In re Coordinated Financial Planning Corp.
| Citation | 65 BR 711 |
| Decision Date | 16 September 1986 |
| Docket Number | BAP No. EC-85-1219-AsVE,Bankruptcy No. 285-00639-W-11. |
| Parties | In re COORDINATED FINANCIAL PLANNING CORPORATION, a California Corporation, Debtor(s). Richard STEFFAN, trustee for Coordinated Financial Planning Corporation, Appellant(s), v. Thomas G. McMILLAN and Johhny Ribeiro, Appellee(s). |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Lawrence B. Dashiell, Carol D. Mills, Russell, Jarvis, Estabrook & Dashiell, Sacramento, Cal., for appellants.
R. Dale Ginter, Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for appellee(s).
Before ASHLAND, VOLINN and ELLIOTT, Bankruptcy Judges.
The trustee challenges the conclusion of the bankruptcy court that a right of first refusal for the purchase of real property is a covenant running with the land and is not subject to rejection as an executory contract pursuant to 11 U.S.C. § 365.
Ronald and Krystyn Morrow (Morrows) were the principal shareholders of debtor Coordinated Financial Planning Co. (CFP). Ronald Morrow was CFP's president.
In 1983 the Morrows purchased the West Butte Duck Club for three million dollars with one million dollars from appellees McMillan and Ribeiro. The grant deed conveying title to the Morrows was recorded January 12, 1984.
For their contribution of one million dollars, appellees received a grant deed of an undivided 50% interest in the Club and certain covenants, conditions and restrictions as contained in an "Ownership Agreement" and "Agreement". The agreements and a memorandum of ownership agreement pertaining to real property were executed January 12, 1984. The grant deed to appellees was recorded January 12, 1985, and the memorandum of ownership agreement was recorded January 17, 1984.
The ownership agreement established a mutual right of first refusal/option to purchase between the parties. The ownership agreement required that if either party desired to sell his interest he must notify the other party of the proposed sale and extend the same terms.
The Morrows subsequently transferred their 50% interest into a family trust, and on February 15, 1985 the trust conveyed the interest to the debtor.
On February 21, 1985 CFP filed a Chapter 11 petition. The case was converted to Chapter 7 on August 5, 1985.
On May 30, 1985 the trustee filed a motion for authority to reject as executory the right of first refusal under § 365. The court denied the motion finding the option to be a covenant running with the land binding upon the debtor and the trustee as his successor in interest.
Whether a right of first refusal for the purchase of real property is subject to rejection as an executory contract pursuant to 11 U.S.C. § 365.
The right of first refusal between the parties is properly classified as a preemption agreement. The preemption agreement gives the appellees the first right to buy when and if appellants want to sell. See Rollins v. Stokes, 123 Cal.App.3d 701, 176 Cal.Rptr. 835 (1981), 1 Witkin, Summary of Cal.Law (8th Ed.1973) § 131, pp. 127-128.
In California, preemption agreements are consistently found to be covenants running with the land. In the early case of Laffan v. Naglee, 9 Cal. 662 (1858) at 678, the court stated: "the preemptive right of purchase contained in a lease constituted an essential part of the lease itself, and, therefore, ran with the land."
Covenants are promises to do or refrain from doing certain things relating to the use of land. Here the parties covenanted not to sell the property to third persons without first extending the same offer to the parties to the agreement. Covenants are not a property interest but are viewed as physically attached to the land. 3 Witkin, Summary of Cal.Law (8th Ed.1973) § 384. They are enforceable against successors in interest.
California Civil Code § 1468 provides that covenants to do or refrain from doing some act are created when four requirements are met:
The covenant readily fulfills three requirements. The land is particularly described. The covenant specifically states that assignees are bound. The memorandum of ownership agreement is recorded and incorporates by reference the covenant which gives constructive notice to all parties. Calvi v. Bittner, 198 Cal.App.2d 312, 17 Cal.Rptr. 850 (1961).
Appellants contend that the preemption right is not within the purview of subsection (c). The subsection is the statutory codification of the common law touch and concern requirement. Preemption rights have been found to relate to the use of land. Richardson v. Callahan, 213 Cal. 683, 3 P.2d 927 (1931).
The parties agreement meets all the conditions of Cal.Civil Code § 1468 and, therefore, is a covenant running with the land.
II
Ordinary principles of contract law are also applicable. Property principles are involved, but in this case, they merely operate to bind a non-contracting party to a covenant. Once a running covenant is established it is enforced according to contract principles. And once a bankruptcy is filed Federal law comes into play.
For purposes of § 365 executory contracts are defined under federal, not state law. In re Alexander, 670 F.2d 885 (9th Cir.1982). Executory contracts are those in which the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach excusing the performance of the other. Countryman, Executory Contract in Bankruptcy...
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