In re Hewitt, Bankruptcy No. 5-81-0005

• Decision Date: 09 February 1982
• Docket Number: Bankruptcy No. 5-81-0005,5-81-0006.
• Citation: 16 BR 973
• Parties: In re Stanley C. HEWITT and Eleanor L. Hewitt, Debtors. KETCHIKAN LODGE NO. 1429, BENEVOLENT AND PROTECTIVE ORDER OF ELKS, Plaintiff, v. Stanley C. HEWITT and Eleanor L. Hewitt, Defendants.
• Court: U.S. Bankruptcy Court — District of Alaska

16 B.R. 973 (1982)

In re Stanley C. HEWITT and Eleanor L. Hewitt, Debtors.

KETCHIKAN LODGE NO. 1429, BENEVOLENT AND PROTECTIVE ORDER OF ELKS, Plaintiff, v. Stanley C. HEWITT and Eleanor L. Hewitt, Defendants.

Bankruptcy Nos. 5-81-0005, 5-81-0006.

United States Bankruptcy Court, D. Alaska.

February 9, 1982.

E. Budd Simpson, Birch, Horton, Bittner, Monroe, Pestinger & Anderson, Juneau, Alaska, for plaintiff.

Dillon E. Jackson, Keller, Jacobson, Hole, Jackson & Snodgrass, Bellevue, Wash., and Drew Peterson, Ellis Law Offices, Ketchikan, Alaska, for defendants.

MEMORANDUM OPINION

J. DOUGLAS WILLIAMS, II, Bankruptcy Judge.

Before the Court for decision is a complaint for relief from the automatic stay of § 362 of the Bankruptcy Reform Act of 1978 (Code), 11 U.S.C. § 362, filed by Ketchikan Lodge No. 1429, Benevolent and Protective Order of Elks (Elks), and seeking leave to continue foreclosure proceedings in Alaska state court concerning the place of business of Chapter 11 Debtors Stanley and Eleanor Hewitt (Hewitts). The Elks received a judgment of foreclosure, pursuant to a deed of trust acceleration clause, in state court before the Hewitts filed their Chapter 11 petition, but no sale has been held. Also before the Court is a complaint for forcible entry and detainer filed by the Hewitts against the Elks, demanding payment of rent arrearages and/or recovery of possession of office space leased by the Elks from the Hewitts in the same building that is the subject of the foreclosure suit. The primary legal issue in this dispute concerns whether the fact that the Elks have reduced their claim under the deed of trust to a judgment of foreclosure, although no foreclosure sale has been held, precludes the Hewitts from curing the deed of trust default and reinstating the maturity of the deed of trust note pursuant to § 1124(2) of the Code. Having heard the evidence presented at the consolidated preliminary and final hearing, having considered the arguments of the parties and having reviewed the applicable legislation, legislative history and case law, this Court finds that pursuant to § 1124(2) the claim of the Elks will not be impaired by reversal of acceleration pursuant to a plan of reorganization, that the Elks' interest in the subject property is adequately protected, and that the Hewitts are not entitled to relief pursuant to their forcible entry and detainer complaint until such time as they implement through a plan of reorganization the benefits afforded them by § 1124(2).

Findings of Fact

The Hewitts operate a restaurant in the Fireside Building in Ketchikan, Alaska, and also operate a commercial real estate rental business in the same building. The Hewitts purchased the Fireside property in January of 1974 with loans from various sources, one loan being from the Elks for $150,000. The Elks received in consideration a note from the Hewitts, secured by a deed of trust on the Fireside property. The deed of trust was recorded on March 26, 1974 in the Ketchikan recording district. The parties also entered into a lease agreement whereby the Elks leased office space in the Fireside Building from the Hewitts.

The Hewitts defaulted on the repayment of their note to the Elks. The deed of trust and the note contained provisions entitling the Elks to accelerate the entire note obligation in the event of any default. On July 2, 1981, the Elks obtained a judgment of foreclosure on the Fireside property pursuant to the deed of trust, in the Superior Court for the First Judicial District of Alaska. That court also made findings and rendered judgment concerning the amount due the Elks on the note as accelerated by default provisions of the note and of the deed of trust and concerning the amount of rental arrearages owed Hewitts by the Elks. Setting off the obligations, and also setting off the costs and attorneys' fees awarded each party, the state court found that the Elks were owed $149,495.21, and the foreclosure judgment was rendered for this amount.

After the rendering of the state court judgment, the parties began to negotiate regarding a delay in the foreclosure proceedings. The outcome of the negotiations was disputed at the final hearing. The negotiations did result in an agreement to postpone the foreclosure sale until July 15, 1981. This Court also finds that the parties agreed to freeze the accounting between them from July 1, 1981 through July 31, 1981, with no interest accruing to the Elks on the obligation of the Hewitts and with no rentals accruing to the Hewitts for the Elks' lease. Although the understanding of the parties was not sufficiently refined to contemplate the situation now before the Court, this Court finds that a fair interpretation of the agreement under the present facts is that the parties agreed to resume the lease arrangement at a rental of $2,399.60 per month after July 31, 1981, if the property had not been foreclosed by that time.

The filing of the Hewitts' Chapter 11 petition on July 13, 1981 halted the foreclosure sale, pursuant to § 362 of the Code. The Hewitts have not yet submitted a plan of reorganization pursuant to Chapter 11.

As of the date of filing of the Chapter 11 petition, the amount owed by the Debtors to the Elks and secured by the Fireside property was $149,495.21. Secured debts against the Fireside property senior to the interest of the Elks totaled $494,408.07 at the time the petition was filed. Interest charges are accruing on these obligations. This Court finds that the present fair market value of the Fireside property, disputed at the hearing, is at least $1,000,000.

This Court further finds that the ownership and rental of the Fireside property by the Hewitts is necessary to an effective reorganization of the business. The totality of the facts shows that the real estate rental business is a necessary component of the Hewitts' business affairs.

On November 5, 1981, the Hewitts filed a complaint in this Court for forcible entry and detainer (FED), pursuant to Alaska Statute 09.45.070. They claim that they are entitled to possession of the premises leased by the Elks and to rental arrearages. The Elks answered, denying the Hewitts' claim and counterclaiming for damages to the Elks' right to quiet enjoyment of the leasehold, allegedly caused by harassment by the Hewitts. On November 17, 1981, the Elks filed the complaint for relief from the automatic stay of § 362, seeking leave to continue foreclosure proceedings in state court or, alternatively, for adequate protection. Pursuant to an agreement of the parties, the preliminary and final hearings on the latter complaint were consolidated, along with the trial on the FED action, and were held on December 23, 1981 in Ketchikan. At the conclusion of the trial the automatic stay was continued in effect pending this Court's ruling, pursuant to Interim Rule 4001(a) as amended by District of Alaska Bankruptcy Rule 23(J).

Conclusions of Law

The Elks argue that their security interest in the Fireside property is not adequately protected, and therefore they are entitled to relief from the automatic stay of § 362 of the Code. It is asserted by the Elks that the state court judgment of foreclosure entitles them to realize the entire debt owed them immediately and that this claim to immediate satisfaction must be protected. The Elks allege that the Fireside property does not provide an adequate equity cushion and that its value is deteriorating. Furthermore, the Elks contend that they are entitled to relief pursuant to § 362(d)(2) because ownership and rental of the Fireside property is not necessary to a successful reorganization of the Hewitts' business, which, say the Elks, is limited to the restaurant business. Finally the Elks argue that they are entitled to relief "for cause" pursuant to § 362(d)(1), claiming that the Hewitts filed their Chapter 11 petition solely to halt the foreclosure proceedings and thus in bad faith.

The Hewitts respond that the Fireside property provides a sufficient equity cushion to protect the Elks' interest in the property. They argue that pursuant to § 1124(2), the Elks' claim will not be impaired if the Chapter 11 plan cures the default on the original note and deed of trust, reinstates the maturity of the note, and otherwise complies with the requirements of that section. Further, argue the Hewitts, if the acceleration of the note is reversed pursuant to § 1124(2), the Elks will be indebted to the Hewitts, as the rental arrearage of the Elks will exceed the amount past due on the unaccelerated deed of trust note. The Hewitts conclude that if the Elks' claim only entitles the Elks to receive payments at the original maturity and at the original interest rate, the Elks will clearly be protected by a curing of the default and performance pursuant to the terms of the note.

Section 1124(2) of the Code allows a debtor pursuant to a Chapter 11 plan to reverse the acceleration of an obligation caused by his default. That section reads as follows:

§ 1124. Impairment of claims or interests. Except as provided in section 1123(a)(4) of this title, a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan—

. . . .

(2) notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default—

(A) cures any such default, other than a default of a kind specified in section 365(b)(2) of this title, that occurred before or after the commencement of the case under this title;

(B) reinstates the maturity of such claim or interest as such maturity existed before such default;

(C) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law; and

(D) does not otherwise

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