a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected....

Id.

The landowners in this case seek to terminate Harris Pine's rights in their lands. They characterize their agreements with Harris Pine as non-residential leases, and argue that the Trustee failed to timely assume the agreements under section 365(d)(4). Thus, they ultimately seek to compel the Trustee to surrender the real property to themselves as lessors. Harris Pine maintains that the agreements are not leases.

I. Applicable law

The parties dispute whether the agreements should be analyzed under the Bankruptcy Code or Oregon law. The landowners claim that, regardless of state law, Congress intended to include agreements such as the ones before us under section 365(d)(4). Specifically, they point to section 365(m), which provides:

For purposes of this section 365 ..., leases of real property shall include any rental agreement to use real property.

In support of their argument, the landowners cite In re Gasoil, Inc., 59 B.R. 804 (Bankr.N.D.Ohio 1986). Gasoil involved oil and gas leases under which a debtor paid landowners a yearly rental if it did not pump oil, or royalties if it did. Id. at 805. The court quoted section 365(m) and said: "[I]t does not matter whether these oil and gas leases are viewed as licenses ... or as leases. For purposes of section 365 they are 'leases' since they at least convey a right to use real property." Id. at 806.

We do not read Gasoil to say that state law is irrelevant to section 365(m). By its terms, section 365(m) covers agreements that are both (1) rental agreements; and (2) for the use of real property. In the passage quoted, the Gasoil court was deciding whether the leases conveyed a right to use However, Ohio cases have said that th[is type of gas and oil] interest is a leasehold rather than a fee interest.... In all of the agreements the royalty is to be paid monthly, and in any year where there is no production, the annual rental must be paid. This makes the agreement run in successive periods of one year. Thus, these agreements seem to be more in the nature of automatically renewing periodic tenancies than in the nature of determinable fees.

real property, i.e., the second requirement of section 365(m). But the court relied on state law to establish a lease, taking into account, among other things, the rent obligations of the debtor:

Id. at 807-08. Thus, Gasoil does not support the view that state law is irrelevant to establish a rental agreement or lease under sections 365(m) or 365(d)(4). ⁴

The landowners' position would be stronger if the Bankruptcy Code specified what constitutes a rental agreement or a lease under sections 365(m) or 365(d)(4). But they have not argued that such a rock-bottom definition exists, nor have we found any guidance in the Code or the legislative history. ⁵ See 11 U.S.C. Sec. 101 (1982 & Supp. IV 1986); H.R.Conf.Rep. No. 882, 98th Cong., 2d Sess. 33 (1984); 130 Cong.Rec. S8887, 8894-8895 (daily ed. June 29, 1984), reprinted in 1984 U.S. Code Cong. & Admin. News 576, 590, 598-99; S.Rep. No. 70, 98th Cong., 1st Sess. 1-23 (1983); S.Rep. No. 65, 98th Cong., 1st Sess. 27-43 (1983).

Where "Congress has not chosen to exercise its power to fashion [a bankruptcy] rule[,] ... [it] has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979). The appellant landowners have not provided any reason why Oregon law supplies an inappropriate standard. It is therefore our view that, to fall under section 365(m), the landowners must show that their agreements are rental agreements or leases under Oregon law. ⁶

II. Oregon law

Both the landowners and Harris Pine agree that no Oregon case has ever held that timber agreements are leases. See Belt v. Matson, 120 Or. 313, 319, 252 P. 80, 82 (1927) (timber contract to sell standing timber and giving buyer five years to remove the timber is a sale and not a revocable license); Reid v. Kier, 175 Or. 192, 207, 152 P.2d 417, 423 (1944) (timber considered goods covered by Uniform Sales Act only if timber severed under the sale contract); The plaintiff in Sproul enjoyed grazing privileges on federal land. The Oregon assessor taxed the privileges pursuant to an Oregon statute taxing leasehold interests in federal property. The plaintiffs claimed their interest was not a leasehold, but a license. The court established three principles of Oregon leasehold law: (1) to create a lease, the lessee must have the right of possession, though possession need not be exclusive as to all uses of the land, id. at 403, 411, 359 P.2d at 549, 552; (2) if the holder retains a particular use of the land, whether the use is exclusive enough to create a lease depends on that use's importance relative to other possible uses of the land, id. at 404, 359 P.2d at 549-50; and (3) exclusive use amounting to possession may be negated if the transferor reserves restrictions on the transferee's use. Id. at 408, 359 P.2d at 551.

Paullus v. Yarbrough, 219 Or. 611, 637, 347 P.2d 620, 633 (1959) (severance must be prompt for a timber contract to fall under the Uniform Sales Act). The Oregon Supreme Court, however, dealt comprehensively with leases in Sproul v. Gilbert, 226 Or. 392, 359 P.2d 543 (1961). The landowners claim that the agreements before us are leases under that case.

The landowners claim the agreements fit the Sproul definition of leases, because Harris Pine's logging operations were exclusive enough to amount to...