In re Chavez

• Decision Date: 18 March 1982
• Docket Number: Bankruptcy No. 81-01343 M A,Adv. No. 81-0808.
• Citation: 18 BR 530
• Parties: In re Ray F. CHAVEZ and Stella A. Chavez, d/b/a Kettle Restaurants, Debtors. HLH ENTERPRISES, INC., Plaintiff, v. Ray F. CHAVEZ, Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

18 B.R. 530 (1982)

In re Ray F. CHAVEZ and Stella A. Chavez, d/b/a Kettle Restaurants, Debtors HLH ENTERPRISES, INC., Plaintiff, v. Ray F. CHAVEZ, Defendant.

Bankruptcy No. 81-01343 M A, Adv. No. 81-0808.

United States Bankruptcy Court, D. New Mexico.

March 18, 1982.

Paul M. Fish, Albuquerque, N.M., for plaintiff.

Jennie Deden Behles, Albuquerque, N.M., for defendant.

MEMORANDUM OPINION

MARK B. McFEELEY, Bankruptcy Judge.

This matter came on for hearing January 21, 1982, and was continued February 25, 1982, on plaintiff's Complaint to Lift Automatic Stay and plaintiff's Motion for Judgment on the Pleadings; plaintiff was represented by its counsel, Paul M. Fish, and defendant was present in person and through his counsel, Jennie Deden Behles. The Court previously ordered that the automatic stay remain in effect with certain modifications pending the resolution of the issues addressed herein.

Plaintiff is a Texas corporation which operates Kettle Restaurants across the country and confers the privilege of operating the same on others through franchise agreements. Defendant is a franchisee of plaintiff, operating two Kettle Restaurants in Albuquerque. The contractual relationship between plaintiff and defendant was established by two sets of three documents each—a lease of real property, a lease of personal property, and a franchise agreement.

On November 25, 1981, plaintiff sent a notice of default to defendant. Defendant filed a petition in bankruptcy under Chapter 11 of Title 11 of the United States Code on December 21, 1981.

Plaintiff contends that the documents labelled "leases" are undoubtedly leases. Pursuant to the alleged leases, the mailing of the notice of default caused to begin a 30-day period of time, the expiration of which resulted in termination of the alleged leases unless the defendant cured the defaults set out in said letter. No action was taken with respect to the alleged defaults and plaintiff alleges that the leases terminated on or about December 25, 1981. Plaintiff asks this Court to lift the automatic stay so as to allow it to regain possession of the premises of said Kettle Restaurants. In the event that this Court finds the leases not terminated, plaintiff seeks lifting of the stay to allow it to terminate said leases due to defendant's substandard operation of the restaurants.

Defendant, however, argues that the documents involved herein are not leases, but documents granting plaintiff a security interest in the premises and equipment of defendant's restaurants. Such a classification is based on paragraph 23 of said franchise agreements, which allows the franchisee to convey his interest in the Kettle Restaurants to a third party so long as plaintiff is given the first right of refusal with respect to such a conveyance. Being characterized as a security interest of sorts, there was said to be no termination of interest of the defendant as a result of the notice of default sent to defendant November 25, 1981.

At the conclusion of the February 25, 1982, hearing, the Court reserved for judgment the following questions:

(1) Are the documents at issue herein in the nature of leases or in the nature of security instruments?

(2) Were these agreements terminated 30 days after the notice of default was sent to defendant?

The Court ruled from the bench February 25, 1982, that the franchise agreement and leases as to each store must be read as a whole rather than as separate documents. Therefore, resolution of the remaining issues will proceed on the basis that the documents with respect to each restaurant be read together. The remaining issues relate to construction of the documents. Consequently, this Court will rely on non-bankruptcy law for guidance in its analysis.

Paragraph 33 of each of the franchise agreements states that the document shall be governed in accordance with the laws of the State of Texas and this Court will do so. In final analysis, law of Texas and New Mexico on the remaining issues provides the Court with the same result, so that even if Texas law does not in fact govern resolution of these issues, the result is nevertheless the same under New Mexico law.

Lease or Security Instrument

The portion of the franchise agreement which allegedly creates a question as to whether the documents are leases or security instruments is paragraph 23(a) of each lease which reads, in pertinent part, as follows:

23. Restrictions of Change of Ownership

(a) Franchisee shall not discontinue the operation of the Licensed Premises, or sell, transfer, assign, lease, sublet, convey or encumber any interest in the Licensed Premises or any part thereof, or in this Agreement without in each instance first offering to H.L.H. the exclusive right to purchase the same.

Plaintiff's complaint, exhibits E and F.

The primary role of construction of an instrument is to ascertain and give effect to the intent of the parties by the language used in the agreement. If the instrument is worded so that it has a certain meaning or interpretation, it is not ambiguous and is not susceptible to modification through the introduction of parol evidence. However, if the instrument is susceptible to more than one meaning, it is said to be ambiguous and may be interpreted through the use of parol evidence. Howell v. Union Producing Co., 392 F.2d 95 (5th Cir. 1968); St. Paul Mercury Insurance Co. v. Price, 329 F.2d 687 (5th Cir. 1964); Wall v. Lower Colorado River Authority, 536 S.W.2d 688 (Tex.Civ.App. 1976); Grayson County State Bank v. Osborne, 531 S.W.2d 846 (Tex.Civ.App.1975). The same rules apply in New Mexico. See Schaefer v. Hinkle, 93 N.M. 129, 597 P.2d 314 (1979); Brown v. American Bank of Commerce, 79 N.M. 222, 441 P.2d 751 (1968); Armijo v. Foundation Reserve Ins. Co., 75 N.M. 592, 408 P.2d 750 (1965).

The language of paragraph 23(a) of the franchise agreement is quite clear and unambiguous. From the language of the franchise agreement, it appears to the Court that the interest which the defendant may convey is only his interest in the "licensed premises," whatever that might be. The "licensed premises" are defined according to the lease agreements. Therefore, the Court directs its attention to the lease agreements to determine just what the defendant has the power to convey.

As with other written instruments, the ends sought in the construction of leases is the ascertainment of the intent of the parties as revealed by the language used in the lease; parol evidence to be admitted only to explain ambiguities on the face of the writing. Ferrari v. Bauerle, 519 S.W.2d 144 (Tex.Civ.App.1975); Armstrong v. Skelly Oil Co., 81 S.W.2d 735 (Tex.Civ.App.1935). See also Gallup Gamerco Coal Co. v. Irwin, 85 N.M. 673, 515 P.2d 1277 (1973); Springer Corp. v. American Leasing Co., 80 N.M. 609, 459 P.2d 135 (1969).

Again, the language in the lease agreements which might be said to give defendant more than a leasehold appears in paragraph XVI. Said paragraph gives the lessee an opportunity to renew the lease for another term. The clear meaning of said paragraph is to merely...