In re Lee West Enterprises, Inc., Bankruptcy No. SA 92-20666 JW.
| Decision Date | 17 March 1995 |
| Docket Number | Bankruptcy No. SA 92-20666 JW. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | In re LEE WEST ENTERPRISES, INC., Debtor. |
James J. Joseph, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, Chapter 7 Trustee.
David A. Gill, Sandra W. Lavigna, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, for Chapter 7 Trustee.
Steven N. Bloom, Gary Owen Caris, Frandzel & Share, Los Angeles, CA, for Tokai Credit Corp.
Nicole C. Bershon, Irell & Manella, Los Angeles, CA, Cory E. Friedman, Carl J. Chiappa, Townley & Updike, New York City, for Jaguar Cars, Ferrari North America, Lotus Cars USA, and Aston Martin Lagonda of North America.
Randy Michelson, McCutchen, Doyle, Brown & Enersen, San Francisco, CA, for Land Rover North America, Inc.
William Lobel, Pamela Karger, Irvine, CA, for debtor.
The Chapter 7 Trustee ("Trustee") seeks an order authorizing the assumption and assignment of certain franchise agreements between the Debtor, Lee West Enterprises, Inc. ("Debtor") and Jaguar Cars ("Jaguar"), Ferrari North America, Inc. ("Ferrari"), Aston Martin Lagonda of North America, Inc., ("Aston Martin"), Land Rover of North America, Inc., ("Land Rover"), and Lotus Cars USA, Inc., ("Lotus"). Jaguar, Ferrari, Aston Martin, Land Rover and Lotus (collectively referred to as the "Franchisors") oppose the Trustee's motion, inter alia, on the grounds that the Debtor's default under the franchise agreements is non-curable under 11 U.S.C. § 365.
The Debtor owned and operated automobile dealerships located in Newport Beach, California, that sold Jaguar, Ferrari, Aston Martin, Land Rover and Lotus vehicles. The Debtor entered into the franchise agreements with Jaguar, Ferrari and Aston Martin in January of 1989. The Debtor entered into a franchise agreement with Lotus in November of 1988 and with Land Rover in May of 1991. Tokai Credit Corporation ("TCC") was the Debtor's flooring lender, holding a first priority security interest in the Debtor's assets.
The Debtor commenced a voluntary case under Chapter 11 of the Bankruptcy Code on September 29, 1992. TCC and the Debtor entered into various stipulations, wherein TCC was granted relief from the automatic stay, subject to an agreement to forbear under certain conditions. During the course of the Chapter 11 case, the Debtor operated the dealerships as a debtor-in-possession. On October 3, 1994, pursuant to a stipulation granting relief from the automatic stay, TCC's receiver took possession and control of the assets of the Debtor. Thereafter, the receiver suspended operation of the Debtor's dealerships.
On October 5, 1994, the Court converted the Debtor's Chapter 11 case to one under Chapter 7. On October 6, 1994, James J. Joseph was appointed interim Chapter 7 Trustee. On October 27, 1994, Jaguar and Ferrari filed an EX PARTE APPLICATION FOR ORDER SHORTENING TIME ON HEARING ON MOTION FOR ORDER: (1) DEEMING DEALER AGREEMENT REJECTED; OR (2) SHORTENING TIME BY WHICH TRUSTEE MAY ASSUME OR REJECT DEALER AGREEMENT; OR, ALTERNATIVELY, (3) GRANTING RELIEF FROM THE AUTOMATIC STAY TO TERMINATE DEALER AGREEMENT. Aston Martin filed a similar application on the following day, October 28, 1994. On November 8, 1994, Land Rover filed a motion for relief from the automatic stay in order to enforce its "rights of termination."
On December 5, 1994, the Trustee filed a MOTION FOR ORDER AUTHORIZING ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACT AND CONVEYANCE OF ASSETS INCLUDING CONTRACTS ("Trustee's Motion"). On December 23, 1994, Lotus joined the other Franchisors in opposing the Trustee's Motion.
The Trustee's Motion, which is joined by TCC, seeks an order authorizing the Trustee to assume the franchise agreements and to assign and convey those contracts, together with the balance of the Debtor's assets, other than the Debtor's cash, accounts receivable, leased equipment, automobiles and real property. TCC claims a security interest in all of the Debtor's assets including the Debtor's rights in the franchise agreements. The assets that the Trustee seeks to convey are part of a package that includes real property being sold by TCC. The real property was formerly owned by a related debtor and is now owned by TCC, who was the successful bidder at a foreclosure sale of the real property.
The Trustee and TCC have agreed that the estate will receive either $300,000 or 30% of the sale price that exceeds $7 million, whichever is greater. Further, if the sale is approved, TCC will provide up to $75,000 in fees and expenses of the Trustee and his professional, while if the sale is not approved, TCC will provide for up to $100,000 in fees and expenses. The Trustee estimates at least $450,000 of the sale proceeds will be allocated to the bankruptcy estate, which will ultimately be distributed to administrative and priority claimants. There appears to be insufficient sale proceeds to provide for any distribution to general unsecured creditors.
The Trustee's motion was initially heard on January 18, 1995. At the continued hearing on February 22, 1995, the Trustee conducted an auction wherein three potential buyers submitted bids. After all the bids were received, the Trustee recommended Mr. Malamut's final bid at approximately $8.75 million. Although another bidder, McGraw, made a higher bid at approximately $8.9 million, the Trustee based his recommendation on the respective financial conditions of the bidders. TCC agreed that if the sale to Mr. Malamut closed, the bankruptcy estate would receive the same as it would have under the McGraw bid.
As part of the motion to assume, the Trustee proposes to cure the defaults under the franchise agreements. Section 365(b)(1) provides that:
The Debtor's business operations have been suspended since approximately October 4, 1994, when the receiver seized the Debtor's assets and the case was converted to Chapter 7. The Franchisors argue that the Debtor's failure to maintain the operations of the dealerships constitutes non-curable defaults such that the Trustee may not assume the franchise agreements. The Franchisors cite California Vehicle Code § 3060(a)(2) which sets forth the specific grounds upon which a franchisor may terminate or refuse to continue an existing franchise. One of the grounds specified is California Vehicle Code section 3060(a)(2) which allows for termination of the franchise based upon:
(E) Failure of the motor vehicle dealer to conduct its customary sales and service operations during its customary hours of business for seven consecutive business days, giving rise to a good faith belief on the part of the franchisor that the motor vehicle dealer is in fact going out of business, except for circumstances beyond the direct control of the motor vehicle dealer or by order of the department.
The franchise agreements contain provisions which provide for termination based upon similar grounds ("closure provisions"). Jaguar's "Dealer Agreement Standard Provisions," Article 14.5, states:
Land Rover's "Dealer Agreement,"1 Article 12.3.7, provides that the agreement may be terminated on fifteen (15) days written notice to Dealer upon the occurrence of the following event:
Failure of the Dealer Premises to operate as a going concern during the normal business hours customary for automobile dealerships in the Primary Area of Responsibility for a period of seven (7) consecutive business days, so long as such failure is not due to causes enumerated in Article 14.8.
Ferrari's "Dealer Standard Provisions," paragraph 4(a), provides that:
Throughout the term of the Dealer Retail Sales and Service Agreement, Dealer shall operate its Premises during, and for not less than, the customary business hours of the trade in Dealer\'s surrounding community.
Aston Martin's "Dealer Agreement," paragraph 5(e), provides that:2
The Franchisors argue that the closure of the Debtor's dealership operations constitutes a "historical fact" which is incapable of being cured by the Trustee. In support of their argument, the Franchisors cite In re Deppe, 110 B.R. 898 (Bankr.D.Minn.1990).
In Deppe, the debtor leased an Amoco retail gasoline service station and operated it under Amoco's brand name. The premises lease provided for termination based upon a "failure by Lessee for any reason to operate the Premises for normal sales of motor fuel during normal business hours for (7) seven consecutive days...." Id. at 900. The Federal Petroleum Marketing Practices Act ("PMPA") similarly authorized termination of a gas station franchise for "failure by the franchisee to operate the marketing premises ... for 7 consecutive days." Id. at 903. The debtor terminated business on December 8, 1989, and filed under Chapter 7 on December 11, 1989. On December 12, 1989, Amoco filed a motion for relief from stay. At the preliminary hearing on December 12, 1989, only Amoco appeared. The court granted Amoco limited relief from stay to reopen...
To continue reading
Request your trial