In re Windmill Farms Management Co.
| Decision Date | 18 July 1990 |
| Docket Number | Bankruptcy No. 84-5115-LM7x. |
| Citation | 116 BR 755 |
| Parties | In re WINDMILL FARMS MANAGEMENT COMPANY and Related Entities, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of California |
David L. Buchbinder, Buchbinder & Associates, San Diego, Cal., Trustee.
James E. Lund, Law Offices of James E. Lund, Escondido, Cal., for debtor.
William M. Rathbone, Weeks, Willis, Rathbone and Johnson, San Diego, Cal., for Trustee.
Jonathan S. Dabbieri, Hillyer and Irwin, San Diego, Cal., for Vanderpark Properties.
Vanderpark Properties, Inc. ("Vanderpark") is again before the court pursuant to a decision by the Ninth Circuit Court of Appeals reversing this court's decision that the trustee of Windmill Farms, Inc., ("WFI") could assume a lease of Vanderpark's commercial property. See, In re Windmill Farms, Inc., 841 F.2d 1467 (9th Cir.1988). In its reversal and remand, the Ninth Circuit directed this court to determine whether Vanderpark's lease had been validly terminated pre-petition and, if so, whether any state anti-forfeiture provision would have relieved the trustee from the termination. Vanderpark filed a motion for jury trial on these issues, along with a request that the bankruptcy court recommend the district court withdraw its reference to conduct this hearing.
Although the Ninth Circuit opinion remanding this matter contains an accurate description of the events in this case, a brief review is appropriate. In July 1975, Vanderpark leased commercial real property to Mini Super, Inc., for a ten-year period. Vanderpark consented to two assignments of the lease. The first was to Windmill Farms, a general partnership; the second assignment was from the partnership to WFI.
WFI was a wholly-owned subsidiary of Windmill Farms Management Company ("WFMC"). WFI was also the general partner of Windmill Farms Ltd. No. 1 ("WFL# 1"), a California limited partnership. WFMC was the general partner in a number of other limited partnerships containing the Windmill Farms name and performed centralized accounting functions for all of the Windmill Farms entities. The Windmill Farms entities were purchased in 1983 by Michael E. Crowley. Thereafter, all rent payments to Vanderpark were made by WFMC.
In February 1985, WFMC failed to remit WFI's February rent. On February 15, 1985, Vanderpark addressed and served a three-days' notice to pay rent or quit on "Windmill Farms." The notice stated that Vanderpark would elect to declare the lease forfeited if back rent and delinquent tax impounds were not paid within the three-days' notice period. They were not paid within the time provided and in March 1985, Vanderpark filed an unlawful detainer action in state court against "Windmill Farms, a partnership." It later amended its complaint to include WFI, WFMC and WFL# 1 as additional defendants.1
On February 27, 1985, an involuntary bankruptcy petition was filed against WFMC. David L. Buchbinder ("Trustee") was appointed Chapter 7 trustee for WFMC. In May 1985, the Trustee learned of the unlawful detainer action filed by Vanderpark. After reviewing the corporate files and believing that WFL# 1 owned the lease, the Trustee filed a Chapter 7 petition for the limited partnership. The WFMC and WFL# 1 cases were consolidated, and the Trustee moved to assume the lease.
Vanderpark opposed the lease assumption. After an evidentiary hearing held on September 27, 1985, the court determined that the lease belonged to WFI and not to the debtor WFL# 1 and, since WFI was not in bankruptcy, the trustee could not assume the lease. Three days later, on the following Monday, the trustee filed a Chapter 7 petition for WFI and on an emergency basis moved to consolidate WFI with the other Windmill bankruptcy proceedings as well as assume the Vanderpark lease and exercise the lessee's option to renew. The bankruptcy court granted the Trustee's motions and has been affirmed by the Ninth Circuit Court of Appeals as not abusing its discretion in doing so. In re Windmill Farms, Inc., at 1472.
Thereafter, the Trustee sought permission to assign and sell the lease free and clear of the interests and liens of Vanderpark. Vanderpark brought a cross-motion for a stay pending appeal pursuant to Bankruptcy Rule 8005, and for continuance. Vanderpark's motions were denied at a hearing held October 22, 1985, and the sale went forward on that date, with sale confirmed to Steven R. Boney for $108,000, with a backup bid for $106,000 from Lee R. Dugan and Yeh-Hua Tsai Lai ("D/L"). The only condition to the sale was that the proposed assignee give Vanderpark adequate assurance of future performance. After consultation with counsel for Vanderpark and the Trustee at the hearing, the court announced a mechanism for approval of the financial qualifications of the successful bidder in the event Vanderpark did not believe them adequate. (Rep.Transcript, Oct. 21, 1985, pp. 5-7).
Boney did not complete the sale and, instead, an order was entered February 24, 1986, approving the sale to D/L for $106,000. The order recited in relevant part:
The approval of the assignments was conditioned upon Lessor Vanderpark Properties, Inc.\'s approval as to the financial condition of the proposed assignees. . . . Mr. Dugan and Ms. Lai were approved by Vanderpark Properties, Inc., as being financially solvent enough to become assignees of the lease and the purchase price for the lease was ultimately $106,000.
The order was submitted by the Trustee and approved as to form by Vanderpark's counsel. No other conditions were set forth in the order. Vanderpark never appealed this order and it has become final.
In the course of considering exhaustive briefs presented by the parties on the question of entitlement to jury trial, it occurred to the court that it was possible this matter was moot. As stated in my letter to the parties:
As I considered the jury trial question and what remains to be determined by a jury, it occurred to me that neither a judge nor a jury determination would have an effect on the present situation. Vanderpark cannot oust the third party from possession because of the failure to obtain a stay; Vanderpark has been made whole by the payment of rent by the trustee; and, it does not appear that any relief that this court could grant pursuant to the Ninth Circuit\'s remand order entitles Vanderpark to the $106,000 on deposit with the Trustee.
The parties were given an opportunity to respond, and in the course of that response, the court learned for the first time that on January 31, 1986, Vanderpark, the Trustee, and D/L (successful back-up bidders at the sale), entered into an agreement called "Assignment of Lease" ("Assignment"). The Assignment provided that Vanderpark was consenting to the assignment to D/L (subject to some limitations which will be discussed), that the Trustee remained liable for performance of the lease obligations and that any legal action brought in connection with the Assignment or lease would entitle the prevailing party to recover attorneys' fees and costs of suit. This Assignment agreement was entered into without court knowledge or approval.
I. Does failure to obtain a stay pending appeal of the order for assignment and sale of the lease moot Vanderpark's appeal of the assumption order?
II. Assuming it does not, is there any controversy affecting the Trustee or the estate which remains for the bankruptcy court to decide?
III. Assuming this matter is not moot, is Vanderpark entitled to a jury determination of whether the lease terminated prepetition?
In the course of supplemental briefing on the issue of mootness, Vanderpark revealed for the first time that it is not claiming the $106,000 paid by D/L for the Trustee's right, title and interest in Vanderpark's lease—a fact never previously admitted by Vanderpark at any appellate level. Vanderpark claims that it is only trying to obtain a court declaration of what the Trustee sold:
What remains to be determined is exactly what the Trustee sold. Vanderpark contends that the lease had terminated and the Trustee had no interest to convey. (Supplemental Memo of Points and Authorities, filed June 1, 1990 ("Supp. Memo."), p. 5:2-6.)
Presumably, Vanderpark's argument is that since it is not claiming the $106,000 sales price, an appeal of the order permitting the Trustee's assumption of the lease did not require it to appeal the order assigning and selling the lease and, therefore, failure to obtain a § 363(m) stay does not render its appeal moot.2 The fallacy of this argument is that it presumes the purchaser agreed to buy ". . . a terminated lease subject only to a right to relief from forfeiture." (Supp. Memo., p. 5:17-18). There is no evidence in the record that that was the case. The Trustee's sale was neither noticed nor conducted subject to Vanderpark's pending appeal of the assumption order.
Vanderpark claims that § 363(m) is "irrelevant" because it does not seek to challenge the validity of the sale or seek modification or reversal of it. (Supp. Memo., p. 7:5-9). This argument is sheer double-talk. Ordinarily, a stay would have been required of the assignment order as well because, as pointed out by the court in her letter, no effective relief could have been given Vanderpark in the absence of one. See, Onouli-Kona Land Co., 846 F.2d 1170, 1171-73 (9th Cir.1988); Mann v. ADI Investments, Inc., 907 F.2d 923, 925-26 (9th Cir.1990).
Vanderpark's argument that it falls within the exception to the stay rule established by the Cada Investments, Inc., 664 F.2d 1158 (9th Cir.1981) and In re Victoria Station, Inc., 88 B.R. 231 (9th Cir. BAP 1988) cases, is also erroneous. In Cada, the court-ordered sale of the assets was made subject to the pending appeal. Cada, at 1160. Similarly, in Victoria Station, it appears that the assignment of lease approved by the court was expressly conditioned on the outcome of the...
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