Huntington Ltd., In re

Citation654 F.2d 578
Decision Date24 August 1981
Docket NumberNo. 79-3088,79-3088
Parties, Bankr. L. Rep. P 68,282 In re The HUNTINGTON LIMITED, a limited partnership, dba The Sheraton Beach Inn, dba Driftwood Beach Club, Debtor-Appellee. Robert A. FISHER, Receiver, Plaintiff, v. CITY OF HUNTINGTON BEACH, a Municipal Corporation of the State of California and The Huntington Limited, a limited partnership, dba The Sheraton Beach Inn, dba Driftwood Beach Club, Defendants. CITY OF HUNTINGTON BEACH, a Municipal Corporation of the State of California, Plaintiff-Appellant, v. The HUNTINGTON LIMITED, a limited partnership, dba Sheraton Beach Inn, dba Driftwood Beach Club, Debtor, and Robert A. Fisher, Receiver, Defendants- Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Gary J. Miller, Sherman Oaks, Cal., argued, for plaintiff; Joseph C. Karol, Albert & Oliker, Los Angeles, Cal., on brief.

Andrew S. Clare, Loeb & Loeb, Los Angeles, Cal., argued, for defendants; Marc Levinson, Sidley & Austin, Los Angeles, Cal., on brief.

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

Before: WALLACE and ALARCON, Circuit Judges, and COPPLE *, District Judge.

ALARCON, Circuit Judge:

Appellant City of Huntington Beach, California, (City) appeals from a district court affirmance of the judgment of the bankruptcy court wherein the bankruptcy court refused to terminate a lease of real property between the City and the Huntington Limited (debtor), a limited partnership. The bankruptcy court also ordered a sale of the leasehold interest without the City's consent, and permitted the proposed assignee to hypothecate the leasehold beyond the amount originally agreed to between the debtor and the City. This court has jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.


In March, 1960, the lessor City entered into a fifty year lease for undeveloped real property within the City limits with two individuals and a corporation. This prime real estate, located within close proximity to the Pacific Ocean, was improved and developed by the lessees pursuant to the terms of the lease. 1 The leasehold interest was eventually transferred to another firm and subsequently assigned to the debtor in August, 1970.

An involuntary bankruptcy petition was filed against the debtor by its creditors in June, 1976. In December of that year, the debtor filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. 2 The bankruptcy court subsequently appointed a receiver to arrange the debtor's estate.

Since the outset of the Chapter XI proceeding, the receiver has operated the property, collected and received rents, attempted to revitalize the debtor's business and has fulfilled the debtor's obligations under the terms of the lease including the payment of rent to the City. The City has not objected to these payments.

When the receiver's attempts to rehabilitate the debtor's business proved unsuccessful, it became increasingly apparent that a sale of the leasehold interest would be the only viable alternative to the resolution of the debtor's severe financial difficulties. The receiver anticipated that a sale of the leasehold interest would raise sufficient funds to discharge encumbrances against the property, pay all unsecured creditors in full and cause the debtor to realize some return on its investment. Accordingly, the receiver applied to the bankruptcy court in December, 1977, for authority to sell the leasehold interest. The City objected to any sale, however, on the grounds that the terms of the lease required the City's consent to any assignment, transfer or hypothecation of the lease. The bankruptcy court, nevertheless, held a sale hearing on January 26, 1978 and entered an order confirming the sale to the Mayer Construction Corporation (Mayer), the successful bidder, on March 17, 1978. The order confirming the sale provided that the estate would receive three million dollars on close of escrow plus a second deed of trust in the amount of $650,000. The order also provided that Mayer would be permitted to hypothecate the leasehold beyond the.$2.1 million amount which then encumbered the estate. 3 The sale, however, was made conditional upon the voluntary consent to the assignment of the leasehold interest by the City or an order of the bankruptcy court determining that such consent was unnecessary.

Mayer and the City were unable to negotiate successfully the City's consent. Consequently, the bankruptcy court held a hearing on June 23, 1978, to determine whether the lease was terminated 4 and whether the City's consent was necessary to effect the assignment. On July 18, 1978, the court entered two judgments. The court held that the lease had not been terminated and that the City's consent to assignment was unnecessary. The district court subsequently affirmed both bankruptcy court judgments without opinion.


1. Termination of the Lease

The City contends that the district court and the bankruptcy court erred in holding that the lease was not terminated. The City asserts that the lease was terminated prior to any attempted sale because of the existence of several defaults which allegedly violated specific provisions of the lease agreement. 5 It is specifically alleged that the lease was in default because of the existence of the Chapter XI proceedings, the contemplated further hypothecation of the lease by the receiver's proposed assignment, unpaid possessory interest taxes, the failure to maintain a corporate surety bond, and the failure to maintain the property at a standard required by the lease and by applicable local ordinances.

The bankruptcy court found that no defaults existed which would justify a termination of the lease. Moreover, to the extent any defaults did exist, the court found that the City had waived them by accepting periodic rental payments from the receiver. The court concluded that it would be an abuse of discretion to permit termination of the lease because of the "horrendous forfeiture" that would accrue to the City at the expense of the debtor and the secured and unsecured creditors.

The bankruptcy court's findings of fact must be accepted by the district court unless they are clearly erroneous. Rules of Bankruptcy Procedure 810. This standard of review also applies to this court. We are "bound to accept findings of fact made by the Bankruptcy Judge and affirmed by the District Court unless such findings are clearly erroneous." In re Howell, 638 F.2d 81, 82 (9th Cir. 1980); Coen v. Zick, 458 F.2d 326, 328 (9th Cir. 1972); Fed.R.Civ.P. 52(a).

In seeking to reverse the findings of fact of the bankruptcy court, the City, as the appellant, has the burden of demonstrating that the findings are clearly erroneous. See Martin v. Mercantile Financial Corp., 404 F.2d 886, 887 (5th Cir. 1968). A mere showing that the bankruptcy court could have reached another conclusion based upon the evidence presented is insufficient. In the instant case the City has failed to meet its burden of demonstrating that the court's findings with respect to termination of the lease were clearly erroneous. Moreover, given the unconscionable forfeiture which would, in all likelihood, accompany a termination, we hold that the court did not abuse its discretion.

A. The Bankruptcy Proceedings

The City contends that the bankruptcy proceedings constituted a default sufficient to terminate the lease because the lease provides for termination at the City's option if the lessee is "adjudged bankrupt or insolvent by any court." The bankruptcy court was correct in its finding that there was no adjudication of bankruptcy and thus no termination under the terms of the lease. The mere filing of an involuntary petition or a Chapter XI petition is not an adjudication of bankruptcy. 6

The City also contends that the lease is in default because the Chapter XI petition was filed. The lease provides for termination at the City's option if a "transfer (of the lease) occurs by operation of law." It is conceded that the Bankruptcy Act provides that a Chapter XI receiver takes title to the assets of the debtor. 11 U.S.C. §§ 110(a), 701, 702. Thus, the City argues implicitly that the lease lapsed into default when the receiver was appointed and took title to it because a transfer of the lease by operation of law occurred at that time.

Section 70(b) of the Bankruptcy Act, 11 U.S.C. § 110(b), made applicable to Chapter XI proceedings by § 302 of the Act, 11 U.S.C. § 702, provides in pertinent part that:

(A)n express covenant that an assignment by operation of law or the bankruptcy of a specified party thereto or of either party shall terminate the lease or give the other party an election to terminate the same is enforceable.

Although the termination provision in the Huntington lease is enforceable under § 70(b), that section does not prohibit the bankruptcy court from exercising its equitable discretion to deny enforcement if compelling equitable and policy considerations so require. See Smith v. Hoboken Railroad, Warehouse and Steamship Connecting Co., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946); In re Fontainebleau Hotel, 515 F.2d 913 (5th Cir. 1975); Queens Boulevard Wine & Liquor Corp. v. Blum, 503 F.2d 202 (2nd Cir. 1974); Weaver v. Hutson, 459 F.2d 741 (4th Cir. 1972), cert. denied, 409 U.S. 957, 93 S.Ct. 288, 34 L.Ed.2d 227 (1973); In re Fleetwood Motel Corp., 335 F.2d 857 (3rd Cir. 1964).

In Smith, the Supreme Court determined that the question of the enforceability of a lease termination provision is separate and distinct from the question of whether enforcement in a particular case would be consistent with other provisions of the Bankruptcy Act. While holding that § 70(b) is applicable to railroad reorganizations, the court recognized that the public interest in maintaining the continuity of operation of...

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